Tax consolidation: Belgium enters the playing field!
Groups with loss making entities may (significantly) reduce their overall Belgian tax burden and optimize their tax prepayments. As from next year, it will become possible to compensate the current year losses of one company with the profits of another affiliated company.
Indeed, for financial years starting as from 1 January 2019, Belgium introduces a concept of tax consolidation (in the form of tax-deductible group contributions) for corporate taxpayers. As a result, Belgian group companies may be able to pay taxes only on their combined results.
How will this work?
The new group contribution system will grant a Belgian company the annual possibility to ‘transfer’ taxable profits to another affiliated company.
Technically, this is organized via a group contribution agreement whereby a Belgian company can transfer (part of its) taxable profits to an affiliated company. This group contribution will constitute a tax deductible item for the contributor and will be taxable for the recipient, thus offsetting their current-year losses.
In order to keep this system neutral for all parties, the contributor must also commit to pay a financial compensation to the recipient for the surplus of tax which would otherwise be due. This financial compensation will be non-deductible for the contributor and tax-exempt for the recipient.
To qualify or not to qualify?
In order to qualify for the group contribution system, it is important that the companies concerned meet certain conditions.
A participation of at least 90% (held directly between the parties to the agreement, i.e. parent-subsidiary, or by a direct common EEA parent, i.e. sister companies) is required. This participation must be held for an uninterrupted period of 5 years.
Also, the companies concerned must, on an annual basis, conclude a written ‘group contribution agreement’ for which a model will be published by Royal Decree.
Opportunities for multinational groups
We note that the regime also allows Belgian companies to conclude a group contribution agreement with the Belgian permanent establishment of a foreign affiliated company (under the same conditions as discussed before). In addition, it provides a Belgian corporate taxpayer the possibility to deduct ‘final losses’ of foreign affiliated companies. For this, a Belgian corporate taxpayer can conclude a group contribution agreement with a foreign affiliated company established in the EEA in case of the definitive cessation of the activities of the latter (with an anti-abuse provision to avoid the double use of losses).
The new regime also has some downsides, the benefit for Belgian holding companies may be limited and the way the 5 year holding period should be calculated in case of a restructuring (mergers, etc.) raises questions.
What to do next?
The new regime is subject to various conditions that may limit the scope of application. Belgian corporate taxpayers are advised to check their group structure to assess if any actions could still be undertaken to maximize their position for the new consolidation regime.