By Coen Ysebaert and Marc Bafort

The Belgian Ruling Commission has released guidance in the form of a policy statement setting out the conditions on which it will grant a ruling with respect to Hong Kong-source dividends. The Commission has already published two rulings with respect to the application of the dividends received deduction (DRD) for Hong Kong-source dividends received by a Belgian company, confirming in both cases the application of the DRD.

Participation Exemption for Dividends Received

The Belgian participation exemption provides for a DRD of 95% of net dividends received, provided both a “participation test” and a “taxation test” are met.

The participation test requires that the shareholder hold for a continuous period of at least one year at least 10% of the capital of the subsidiary or hold a participation with an acquisition value of at least Euro 1.2 million on the distribution date.

The taxation test set forth in the Belgian tax code provides that certain dividends will not be entitled to exemption under the DRD. Specifically, dividends are excluded if the dividends are distributed by:

1. A company that (a) is not subject to Belgian corporate income tax or, in the case of a foreign subsidiary, a corporate tax similar to the Belgian corporate income tax, or (b) is located in a country where the common tax regime is significantly more advantageous than in Belgium (article 203, §1, 1st limb, 1° ITC92);
2. A finance company, a treasury company or an investment company benefiting from a tax regime that deviates from the common tax regime in their country of residence (article 203, §1, 1st limb, 2° ITC92);
3. A company whose income (dividends excluded) does not originate from its country of residence and benefits in its country of residence from a special tax regime deviating from the common regime - i.e. offshore companies (article 203, §1, 1st limb, 3° ITC92);
4. Companies with foreign branch income that is globally subject to a tax regime that is significantly more advantageous than in Belgium (article 203, §1, 1st limb, 4° ITC92); and
5. Intermediary companies (other than investment companies) redistributing dividends that would not qualify for the DRD under article 203, §1, 1st limb, 1°-4° ITC92 for at least 90% (article 203, §1, 1st limb, 5° ITC).

Policy Statement on Taxation Test

The Ruling Commission has confirmed the previous positions taken by the Belgian tax administration (Circular Letter dated 31 March 2005) and the Minister of Finance (Parliamentary question dated 28 March 2006). That is, dividends distributed by a Hong Kong company cannot be excluded from the DRD on the basis of items 1 through 3 above (i.e. article 203, §1, 1st limb, 1° to 3° ITC92).

The Ruling Commission has further clarified that dividends received from a Hong Kong company could be excluded from the DRD if distributed by an intermediate holding company (article 203, §1, 1st limb, 5° ITC92) or a low-taxed foreign branch (article 203, §1, 1st limb, 4° ITC92), but the Commission is willing to examine both exclusions in the context of an advance ruling request.

The low-taxed foreign branch exclusion rule is applicable to the extent the distributing company realizes profits through one or more foreign establishments that are globally subject to a tax regime that is considerably more favorable than in Belgium. The dividends remain eligible for the DRD if the effective tax charge on the branch profits, on a cumulative basis (i.e. both at the level of the foreign establishment and its head office), is at least 15%. Important to note is that the effective tax charge on the branch profits (on a cumulative basis) should be compared to the amount of branch profits determined based on the application of Belgian rules.

The Ruling Commission examined this exclusion in its rulings to determine whether the taxation requirement was met where the Hong Kong subsidiary holds a representative office abroad. The Commission’s opinion‘s is that a representative office in China is subject to tax in accordance with local administrative practice, whereby the effective global tax charge for the representative office in China will exceed 15%. Therefore, the Commission has concluded (in both the policy statement and at least in one of the rulings) that the low-taxed foreign branch exclusion rule does not apply to representative offices in China.

With respect to representative offices in other countries, the policy statement confirms that the low-taxed foreign branch exclusion does not apply to the extent that:

The fifth exclusion rule was not applicable in the two rulings because the Hong Kong companies did not hold participations.

Additional Investigation by the Ruling Commission

The policy statement provides that cases brought before the Ruling Commission will be assessed based on economic substance in Hong Kong (i.e. the employment of personnel and tasks assigned, composition of the Board of Directors in Hong Kong, estimated turnover and profits, etc.), and as a general rule, rulings will be granted if a transfer pricing ruling request is also filed. Further, the applicant will be requested to agree that the operation will have not have any adverse consequences on employment in Belgium.

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