CFC rules: artificial offshore constructions under increased pressure
As from 2019, Belgian companies will also pay tax on the non-distributed profits of a “controlled foreign company” (CFC) resulting from an artificial construction set up with the main purpose of obtaining a tax advantage.
What is a CFC?
A foreign (not only non-EU, but also EU) company qualifies as a CFC if
- the taxpayer (indirectly) owns the majority of voting rights, a participation of at least 50% of capital or is entitled to at least 50% of profits, and
- the foreign company is not subject to income tax or is subject to income tax which is less than half of the corporate tax which would be due if the foreign company was established in Belgium.
Subject to conditions, the undistributed profits of a qualifying CFC are included in the taxable basis in Belgium.
The new CFC rules not only apply to controlled foreign companies, but also to foreign branches.
Taxpayers have the legal obligation to declare the existence of any CFCs in the corporate income tax return.
Which profits of a CFC fall within scope?
Only CFC profits resulting from an artificial construction are targeted. Those profits will be included if they are generated by assets and risks that are linked to key functions, exercised by the Belgian company and not by the CFC. A construction will be considered as artificial if the foreign company (CFC) would not have been the owner of the assets or assumed the risks that generate its income if that company would not have been under the control of the Belgian company where the relevant key functions for those assets and risks are exercised which fulfill an essential role in generating the income of the foreign company.
Is double taxation avoided?
Double taxation is to a certain extent avoided. Profits distributed by a CFC or (non-exempt) capital gains on shares in a CFC benefit from the dividends-received deduction to the extent that, in a previous year, the profits of the CFC were taxed as non-distributed profits of the CFC. No credit is provided for foreign taxes paid on the CFC profits. Further, it is uncertain whether double taxation could be avoided if a CFC is indirectly owned by a Belgian company.
What to do next?
Existing corporate structures should be reviewed for their CFC impact. We note that the new Belgian CFC rules create different risks of double taxation. CFC rules should also be kept in mind while setting up new corporate structures. Transfer pricing group policy should also be reviewed.