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13.4.2. Specific TP Issues

Tangible Property

There are no specific rules in Belgium as to the intra-group sale and use of tangible property. Generally, it can be stated that the Belgian tax authorities will assess the sale and use of tangible property based on the general provisions of the ITC.

It is worth mentioning that, under Belgian law, the tax treatment of a transaction follows its accounting treatment unless tax law explicitly deviates from accounting law. As such, in order to determine the appropriate tax consequences of sale and lease/rent-back transactions and transactions of the like, an analysis of their accounting treatment is required. From that perspective, it will be fundamental to assess whether the lease transaction is to be considered an operating lease (“rent”) or a financial lease, as the difference has a direct impact on who is to be considered the economic owner of the asset. Under Belgian accounting law with respect to tangible assets, a financial lease is defined as one where the lease payments (excluding interest and expenses) allow for the invested capital to be fully reinstated. Any purchase option is not taken into account. Operating leases are not defined under Belgian GAAP but, referring to the IFRS, we can state that an operating lease is a lease other than a financial lease. As under IFRS, substance over form applies under Belgian GAAP. A financial lease is entered on the balance sheet and includes the building and the associated debt. An operating lease is off-balance sheet. In the profit and loss account, a financial lease is expressed as amortization and interest charges. An operating lease is booked under rental payments.


For Belgian transfer pricing purposes, a distinction needs to be made between “shareholder services” and “beneficial services”. The concept of shareholder services is not defined in Belgian tax law. According to the 2010 TP Guidelines, however, shareholder services are those activities performed by a parent company solely because of its ownership interest in one or more group companies (i.e. in its capacity as a shareholder). Beneficial services, on the other hand, are those services rendered by a parent company to a subsidiary, which the subsidiary would be willing to pay for or perform itself.

In this respect, following the proceedings of the EU Joint Transfer Pricing Forum, a paper on central services was issued in February 2010 and provided further guidance on the treatment of low value adding intercompany services from a transfer pricing perspective. During the ECOFIN meeting held in Brussels on 17 May 2011, the EU Economic and Financial Affairs Council endorsed the Guidelines drafted by the EU Joint Transfer Pricing Forum (“JTPF”) in this respect. The Council considers that the implementation of these Guidelines should contribute to reducing tax disputes within the EU and should improve the functioning of the internal market.

In order to assess whether intra-group services are tax deductible for Belgian corporate income tax purposes, the provisions of sections 49, 26 and 207 ITC need to be analyzed. Since shareholder services are only rendered by a parent company in its own interest, they will not comply with the provisions of section 49 ITC and hence will not be tax deductible. Where services can be regarded as “beneficial services” they will, in general, be tax deductible as they comply with the criteria of section 49 ITC. Although beneficial services are tax deductible, this does not mean that the Belgian tax authorities automatically accept the level of the fee and the mark-up applied. When analyzing whether beneficial services comply with the provisions of Arts. 26 and 207 ITC, a distinction has to be made between the situation where the Belgian entity is rendering the services and the situation where it is receiving the service.

The Belgian Entity Renders the Services

Where the fee and mark-up for the services rendered are not at arm’s length, they can be higher or lower than would be applied by an independent company. Where the fee and applied mark-up for the services rendered are lower than those applied by an independent company, the Belgian tax authorities can argue that the entity rendering the services has granted an abnormal or gratuitous benefit. Under Art. 26 or 185(2)(a) ITC, the amount of the abnormal or gratuitous benefit will be added back to its taxable income. As already mentioned above, this does not apply in a purely Belgian context where the benefit is taken into account for the determination of the taxable income of the Belgian company on the receiving end.

Where the fee and applied mark-up are higher than those applied by an independent company, the Belgian tax authorities can argue that the entity has received an abnormal or gratuitous benefit. Under section 207 ITC, certain items such as the notional interest deduction, tax losses carried forward (TLCF) or the dividends-received deduction will not be tax deductible from the amount of abnormal or gratuitous benefits received.

The Belgian Entity Receives the Services

Where the fee and applied mark-up on services received are lower than those applied by an independent company, the Belgian tax authorities can argue that the entity has received an abnormal or gratuitous benefit. Under Art. 207 ITC, certain items, such as the notional interest deduction, TLCF or the dividends-received deduction will not be tax deductible from the amount of abnormal or gratuitous benefits received.

Where the fee and applied mark-up are higher than those applied by an independent company, the Belgian tax authorities can argue that the entity has granted an abnormal or gratuitous benefit. Under Art. 26 or 185(2)(a) ITC, the amount of the abnormal or gratuitous benefit will be added back to its taxable income. As already mentioned above, this does not apply in a purely Belgian context where the benefit is taken into account for the determination of the taxable income of the Belgian company on the receiving end.


Where a Belgian entity renders a service, the Belgian tax authorities expect a profit element to be included in the fee charged for that service (except in case the rendering of the service is very remote from its core business).

For routine services, only a modest markup is usually applied.

Indeed, once the cost base of a particular service is determined, it is appropriate to consider what markup on those costs should be applied, if any. In cases where it is appropriate to use a mark-up, this will normally be modest and experience shows that typically agreed markups fall within a range of 3-10%, often around 5%. However, this statement is subject to the facts and circumstances that may support a different mark up.

For more value-added services, the cost-plus approach may prove not to be the most appropriate methodology. For those types of services, alternative methodologies may be used, such as a commission on sales.

Cost Contribution Arrangements

Cost Contribution Arrangements (CCAs) on services are commonly used as a cost-effective means for MNEs to carry out group activities. The business decision to use a CCA can be justified by various reasons, e.g. economies of scale, sharing of risks, skills or resources.

CCAs are not covered by a specific tax or transfer pricing provisions in Belgian tax legislation or case law. Their absence reflects the overall approach adopted by the Belgian authorities that seem to prefer to apply general tax provisions in the field of transfer pricing rather than developing a separate legal framework for transfer pricing purposes.

As regards CCAs on services not creating intangible property, reference can be made to the report adopted by the JTPF on this topic on 7 June 2012. This report provides practical and pragmatic guidance on how to approach and assess the arm’s length nature of the terms and conditions of an intra-group CCA which does not create IP. First of all, the report provides guidance on how to distinguish “traditional” intra-group services from CCAs by developing a set of basic notions to guide reviewers in making such distinction (e.g. allocation of risk, profit element, presence of written agreements, etc.). Furthermore, the document contains a list of typical features an at arm’s length CCA (on services not creating IP) should have. The JTPF also developed an approach/guidance on the documentary evidence one can reasonably expect in this context (e.g. general information, expected benefit, contribution, etc.) which should allow a reviewer to get an understanding of how the CCA works in practice.

Finally, certain aspects are addressed in more detail, such as the expected benefit test, allocation keys that may be used for determining each participant’s contribution, ways to measure contributions in kind, the treatment of cases where costs referred to are those initially budgeted rather than those actually incurred, as well as the possible application of accounting standards generally used throughout the group. In its Communication of 19 September 2012, the European Commission has formally adopted the above-mentioned report. The Commission invites the Council to endorse the report and invites EU Member States (including Belgium) to quickly implement the recommendations included therein their national legislation/administrative rules.

It is clear that the report will facilitate the reduction of cross-border disputes in this area and it is expected to impact also the Belgian TP practice (as set out below). Needless to say, the exclusion of "IP creating" activities poses certain limitations to what can be achieved in this respect.

Definition and Types Allowed

In the absence of a specific definition of CCAs in the legislation, administrative guidelines or case law, reliance should be placed on the definition given by the OECD TP Guidelines, according to which a CCA can be defined as an arrangement whereby members of a multinational group of companies acting jointly produce or provide goods, intangible property or other services to, or acquire goods, intangible property and/or services from, a third party.

As follows from this definition, CCAs may have a broad scope of application and are certainly not limited to the traditional joint production or development of intangible property under which participants jointly hold rights in the property developed. Although these kinds of CCAs are probably the most common, CCAs can exist for any joint funding or sharing of cost and risk, for developing or acquiring property or for obtaining services. This broad scope is also reflected in the complete absence of limits on the entities that may enter into a CCA.

Tax Treatment of a CCA

Contributions by a participant to a CCA are treated for tax purposes in the same manner as would apply under the general rules of the Income Tax Code. Sections 26 and 185(2) ITC are the main tools available to the tax authorities to challenge the contributions of the different members of a CCA: their effect is that each participant’s proportionate share of the overall contributions must be consistent with its proportionate share of the overall expected benefits. For Belgian participants in a CCA, this means that they should at least aim to recover the expenditure incurred in performing the relevant activities. On the basis of the OECD TP Guidelines, it follows that the contributions to a CCA should not include a profit mark-up. The application of this principle, however, varies depending on whether the local entity has incurred or shared this expenditure. If a participant incurs expenses to which the link with future local profit potential is too remote, a cross-charge at cost may be subject to specific scrutiny on the basis of the stewardship argument. This may, for example, be relevant in the context of enterprise resource-planning implementation.

In addition to Arts. 26 and 185(2) ITC, the tax authorities could also rely on the general rule in section 49 of the ITC. Thus, the crucial issue in assessing the arm’s length nature of a CCA is to determine each participant’s share. This will not only be important for participants in an existing CCA but also in the event that parties wish to join or leave the CCA. In principle, the expected benefits should be estimated based on the anticipated additional income generated or costs saved by each of the participants.

Where a CCA is deemed to breach the arm’s length standard, the following tax consequences could arise:

  • taxation of an abnormal or gratuitous benefit that is deemed to be granted by the Belgian participant in a CCA; or
  • denial of relief for the costs relating to the arrangement.

Alongside this, a CCA could also simply be disregarded where the facts and circumstances indicate that the reality of the arrangements differs from the terms agreed upfront by the participants. This might be the case where one or more of the participants have no reasonable expectation of benefiting from the CCA or expect only a small fraction of the overall anticipated benefits. However, this analysis should always be viewed using the facts and circumstances as they were known to the parties when they entered into the agreement.

Transfer and Use of Intangible Property

Definition and Classification of Intangible Property

There is no specific definition of intangible property for transfer pricing purposes in Belgium. Since intangible property is considered as part of the intangible assets of a company, reference needs to be made to the definition as laid down in accounting law.

Under Belgian accounting law, intangible fixed assets are defined as:

  • research and development expenses;
  • concessions, patents, licenses, know-how, trademarks and other, similar rights;
  • goodwill; and
  • prepayments for intangible assets.

Although the term “royalty” is also not defined in Belgium’s tax law, references to royalties can be found in Arts. 17 and 90 ITC. For Belgian tax purposes, they can be defined as:

  • revenues from renting, leasing, use or concession of movable goods which are subject to withholding taxes; or
  • revenues from copyrights or similar rights which are marked as movable income and subject to withholding taxes.

In this respect, we refer to the recent discussion draft on Chapter VI of the OECD TP Guidelines which states that intangibles are intended to address “something which is capable of being owned or controlled for use in commercial activities”. The discussion draft clearly indicates that intangibles that are important for TP purposes are not always recognized as such for accounting purposes.

Ownership of Intangible Property

When talking about "ownership" of intangible property, a very fundamental distinction has to be made between "legal" and "economic" ownership. The latter concept can particularly lead to controversy, simply because Belgium adheres to the OECD TP Guidelines, which do not comprehensively define the concept of "economic ownership". We are of the opinion that "economic ownership" is to a large extent comparable to the common law concept of "beneficial ownership".

The legal owner is the entity recognized in law as the owner of the property, even though it may, in fact, be a nominee or agent. The beneficial owner is the entity lawfully entitled to enjoy the fruits of ownership and may differ from the legal owner, usually by agreement.

Economic ownership refers to a non-legal distinction referring to the entity that has contributed financially to the ownership of the property and that bears the associated risks. Therefore, bare legal title to the intellectual property will not necessarily carry all or even much intangible value. A typical example could be local registration, which may be nothing more than a legal requirement in a jurisdiction, in which case further consideration of economic and beneficial ownership is imperative.

As transfer pricing deals with a fair matching of income and expenditure, taking into account the functionality and the risk profile of the parties involved, the relevance of these ownership concepts for the transfer pricing practitioner lays, in our view, simply in the fact that it should be possible to channel income and/or cost streams to the entity or entities that “merit” these, even if different from the legal owner, as these entities made the bulk of the efforts to develop, maintain and/or enhance the value, as the case may be.

In the case of (legally) unprotected intangibles, the issue is relatively straightforward. Indeed, the company that bears the largest share of the costs in the development of the intangible is to be seen as the economic owner. The OECD TP Guidelines state that: “It must always be examined which company has developed the intangible and, consequently, has also borne the costs and risks”.

When dealing with legally protected intangibles (patents, trademarks, etc.), the ownership issue is more complicated, except in the case of independent development of an intangible. In this case, one enterprise of the group assumes the development in its own name. It bears all the costs and risks. This means that, if no intangible finally comes into being, the loss will be borne by this company. The legal owner and economic owner are the same enterprise. The developed intangible can then be licensed to other members of the group, which pay the legal and economic owner market-equivalent remuneration.

The situation of joint development calls for a distinction. First, joint development can take place within a multinational. To determine which entities will be the legal and the economic owner, respectively, the role played by each entity will be very important.

Two different forms to develop an intangible exist:

Under the first form, the research and development is performed on a contract basis. This principle can be summed up as follows: “one or more companies in the group carry out all research and development activities, for which they are paid by means of so-called services fees, which are paid by another company, called ‘the principal’. The principal, in turn, bears all the costs and risks with regard to the success or failure of the research work. If the research and development is successful and results in the creation of an intangible, then the principal holds all intellectual property rights over the research results or developments, and all income from the intangible will be due to it”.

So, the economic owner is the entity that bears the R&D costs as well as the risk of failure. The Belgian tax authorities (including the APA Commission) are well acquainted with this concept.

Cost-plus arrangements for contract R&D can easily be obtained. Since January 2005, the APA Commission has demonstrated to be actively engaged in issuing rulings that basically offer a similar treatment as what could be obtained under the service center regime.

Please note that the development of marketing intangibles can also be governed by the same type of contract. However, although a contract can be used to develop intangibles, it does happen that subsidiaries contribute to developing the parent company brand’s name in the country where they are established. A typical example would be where a parent company calls on the services of a subsidiary to distribute merchandise produced by the parent in the subsidiary’s country of residence. The appeal of the product in the consumers’ minds (i.e. the brand) may already be valuable in some sales territories but not, or less so, in others, so that the subsidiary may have to undertake significant marketing efforts to be successful in penetrating its local market.

The question may then be whether the subsidiary needs to be compensated by the parent for the higher value that it confers on the already existing marketing intangible. Unlike, for example, the United States, the Belgian tax authorities do not seem to take a particularly harsh viewpoint in these circumstances but rather stick to the OECD TP Guidelines.

In the absence of Belgian case law on the topic, we could simply rely on experiences in tax audits, where it looks as if tax authorities look at the amount of costs incurred by the subsidiary so as to come to an assessment as to the “fairness” of these amounts in comparison to what independent distributors with similar functionality and risk profiles would do.

All the companies participating in the cost-sharing arrangement can acquire a part of the legal ownership. Alternatively, only one company acquires the legal ownership and the others acquire economic ownership. The OECD is clearly of the view that economic ownership prevails over legal ownership.

Secondly, joint development can take place outside a multinational company group. This happens, for instance, when collaborating with third-party contractors, corporate partnering, corporate venturing, etc.

It is probably too easy to simply argue that in all of these scenarios, the conditions should automatically comply with the arm’s length standard as these are third-party transactions. We feel that this issue is less straightforward and that one should first assess whether there is a “controlled transaction”, i.e. between associated enterprises and, if so, whether transactions are engaged in while honoring the arm’s length standard. The notion of “associated enterprises” is not much commented on by the OECD. The OECD TP Guidelines do not contain a definition but rather refer to article 9(1)(a) and (b) of the OECD Model.

Under article 9(1)(a), a transfer pricing adjustment is allowed when a company in one of the Contracting States participates in the share capital of a company located in the other State (no minimum threshold is mentioned), to the extent that the business profits concerned are affected by (commercial) terms and conditions differing from those customary between enterprises acting independently from each other. As said before, Belgium adheres to the OECD TP Guidelines. However, it adopts a broader notion of associated enterprises. Basically, any form of “de facto” or “de jure” control is sufficient, as generally accepted and applied before the courts.

Also, regarding the ownership of intangibles and entitlement to premium returns, reference can be made to the recent discussion draft on Chapter VI of the OECD TP Guidelines.

Sale, Licensing and Other Ways of Transferring an Intangible

Intellectual property rights can, in general, be transferred from one undertaking to another in three ways: by contribution in kind, by sale or by grant of a right of use. In the following, we elaborate on the grant of rights over, and the actual sale of, intangible property.

(a) Licensing

Licensing intangible property in exchange for the periodic payment of royalties is probably the most common way of exploiting intangibles. When this route is followed, attention should be paid to the fact that royalty payments will only be tax deductible provided a true benefit has been derived from the license or it was reasonably expected that such a benefit would be obtained at the time the agreement was entered into.

The importance of this can be illustrated by a case in which the Belgian tax authorities took the position that a Belgian company had artificially shifted profits to its French parent by paying royalties for use of the parent company’s name whilst the Belgian subsidiary bore the same name. The tax office’s position was that the French shareholder had free disposal over the name by means of its dominant position and that the royalty agreement was only set on paper seven months after incorporation of the Belgian subsidiary. The Brussels Court of Appeal confirmed the tax authorities’ position.

Attention should also be paid to the consistency of the amount of royalty paid. In a case decided by the Brussels Court of Appeal, a group company had paid a royalty of 10% for several years and at a given moment this was adjusted to 5%. The tax authorities had no problem with this change going forward but successfully challenged why 10% had been paid in the past.

(b) Sale of intangible property

From a tax perspective, a relevant aspect when transferring intangibles is a capital gains exemption, or at least a deferral of the taxes due on capital gains realized as a result of divestment.

Three ways of selling an intangible can be distinguished:

  • an asset deal: a capital gain may arise to which the ordinary taxation regime in principle applies; however, provided that it concerns capitalized fixed assets and certain conditions are fulfilled (such as the reinvestment of the sales price in depreciable (in)tangible fixed assets), the capital gains realized can enjoy the spread taxation regime meaning that taxation will be spread following the depreciation period of the assets in which the sales proceeds have been reinvested;
  • a share deal: the outcome can be either a capital gain (which can be tax exempt if the shares qualify for the Belgian participation exemption) or a capital loss (which is not deductible for Belgian tax purposes); and
  • intellectual property may also be contributed as an asset to another company as part of a contribution in exchange for shares. Contributions of this type may give rise to a taxable capital gain, except for intellectual property that is part of a line of business or a universal transfer.


Determining Arm’s Length Interest Rate

As there are no specific transfer pricing guidelines in Belgium as to intra-group financing agreements, guidance can be sought in advance pricing agreements (APAs).

The APA Commission’s practice provides some guidance on the pricing of loans granted by internal banks. In recent rulings, one can observe a clear tendency to grant a ruling for a methodology/transfer pricing policy. In order to determine an arm’s length remuneration, the following approach seems to be the prevailing one.

The starting point will often be the assessment of a stand-alone rating. In other words, what would be the creditworthiness of a given borrower if it were not to be a member of a multinational. Various options to estimate such a stand-alone rating have been accepted:

  • formal rating analysis by a rating agency such as Moody’s, Standard & Poor’s or Fitch;
  • specialized software which will often be issued by rating agencies;
  • internal credit scoring mechanisms (i.e. the internal treasury person of the multinational will perform a credit rating analysis based on a predefined methodology, i.e. based on financial ratios); and,
  • derive the credit rating from third-party funding.

Once a stand-alone rating has been determined, some further refinement can be performed. The most important refinement consists for the probability that a parent company would intervene if a subsidiary were to face going into default. However, the parent is not legally obliged to intervene, as there is no formal guarantee. Based on the willingness and the ability of the parent to intervene, the stand-alone rating may be adjusted (and could in some cases be close to the groups rating). This is commonly referred to as the “implicit guarantee”. Other factors that might influence an adjustment of the rating include collateral and the type of loan. Therefore, one should have a good look at the terms and conditions as stipulated in the loan agreement, as these can significantly impact the interest rate.

Once the stand-alone credit rating has been refined, the corresponding credit spreads are then retrieved. Also here, one should have a good look at the terms and conditions of the loan agreement, as these may impact the interest rate (e.g. maturity, currency). This can be done by means of financial databases, internal credit spread grids or via internal CUPs.

Treatment of Guarantees

Within the Belgian legislative context, there are no specific regulations concerning the transfer pricing treatment of guarantees. The Belgian tax authorities take the OECD TP Guidelines as guidance when it comes to the treatment of guarantees.

Given the lack of Belgian-based guidance, two key topics are often discussed with the tax authorities:

  • the approach used to value the intra-group guarantee fee; and
  • the potential split of the value of the guarantee between the guarantor and the guaranteed entity.

With respect to the valuation of the formal guarantee, several approaches referred by the literature are generally accepted by the Belgian tax authorities e.g. an option-pricing model, interest differential, etc. This being said, the most common methodology is based on the interest rate differential between the interest rate on a loan without guarantee and the interest rate on a loan benefiting from a formal guarantee. This differential is often divided between the guarantor and the guaranteed entity to obtain the guarantee fee.