The main attractiveness of Belgium in international corporate taxation lies undoubtedly in the Notional Interest Deduction, explaining the success of Belgian group financing companies over the past decade. This incentive, which basically eliminated the discrimination between debt and equity, has been a hotly debated issue over the past year. Because of its permanent and non-ring-fenced nature, the measure has been fully accepted by the European Commission as being non-tax competitive and is not listed as “potentially harmful” in accordance with the OECD Report on Harmful Tax Practices. However, at the national level, the NID was a hotly debated political issue with socialist politicians as its fiercest opponents. Designed to attract foreign investments into Belgium thereby creating employment for the local market, large multinationals have capitalized Belgian companies with available cash within the group. While this is true, it should not be the main worry of Belgium in preserving its domestic tax base. Thanks to the measure the high Belgian corporate income tax rate of 29.58%, has effectively come closer to the EU average. Nonetheless year after year the benefits of the NID regime are being diminished, which will further deteriorate the position of Belgium as a recipient of FDI, especially with the proximity of both the Netherlands and Luxembourg offering attractive holding and IP regimes.
Another particular attractiveness lies in the liberal approach of Belgium regarding the re-domiciliation of companies to and from Belgium. Changing the jurisdiction in which a company is incorporated or changing the jurisdiction from which it is managed and controlled might need to be considered in order to achieve certain tax planning purposes. In recent years there has been a growing interest in the re-domiciliation of companies into Belgium. In view of the favorable Belgian tax regulations on capital gains realized on shares, the participation exemption, and available exit route strategies, Belgium can be seen as an attractive jurisdiction to relocate a foreign holding company.
Excess Profit Tax Rulings
On 11 January 2016, the European Commission determined that Belgium's "excess profit" tax rulings violate EU State aid rules. The investigation examined tax rulings issued by Belgium since 2005 that allowed Belgian resident members of MNE groups to deduct "excess profits" from their tax bases for Belgian tax purposes. The rationale behind the excess profits deduction is that standalone entities would incur tax deductible expenditure towards developing their reputation, clientele and other intangibles. In contrast, members of MNEs benefit from group synergies and often do not incur such tax deductible expenditure, thus resulting in more profits than would have been the case had they been standalone entities. Excess profits rulings intend to address the potential double taxation arising from this situation by allowing a downward adjustment of Belgian taxable profits by a percentage -usually ranging from 50% to 90% of taxable profits- deemed to represent such excess profits.
In its decision, the European Commission found that the excess profits scheme derogated both from normal practice under Belgian company tax rules and the arm's length principle. Based on this and certain other factors, the scheme was found to provide preferential tax treatment that is illegal under EU State aid rules. Based on this finding, the Commission ordered the recovery of approximately EUR 700 million in illegal State aid. In the ensuing litigation, the EU General Court. On appeal, however, the Court of Justice of the European Union (CJEU) on 16 September 2021 reversed the judgment of the General Court and held that the excess profits rulings can be constitutive of “aid schemes”. It referred the matter back to the General Court to adjudicate the matter based on the CJEU’s findings.
CJEU Decision on Tax Exemption of Belgian-Originating Securities Debt Interest
On 29 October 2015, the Court of Justice of the European Union (CJEU) issued its decision on a case brought before the CJEU by the EU Commission concerning Belgium’s tax treatment of interest on debts represented by securities originating in Belgium. The issue is that Belgium provides an exemption from tax on interest from such securities when deposited or credited to a Belgian bank account, but does not provide an exemption when such securities are deposited or credited to an account with a financial institution established in another EU/EEA Member State.
In its decision, the CJEU ruled that such differing treatment constitutes a failure by Belgium to fulfill its obligations under Article 56 of the Treaty on the Functioning of the EU and Article 36 of the Agreement on the EEA, which concern the freedom to provide services between the Member States without restriction.
On 26 June 2015, the European Parliament’s Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE Committee) published the responses of jurisdictions to the Committee’s request for information on tax ruling practices made in April 2015. The TAXE Committee was formed earlier in the year to investigate the tax rulings of the EU Member States that are seen as unfair, especially those given for large multinationals.