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New Pillar Two law adopted by Belgian parliament

Corporate Tax Alert | Business Tax Alert

On 2 May 2024, the Belgian parliament adopted a new Pillar Two law (Dutch | French) that incorporates specific provisions contained in the administrative guidance issued by the OECD/G20 Inclusive Framework on BEPS (“OECD inclusive framework”) during 2023 and corrects certain legislative errors identified in the original Pillar Two law dated 19 December 2023. 

In addition, the law introduces modifications to the Belgian innovation income deduction (IID) intended to preserve the effectiveness of the IID for groups that are subject to the Pillar Two legislation in Belgium. Without any modifications, the benefit of the IID would have been partially lost, since a top-up tax would have been payable by groups with a GloBE tax rate in Belgium lower than 15% as a result of the IID. 

The new law will come into force as from the same dates as the original law of 19 December 2023: the qualified domestic minimum top-up tax (QDMTT) and income inclusion rule (IIR) will come into effect on 31 December 2023 (i.e., as from 1 January 2024 for calendar year taxpayers), and the undertaxed profits rule (UTPR) will come into effect on 31 December 2024 (i.e., as from 1 January 2025 for calendar year taxpayers).

Key features of the new law

Adoption of the transitional country-by-country (CbC) report safe harbour clarifications 

The law incorporates the administrative guidance issued by the OECD inclusive framework in December 2023 with respect to the application of the transitional CbC safe harbours, including the application of the anti-hybrid rules. For Belgian purposes, the anti-hybrid rules apply only to hybrid arbitrage arrangements entered into after 18 December 2023 and not as from 15 December 2022 (the date of issuance of the original transitional CbC safe harbour rules by the OECD) as Belgian constitutional law does not allow for the retroactive application of such provisions.

Correction of the safe harbour for multinational enterprise (MNE) groups in the initial phase of their international activity

According to the OECD rules, the top-up tax percentage under the UTPR is reduced to zero for the first five years from the first day of the first fiscal year for which the MNE group comes within the scope of the Pillar Two rules for MNEs that are in the initial phase of their international activity. 

Council Directive (EU) 2022/2523 (the “Pillar Two directive”) extends the safe harbour to the application of the IIR but only where the jurisdiction of the ultimate parent entity (UPE) is low-taxed. The wording of the original Belgian Pillar Two law suggested that this safe harbour would be further extended to apply to the IIR for all low-taxed jurisdictions and not only the jurisdiction of the UPE. 
The amendments ensure that the new legislation is aligned with the provisions of the EU Pillar Two directive and the OECD Pillar Two model rules. 

Finally, the Pillar Two law of 19 December 2023 has also been modified so that this safe harbour is not extended to the Belgian QDMTT.

Modifications to the IID

The new law introduces modifications to the IID which allow for an effective minimum tax of 15% payable by Belgian taxpayers but still ensure that Belgium remains competitive to foster innovation. 

The amendments allow taxpayers to defer the use of all or part of the IID to future years. Taxpayers may limit the use of the IID in a given year to ensure a GloBE minimum tax rate of at least 15% and carry forward the remaining IID indefinitely in the form of a non-refundable tax credit. 

To ensure that the effective tax rate in future years is also aligned with the GloBE minimum effective tax rate of at least 15% and does not drop below 15% because of a required offset of the tax credit carried forward against corporate income tax payable, taxpayers may choose to what extent they use the carried forward amount to offset the corporate income tax of future years. 

The accounting treatment of the above amendment to the IID should also be carefully considered. 

Extension of the definition of qualified refundable tax credits (QRTC) to include marketable transferable tax credits (MTTC)

MTTC (tax credits that can be marketed or sold to another party) will qualify as QRTC where they meet specific marketability and transferability criteria. 

Election in respect of excluded dividends

Dividend income is excluded from GloBE income unless the dividends are derived from short-term portfolio shareholdings (i.e., the UPE has held an ownership interest of less than 10% for less than one year). In accordance with the administrative guidance issued by the OECD inclusive framework in February 2023, the law includes provisions allowing MNE groups to elect for each constituent entity to include dividends from all their portfolio shareholdings (including long-term portfolio shareholdings) in their computation of GloBE income or loss. 

Inclusion of safe harbour rules

The law includes the following safe harbour rules:

  • Simplified safe harbour calculations for non-material constituent entities as defined in the administrative guidance issued by the OECD inclusive framework in December 2023.
  • QDMTT safe harbour provisions. Where an MNE group qualifies for a QDMTT safe harbour in a particular jurisdiction, article 8.2 of the OECD Pillar Two model rules excludes the application of the GloBE rules in other jurisdictions by deeming the top-up tax payable under the GloBE rules to be zero in other jurisdictions. A QDMTT safe harbour therefore allows the MNE group to undertake one computation under the QDMTT and then rely on article 8.2 to automatically reduce the top-up tax to zero in other jurisdictions, avoiding the need to undertake multiple calculations.
  • Transitional UTPR safe harbour. The UTPR top-up tax amount calculated for the UPE jurisdiction will be deemed to be zero for fiscal years ending at the latest on 31 December 2026 if the UPE Jurisdiction has a corporate income tax rate of at least 20%.
Allocation of taxes arising under a blended CFC tax regime 

The administrative guidance issued by the OECD inclusive framework in February 2023 provided additional assistance on how to allocate CFC taxes arising from a blended CFC tax regime such as the US global intangible low-taxed income (GILTI) regime. This guidance has been adopted in the Belgian law.