Foreign business profits may be derived directly or through a PE. With respect to foreign business profits originating from a treaty country, double taxation is avoided by means of the exemption method. With respect to foreign business income (realized through a foreign PE or derived from foreign immovable property) sourced in a country with which Belgium has not concluded a tax treaty, currently, no unilateral measures for the avoidance of double taxation are provided for under Belgian law. However, based on administrative practice, foreign taxes paid are deductible as a business expense for Belgian tax purposes.
Although Belgium does not impose a branch profit tax, under some tax treaties concluded by Belgium, the treaty partner is allowed to levy such a tax. Branch profit taxes are treated as business expenses of the PE and are, thus, deductible when attributing PE income to the general enterprise.
For foreign dividends, other than those attributable to a PE abroad, which are received from a company established in any country, the only relief available is the participation exemption, which is subject to certain conditions. If the dividends are attributable to a PE abroad, they may also qualify for an exemption under treaty provisions. For dividends from non-resident investment companies, a fixed foreign tax credit of 15/85 may be granted, subject to certain conditions
The EU Parent-Subsidiary Directive (90/435) requires Belgium to relieve the double taxation of qualifying dividends received from a subsidiary resident in another EU Member State. The participation exemption described above meets this requirement. Effective 1 January 2017, the participation exemption will not be available if the dividends received are tax deductible in the hands of the paying company.
In the case of interest, the credit is variable but subject to a maximum. The credit is not refundable. The credit is not granted in respect of:
- interest originating from assets or capital used outside Belgium for business purposes (Art. 285 ITC); and
- interest paid to a person acting only as an intermediary on behalf of a third party who provided the funds and who bears all or part of the risks relating to the loan (anti-channeling provision of Art. 289 ITC).
For foreign interest, a tax credit corresponding to the actual amount of the foreign tax paid is granted, with a maximum of 15%. The tax credit must be included in the taxable basis of the Belgian beneficiary of the interest income (Art. 37(3) ITC). The credit can only be credited against net taxable income received in the same tax year during which the interest was earned. A carry-back or carry-forward of any excess credit is not possible and the excess credit is also not refundable.
The amount of credit calculated must be multiplied by the debt financing coefficient: a coefficient which takes into account the amount of interest and royalty charges incurred by the company in proportion to the general total of income received. Therefore, the credit must be multiplied by the following fraction (Art. 287 ITC):
- the numerator is the total of movable and immovable income increased by the gross business income less capital gains, and reduced by the difference between the income from movable property and capital less distributed dividends; and
- the denominator of the fraction is equal to the total amount of movable and immovable income, increased by the gross business income less capital gains.
Finally, an anti-channeling provision is included in the ITC which provides that the credit is only granted in proportion to the period during which the beneficiary had the full ownership of the loan or financial instrument on which the interest was paid. Furthermore, no credit is granted if the creditor is acting on account of a third person, who has put the funds for the loan at his disposal (Art. 289 ITC).
In a decision on 22 January 2010, No. F.08.0110.F., the Belgian Supreme Court decided that, in the case of classification conflicts under a tax treaty, the classification given under Belgian domestic law is decisive for the calculation of the amount of the foreign tax credit. This means that if the payments in the foreign country are classified as royalties, whereas Belgium classifies the payments as interest, Belgium will grant the foreign tax credit applicable to interest.
A foreign tax credit is granted in respect of royalties that are subject to a foreign tax similar to the Belgian tax. For royalties, not qualifying for the 80% deduction, the credit is equal to 15/85 of the royalties net of foreign tax but before the deduction of the Belgian withholding tax which is levied in certain cases. In computing the Belgian tax, the royalties must be grossed up by the credit. If, for example, foreign royalties are received subject to a foreign withholding tax of 10%, the computation is as follows:
|foreign withholding tax||(10)|
|foreign tax credit (90 × 15/85)||15.88|
|Belgian corporate income tax (105.88 × 0.3399)||35.98|
|net Belgian tax payable||20.10|
The credit is not granted in respect of royalties originating from assets or capital used outside Belgium for business purposes (Art. 285 ITC). The credit in respect of royalties is only creditable in full if the underlying assets have been held during the entire tax year. If not, the credit is given pro rata temporis.
With respect to patent royalties qualifying for the 80% deduction, the presumptive calculation approach is partly replaced by an actual foreign tax credit rule. The credit is calculated by means of the following fraction:
- the numerator is equal to the foreign tax withheld as a percentage of the patent income, subject to a maximum of 15%; and
- the denominator is equal to 100 less the amount of the numerator.
Belgian tax law does not contain special provisions concerning the unilateral relief for foreign taxes on capital gains. The same rules that apply to (ordinary) business income apply to capital gains. Gains on shares in non-resident companies may qualify for the participation exemption, i.e. the 100% dividend deduction.
The tax treaties concluded by Belgium usually provide for credit relief in respect of dividends, interest, and royalties. Although under Belgian domestic law the foreign tax credit for dividends is limited to dividends from investment companies, credit relief is available where so provided under a treaty.
Business income derived through a PE in the other contracting state is normally exempt in Belgium under tax treaties.