Tax authorities issue first clarification of new CFC rules

The Belgian rules on controlled foreign companies (CFCs) were amended by the Program Law of 22 December 2023. 

The new rules raise a number of questions and the tax authorities have provided some important initial clarification regarding the definition of CFC and the application of the participation requirement. Further clarification is expected, but as the rules are effective as from tax year 2024 (i.e., for financial years ending on or after 31 December 2023) taxpayers will have to take a position in the near future regarding the application of the regime when preparing their financial statements and corporate income tax return.

Participation requirement

Under the new rules, a foreign entity qualifies as a CFC when both the participation requirement and the taxation requirement are met.

The participation requirement is met if the taxpayer alone, or together with its associated entities, holds a qualifying participation (more than 50% of the voting rights, or at least a 50% participation in the capital or profit entitlement) in a foreign company.

While Council Directive (EU) 2016/1164 (the EU Anti-Tax Avoidance Directive (ATAD I)) provides that the direct and indirect participations of the taxpayer (and of any associated company) should be taken into account to assess whether one of the thresholds of the participation requirement is met, the new Belgian legislation does not include any provisions in this respect. This generated discussions among academics and tax professionals, resulting in uncertainty for taxpayers. However, the inclusion of indirect participations would be inconsistent with the choice made by the Belgian legislator to limit any CFC income based on the effective percentage of direct participation in the CFC.

Position taken by tax authorities

The notice to the corporate income tax return for tax year 2024 published by the tax authorities (Dutch | French) provides the following guidance:

• The participation requirement can only be met if the taxpayer holds at least one share (i.e., a voting right, participation in capital, or profit entitlement) in the potential CFC.

• The direct participation of any associated entity of the taxpayer must be added to the direct participation of the taxpayer to assess if any of the participation thresholds is met by the taxpayer; the participation of the associated entity is not prorated.

The notice gives the following example:

Based on the notice, the analysis of the participation requirement is as follows:

• A holds directly 10% of B

• .A and C are associated entities (parent/subsidiary (direct or indirect) relationship of at least 25%).

• The (direct) participations of A and C in B (i.e., respectively 10% and 42%) should be added to assess if A, jointly with C, meets one of the participation thresholds. 

• A holds 52% of B jointly with C and therefore meets the participation requirement. 

The tax authorities therefore implicitly confirm that the notion of control under the new Belgian CFC legislation (and ATAD I) differs from its definition under the Belgian Code of Companies and Associations (BCCA). It is possible that A does not control C under the BCCA due to its minority participation and as a consequence does not control B under the BCCA, but at the same time, B is considered as controlled by A for CFC purposes.

Taxpayers need to ensure that they pay proper attention to these differences when reviewing group entities potentially qualifying as CFCs as they may lead to group entities unexpectedly qualifying as CFCs, as well as practical challenges, such as obtaining the relevant information from the CFC to undertake the full CFC analysis. 

Unanswered questions

While this clarification is naturally welcome, a number of key questions with respect to the new CFC regime remain open, including:

• The accounting standard to be used to determine the deemed Belgian taxable basis of the (potential) CFC, and its possible adverse consequences in the event of pure GAAP-related timing differences. 
• The successive application (application “in cascade”) of the CFC rules to these calculations, possibly triggering the application of the provisions to indirect subsidiaries.
• The impact on these calculations of differences between the tax legislation of the jurisdiction of residence of the CFC and Belgian legislation (e.g., in areas such as tax consolidation, interest deduction, use of tax losses (the Belgian “basket limitation” rule)), and the potential adverse consequences of pure timing differences
• The concrete conditions of application of the exemption for “substantial economic activity,” including their interactions with ATAD I and primary EU law..

It is expected that these questions will be addressed in future administrative guidelines.