Corporate/International Tax Alert (14/12/2010)
Tax authorities publish administrative circular on payments to tax havens
The Belgian tax authorities published a long-awaited administrative circular on 8 December 2010 (dated 30 November 2010) that clarifies the scope of a 2009 law on payments made to tax havens (click here for the Tax Alert of 8 February 2010 regarding this law).
The program law of 23 December 2009 introduced (in Article 307, §1 of the Belgian Income Tax Code (ITC)) a requirement that resident and nonresident companies report all direct and indirect payments made as from 1 January 2010 to persons located in tax havens (i.e. zero or low tax jurisdictions, identified as such by Royal Decree) or in countries that are considered to be uncooperative jurisdictions by the OECD, to the extent the total of such payments amounts to EUR 100,000 in the taxable period.
In addition, these payments are not deductible if not reported. Even if reported, a deduction for the payments will be disallowed if they are not executed in respect of actual and genuine transactions with persons other than artificial arrangements.
With respect to the reporting requirement, the administrative circular provides guidance on the following points:
- The payment must be reported in the taxable period in which it is actually made (not in the period in which the payment is accrued in the accounts);
- The concept of “payment” includes payments that represent a cost (e.g. interest), as well as payments that only entail recording on the balance sheet (e.g. payments for the acquisition of fixed assets);
- The concept of “payment” includes payments in cash or in kind, as well as payments made via bank transfer;
- All payments made by a taxpayer are covered, regardless of whether they are made in the person’s own name and for its own account or in the name and/or for the account of a third party;
- Only the amount of the actual payment must be reported (e.g. the net amount of an interest payment after deduction of withholding tax);
- An “indirect payment” is covered if the taxpayer knows or should have known that the legal beneficiary of the payment (even though it receives the payment for its own account) is not the beneficial owner of the payment. In the case of intragroup payments, the circular states that it can be assumed that the identity of the beneficial owner should be known;
- The concept of “person” includes individuals, legal persons and any other association of persons;
- The reporting requirement applies, in principle, when the beneficiary has an address or a bank account in a targeted jurisdiction. It also applies when the payment is made to a branch located in a non-targeted jurisdiction but the head office of the branch is located in a targeted jurisdiction (the circular provides numerous practical examples on these situations).
The circular also notes that targeted payments may be reported spontaneously by the taxpayer, even though the minimum threshold of EUR 100,000 is not reached. The advantage of voluntary reporting is that, if upon audit the tax authorities discover unreported payments, the reported payments will not be rejected automatically provided they satisfy the deductibility conditions (see below).
The administrative circular further clarifies that:
- To demonstrate the actual and genuine character of a transaction, the taxpayer must demonstrate that it meets an “industrial, commercial or financial need,” which is duly compensated in accordance with the arm’s length standard (cf. Article 54 ITC);
- A person is not considered an artificial arrangement if it has developed an actual economic activity in the country where it is established, which, inter alia, implies demonstrating the physical existence of that person in terms of office space, personnel and equipment (the circular refers to the European Court of Justice decisions in the Cadbury-Schweppes and Eurofood IFSC cases);
- The specific deductibility conditions for these payments do not affect the fact that the payments must be at arm’s length (cf. Article 26 ITC) and must meet the general deductibility conditions in Articles 49 and 54 ITC
- For payments covered by the provisions relating to the secret commission tax (e.g. service fees), the reporting obligations of both measures must be met simultaneously. However, when the secret commission tax is applied, the targeted payments are tax deductible even when the specific deductibility conditions for payments to tax havens are not satisfied.
The circular also provides that the reporting obligation and deductibility conditions may, in certain circumstances, be affected by the nondiscrimination provisions in a tax treaty or the EU principles on the free movement of capital and payments. As a result, the reporting obligation and deductibility conditions may not fully apply for all payments to targeted countries (e.g. according to the nondiscrimination provision in the Belgium-United Arab Emirates treaty, payments cannot be disallowed merely because they have not been duly reported).
Failure to comply with the new reporting requirements could have material adverse consequences. Now that the position of the authorities is available, affected taxpayers should track any (direct and indirect) payments to targeted countries and asses the applicability of the new rules.