Foreign business income is accounted for according to domestic tax rules and converted into Belgian currency (euro). For attribution of profits between head office and permanent establishment (PE), the single entity approach is endorsed, i.e. the permanent establishment is treated as if it were an independent part of the general enterprise dealing at arm’s length with the rest of the enterprise. The permanent establishment must maintain separate accounting records in the currency of the country in which it is located. Currency exchange results are allocated to the head office and are taxable or deductible for tax purposes. The euro may be substituted by a functional currency.
As a method for relieving juridical double taxation, Belgium uses the tax exemption method. As a consequence, losses incurred by the foreign permanent establishment can be deducted by the head office, which is taxable on its worldwide income. A carry forward is available for permanent establishment losses that could not be used in a given taxable year. Belgium’s treaties, in general, including Belgium’s model convention of 2010 (Art. 22.2(f)), provide for recapture of losses. If foreign permanent establishment losses were previously deducted from profits in Belgium, the treaty exemption of foreign profits in subsequent years would be denied to the extent that those losses reduced the tax base in the foreign state due to a carry-forward rule in the latter State. A similar recapture rule was also introduced in domestic law (Art. 206(1)(2) ITC).
Effective 1 January 2020, Belgium introduced new rules on deductibility of foreign losses whereby losses from a foreign permanent establishment or on the disposal of fixed assets are not allowed as a deduction for corporate tax purposes if the corresponding profits are exempt in Belgium in accordance with a tax treaty, except when the losses are final (definitive) losses arising in an EEA Member State.
On 3 November 2021, the Belgium tax authorities published Circular 2021/C/97, which provides the following guidance on the tax treatment of foreign losses effective 1 January 2020:
- Where profits are exempt in Belgium in accordance with a tax treaty, losses in a foreign establishment or on the disposal of fixed assets may not be deducted in determining the tax base in Belgium unless the losses are final and are attributed to an establishment in an EEA Member State;
- Where tax on profits is reduced in accordance with a tax treaty, the losses are deductible in proportion to the taxation of profits in Belgium;
- Where the allowed foreign losses cannot be deducted due to insufficient income, the excess may be carried forward as per the same rules for domestic losses (see Sec. 7.);
- The non-deductible portion of foreign losses is excluded;
- Losses are considered final (definitive) losses arising in an EEA Member State when:
- the Belgian company ceases its activities in the Member State and no longer owns assets (in the absence of a foreign establishment) in the Member State, and
- no deduction of any kind is granted for the losses in the Member State in which the foreign establishment or the assets concerned were located;
- Foreign losses are not considered final losses if the losses pass to another establishment of the company or to an associated enterprise that is active in the same Member State; and
- An anti-abuse provision applies for final losses whereby if a company ceased its loss-making activities and claimed a deduction for the final loss, such loss amount will be recaptured if the company restarts activities in the relevant Member State within three years following the deduction. The three-year period begins on the first day of the taxable period following the period during which the final losses were deducted.
For tax periods prior to 1 January 2020, losses were deductible if the company was able to continuously demonstrate that the losses are not deductible from the profits of an establishment in the State where it is located. If for any tax period the company was unable to demonstrate that the losses were not deductible then the loss deduction was required to be recaptured. If the losses under a tax treaty prior to 1 January 2020 have not yet been deducted, then such losses:
- Are no longer deductible if the company does not demonstrate that the losses are not deducted from the profits of the foreign establishment in the State where it is located;
- Are no longer deductible if the foreign establishment concerned was transferred as part of a contribution, merger, demerger, or similar operation; and
- Can only be deducted from the remaining profits to the extent that the losses exceed the profits exempted by the relevant tax treaty.