Advocaten / Avocats / Lawyers

Tuesday, 03 April 2018

Corporate Tax Reform

Editor

Ivo Vande Velde

 

Input on Luxembourg by

Michiel Boeren

 

Input on the Netherlands by

Kristel Tijsterman (Atlas)

A recent reform has reshaped the corporate income tax rules in various key areas, thus creating new tax benefits for Belgian companies, but also introducing new compensating measures to balance out the new advantages.

The reform was passed into law on 25 December 2017, and will come into force in three separate phases: the first phase entered into force on 1 January 2018; the second phase will start on 1 January 2019; the last phase is planned for 1 January 2020.

The recent changes are discussed below. In addition, where useful, the recent corporate income tax reform in Belgium will be compared with recent tax developments in the Netherlands and Luxembourg.

Phase 1: 2018

Corporate income tax rates

The standard corporate income tax rate of 33% is gradually being lowered to 29% in 2018 and 2019, and to 25% from 2020.

Under certain conditions, small and medium sized enterprises will, from 2018 onwards, benefit from a special reduced rate of 20% on the first bracket of EUR 100,000 EUR of taxable profits.

The ‘additional crisis contribution’ (previously 3% of the corporate income tax rate) will be gradually abolished.

As from 2018, a separate tax of 5.1% (10% as from 2020) applies to companies that fail to annually grant at least EUR 45,000 (or, if lower, at least the company’s net taxable result) gross salary to at least one of its directors. The distinct rate is levied on the difference between the minimum required gross salary and the effectively granted gross salary.

Under certain conditions, an exception applies for related companies. In this case, a gross salary of EUR 75,000, granted to one of their joint directors is sufficient to avoid the application of the separate tax at the level of each individual company.

Finally, the ‘exit-tax’ rate that applies if a real estate company is converted into, or engaged in a reorganisation with a BE-REIT (regulated real estate company) or a Belgian SREIF (specialised real estate investment fund), is reduced to 12.75% (previously: 16.995%) as from 2018, but will be increased again to 15% as from 2020.

Summary:

   Financial years starting on or after 1 January 2018 and ending on or after 31 December 2018 (tax year 2019)  Financial years starting on or after 1 January 2020 and ending on or after 31 December 2020 (tax year 2021)
Standard rate   29.58% (incl. 2% ‘additional crisis contribution’)  25%
 Rate for SMEs (first bracket of EUR 100,000 of taxable profits)  20.40% (incl. 2% ‘additional crisis contribution’)  20%
 Exit Tax  12.75%  15%

 

Benelux perspective

VlagNL NETHERLANDS       

The current standard corporate income tax rate is 20% on the first EUR 200,000 taxable amount. The tax rate applying on taxable amounts exceeding EUR 200,000 is 25%.

From 2019, the new government coalition intends to reduce CIT rates. The standard rate will be reduced in steps from 25% to 21% in 2021. The lower rate will decrease by equivalent same steps, from 20% to 16% in 2021.

The innovation box regime taxes profits from patented intangibles or certain R&D activities against a reduced effective tax rate of 7% (up to 2018: 5%).

VlagLUX LUXEMBOURG

Luxembourg companies are subject to corporate income tax and municipal business tax on their net taxable income.

The corporate income tax rate has been decreased to 18% from tax year 2018. Companies with an annual taxable income below EUR 25,000 benefit from the reduced 15% rate. On top of the corporate income tax, a contribution to the unemployment fund is levied at a rate of 7% resulting in an overall corporate income tax rate of 19.26%.

Municipal business tax is levied at a rate ranging from 6.75% to 10.5% depending on the city where the company is established. For companies established in Luxembourg city, the municipal business tax rate amounts to 6.75%.

For the city of Luxembourg, the overall income tax rate therefore amounts to 26.01%.

In 2017, Luxembourg proposed a Bill introducing a “Patent box” regime. Eligible income derived by eligible companies established in Luxembourg city would be taxed at an effective tax rate of 5.20%, i.e. 20% of the usual income tax rate.

 

Notional Interest Deduction

The tax reform changes the calculation base for the notional interest deduction (hereafter ‘NID’), causing a (further) decrease of the tax advantage.

As from 1 January 2018, the basis for the NID is limited to the ‘incremental’ equity over a period of five years. This basis is calculated by taking the positive difference between the net equity at the end of the taxable period and the net equity of the taxable period five years prior.

For newly-incorporated companies, an exception applies during the first 5 years following their incorporation. The NID basis in that case is the full equity at the end of the taxable period.

These modifications apply for the financial years starting on or after 1 January 2018 and closing on or after 31 December 2018 (tax year 2019). According to a pre-draft bill of law, an anti-abuse rule will be introduced in order to avoid double-dips Under this anti-abuse rule, no NID can be claimed in respect of capital contributions made by an affiliated company by means of borrowed funds, if such affiliated company has claimed a tax-deduction for interest paid in respect of the loan.

The NID rate for tax year 2019 will be 0.746%. For Small and Medium-sized Enterprises the NID rate for tax year 2019 will be 1.246%.

Benelux perspective

VlagNL NETHERLANDS

The Netherlands do not apply a NID.

VlagLUX LUXEMBOURG

Luxembourg does not apply a NID or any deduction similar in nature.

 

Minimum taxable basis

The utilisation of certain deductions against the taxable profit of a given financial year has been limited. The limited deductibility applies for:

  • carried-forward tax losses;
  • dividend-received deduction that has been carried-forward due to insufficient taxable profits;
  • carried-forward ‘innovation’ deduction for innovation revenue;
  • prior years’ and current year’s NID.

For profits up to EUR 1,000,000, no limitation applies for the utilisation of these deductions. However, if the threshold of EUR 1,000,000 profits is exceeded, then the deduction can only be claimed up to 70% of the taxable basis exceeding the EUR 1,000,000 threshold. This means that: (i) these deductions can no longer be claimed against the company’s full tax base, but only within a limited ‘basket’, and (ii) despite the available deductions, a company may be taxed on a ‘minimum taxable basis’, which amounts to 30% of the taxable basis exceeding the EUR 1,000,000 threshold.

Importantly, the carried-forward deductions that cannot be applied due to the new provisions relating to the ‘minimum taxable basis’ can be carried-forward to subsequent financial years under the principles that apply to each individual deduction, resulting in a ‘timing difference’.

Benelux perspective

VlagNL NETHERLANDS

No similar regime applies in the Netherlands.

VlagLUX LUXEMBOURG

Luxembourg imposes corporate income tax and municipal business tax on net taxable profits.

In addition, Luxembourg tax resident companies as well as non-resident companies operating in Luxembourg via a permanent establishment are annually subject to 0.5% net wealth tax (“NWT”). Companies are annually subject to a minimum NWT, which ranges from EUR 535 to EUR 32,100 for operating companies and Euro 4,815 for pure holding and/or financing companies.

 

Participation exemption (dividends received)

The participation exemption on dividends received is increased from 95% to 100%. As before, this exemption is subject to:

  • a participation threshold: the shareholder (parent company) must have a shareholding of at least 10% in the capital of the distributing company, or a shareholding with an investment value of at least EUR 2.5 million at the date of attribution of the dividend; and
  • a holding period condition: the shareholder (parent company) must hold the full legal ownership of the shareholding for an uninterrupted period of at least 1 year.

These conditions do not apply for shares held in or by an investment company (e.g. Pricaf Privée).

 

Participation exemption (capital gains)

The conditions to benefit from the capital gains exemption are aligned with those applying to the participation exemption for dividends received. This means that as from 1 January 2018, only holdings of at least 10% in the capital of the company or with an investment value of at least EUR 2.5 million can benefit from the exemption.

The participation threshold and the 1-year holding requirement do not apply for the shares held in or by an investment company (e.g. Pricaf Privée).

Capital gains on shares whose dividends do not entirely benefit from the participation exemption (based on the taxation condition) are also partially exempted.

The 0.412% tax on capital gains realised by ‘large’ companies has been abolished, meaning that capital gains on shareholdings that meet both the minimum participation threshold and the 1-year holding condition will henceforth be fully exempt.

Summary

   Financial years starting on or after 1 January 2018 and ending on or after 31 December 2018 (tax year 2019)  Financial years starting on or after 1 January 2020 and ending on or after 31 December 2020 (tax year 2021)
Subject-to-tax, participation threshold and 1-year holding condition being met   Full exemption  Full exemption
 Subject-to-tax,
participation threshold being met;
1-year holding condition not being met
25,5%

20.4% for SMEs (first bracket of EUR 100,000 of taxable profits)

25%

20% for SMEs (first bracket of EUR 100,000 of taxable profits)

 Subject-to-tax condition being met;
Participation threshold not being met

29.58%

20.4% for SMEs (first bracket of EUR 100,000 of taxable profits)

25%

20% for SMEs (first bracket of EUR 100,000 of taxable profits)

 Subject-to-tax condition not being met 29.58%

20.4% for SMEs (first bracket of EUR 100,000 of taxable profits)

25%

20% for SMEs (first bracket of EUR 100,000 of taxable profits)

 

Benelux perspective

VlagNL NETHERLANDS

The Dutch participation exemption provides for a 100% exemption for dividends and capital gains received from qualifying shareholdings. The requirements for applying this exemption are exactly the same for dividends and capital gains. In contrast to Belgium, a 5% minimum ownership is required and no minimum investment requirement is in place. In addition, no minimum holding period applies. The Dutch participation exemption also applies to low taxed shareholdings provided that one of the other requirements (the ‘motive test’ or the ‘asset test’) is fulfilled.

VlagLUX LUXEMBOURG

Like the Netherlands, the Luxembourg participation exemption provides for a 100% exemption for income (i.e. dividends and liquidation distributions) and capital gains derived from qualifying participations.

The minimum participation threshold amounts to 10% of the share capital or shares with a historical acquisition price of EUR 1,200,000 (for the exemption to apply in respect of income) or EUR 6,000,000 (for the exemption to apply for capital gains). Further, a minimum holding period of 12 months applies.

Expenses having a direct economic connection with exempt participations are in principle fully tax deductible. However, their deduction may be limited if income from the relevant qualifying participation is received in the same year or is subject to a future ‘claw-back’/‘recapture’ if a capital gain is derived from a transfer of the relevant participation.

Losses realised upon the sale of exempt participations remain fully deductible and could be used to offset against other items of taxable income.

 

Phase 2: 2019

Tax consolidation

One of the most important measures of the Belgian corporate income tax reform is the introduction, as from 2019, of a system of tax consolidation. Belgium was one of the last European countries in which no such consolidation had been introduced.

The Belgian system will not entail a full tax consolidation, but will be inspired by the Swedish model and thus introduce a ‘group contribution’ system. The Belgian system will not require establishing consolidated accounts. Companies will be able to transfer (part of their) taxable profits (i.e. to make a ‘group contribution’) to an affiliated company with the aim of off-setting these profits against the tax losses of that same taxable period. Carried forward losses cannot be off-set against the profits transferred by way of ‘group contribution’). The profitable company transferring (part of) its profits will be entitled to claim a tax-deduction for the ‘group contribution’ made.

The system will apply between Belgian companies or Belgian permanent establishments of foreign companies established in an EEA member state. A direct 90%-shareholding is required, held either between the parties to the ‘group contribution’-agreement or by a joint parent. The companies are required to be affiliated for at least 5 consecutive years. Certain companies that have the benefit of a special tax regime, such as investment companies or regulated real estate companies, are excluded from the consolidation system.

To benefit from the consolidation system, the group companies concerned must, on an annual basis, conclude a ‘group contribution’-agreement that must comply with certain legal requirements. A model agreement will be determined by a Royal Decree.

Importantly, the (profitable) group company making the group contribution will have to financially compensate the (loss-making) company for the tax benefit resulting from the tax-deductible ‘group contribution’ made (i.e., from an economic perspective, resulting from the tax losses of the loss-making company). This financial compensation constitutes a tax-neutral payment, in that it is a disallowed expense for the paying (profitable) entity, and a tax-exempt income item for the receiving (loss-making) entity.

The group contribution is deductible from the contributing (i.e. profitable) company’s profits, provided that the contribution is effectively included in the taxable basis of the (loss-making) company benefitting from the contribution, and provided that the financial compensation is actually paid.

The new legislation also provides the possibility to deduct ‘final losses’ of foreign affiliated companies under this group contribution system. However, if such a ‘final loss’ has been deducted from a Belgian group entity’s taxable base, and the activities of the foreign company concerned are subsequently restarted within a 3-year period, then there will be a ‘recapture’ of this foreign tax loss in Belgium.

Benelux perspective

VlagNL NETHERLANDS

Under Dutch tax law a full tax consolidation regime is available. A 95% shareholding is required.

Based on the Dutch consolidation regime, the activities and assets and liabilities of the subsidiaries are allocated to the parent company. Internal transactions within the fiscal unity regime are disregarded for tax purposes.

On 22 February 2018, the Court of Justice of the European Union declared that the Dutch fiscal unity regime has been partly in breach of EU law. As a consequence, amendments have been introduced (with retro-active effect to 25 October 25 2017), based on which the fiscal unity regime is disregarded for the application of certain tax avoidance rules

A proposal for a new tax consolidation regime is expected to be published in the course of 2018.

VlagLUX LUXEMBOURG

Luxembourg tax law provides for a tax consolidation regime. The minimum shareholding is 95%; all companies need to start and close their fiscal year on the same date and the consolidation regime is open for Luxembourg resident parent/subsidiary companies or permanent establishments in Luxembourg maintained by a non-Luxembourg resident capital company which is itself sufficiently subject to tax in its country of residence.

The tax bases of all companies belonging to the group are added to the one of the consolidating entities.

Tax losses incurred before the tax consolidation may only be offset against profits of the company that incurred the losses. However, tax losses incurred during the tax consolidation may be offset against the profits of the other entities of the tax consolidated group. After the consolidation, tax losses that arose during the consolidation period remain at the level of the consolidating entity. The regime does not entail a full consolidation of its members. Hence, transactions between member companies are not disregarded. The tax base of each member company is assessed individually bearing in mind all transactions (within the group or outside the group).

Following EU case law, horizontal consolidation has been allowed since 2016 for subsidiaries of a foreign parent entity located in an EEA member state and sufficiently subject to tax in its country of residence.

 

Interest limitation rule

In line with ATAD, the tax-deductibility of ‘exceeding borrowing costs’ (i.e. net funding cost) will be limited to (the higher of) EUR 3 million or 30% of the tax-adjusted EBITDA.

The new rules on interest limitation that have been laid down in the corporate income tax reform act (Law of 25 December 2017) are expected to be changed again. A pre-draft bill of law is currently being prepared to this end.

In principle, this interest limitation rule will apply on a legal entity basis. Belgium has not opted for allowing a group EBITDA or ‘Equity escape’, as provided by ATAD.

However, the new rules provide for a system that allows using excess interest capacity of an affiliated entity (company or permanent establishment) on the basis of a bilateral ‘interest deduction’-agreement. To this end, the Law of 25 December 2017 provides for a system allowing the transfer of the excess funding cost of one Belgian entity to an affiliated Belgian entity that has excess interest capacity to absorb the funding cost. It is, however, expected that the technical approach will be changed: under a pre-draft bill of law, the company with excess interest capacity would ‘grant’ (all or part of) its unutilised excess interest capacity to the affiliated entity bearing the funding cost. Such transfer of unutilized interest capacity is subject to a (tax-neutral) payment being made by the group entity benefitting from the interest capacity transfer to compensate for the resulting tax saving.

Any exceeding borrowing cost that is disallowed for exceeding the interest capacity threshold, can be carried-forward indefinitely.

The new legislation provides a ‘grandfathering’ rule for interest payments made for loans contracted prior to 17 June 2016: these loans are not subject to the new interest limitation rule, provided the loan has not been substantially modified as from that date. Intra-group interest payments for ‘grandfathered’ loans remain subject to the current thin cap rules (5:1 debt/equity ratio).

Benelux perspective

VlagNL NETHERLANDS

In line with ATAD, the Netherlands will also introduce an interest limitation rule that will limit the tax-deductibility of ‘exceeding borrowing costs’ (i.e. the net funding cost) to 30% of the tax-adjusted EBITDA. However, in contrast to Belgium (which opts for a threshold of EUR 3 million), the Netherlands has opted for a threshold of EUR 1 million. As with Belgium, the Netherlands has not opted for allowing a group EBITDA or Equity escape.

Most of the existing Dutch interest deduction limitation rules will be abolished except for the interest limitation rule of Article 10a of the Dutch Corporate Income Tax Act, which is an anti-abuse rule aimed at preventing the erosion of the Dutch tax base.

Finally, the Netherlands has not opted to provide for a ‘grandfathering’ rule for existing loans. As such, the ATAD interest limitation rule will be applied to all loans from 1 January 2019.

VlagLUX LUXEMBOURG

Under current Luxembourg legislation, excess borrowing costs could be qualified as a ‘hidden’ dividend distribution under certain circumstances. However, Luxembourg does not have an exhaustive set of rules on the subject and will implement ATAD I rules, including interest deduction limitation rules, in its domestic law by 31 December 2018. Draft legislation has not yet been published and hence it remains to be seen how exactly Luxembourg will implement matters domestically.

 

Hybrid mismatches

With a view to implementing ATAD and ATAD II, Belgian tax legislation now contains a series of provisions tackling ‘hybrid mismatches’ arranged by Belgian corporate taxpayers. In line with ATAD II, the new provisions contain rules on (i) the disallowance of deductions from the Belgian corporate income tax base of costs relating to payments made in the context of a hybrid mismatch, (ii) the inclusion in the Belgian corporate income tax base of certain income received in the context of a hybrid mismatch and (iii) the limitation of the use of a foreign tax credit in case of a hybrid transfer.

These measures will enter into force from tax year 2020 (i.e. the financial years starting on or after 1 January 2019 and ending on or after 31 December 2019).

Benelux perspective

VlagNL NETHERLANDS

In line with ATAD II, the Netherlands must introduce hybrid mismatch rules (from 2020). Draft legislation is not published yet, but is expected.

VlagLUX LUXEMBOURG

Although some anti-abuse rules already exist (participation exemption denied for tax deductible dividends from other EU entities), Luxembourg has no specific rules on hybrid mismatch and will implement the rules provided by ATAD II into national law by 31 December 2021. Those rules should then apply from 1 January 2022. Draft legislation has not been published yet.

 

CFC

Belgium has transposed into national legislation the provisions on controlled foreign companies (‘CFC’) contained in Articles 7 and 8 of the ATAD.           

In contrast to the Directive, which also targets foreign permanent establishments, the new provision defines a CFC as a foreign company:

  • of which a resident corporate taxpayer (alone or with its affiliates) directly or indirectly exceeds 50% possession of the voting rights or capital, or is entitled to more than 50% of the profit (the so-called ‘participation’-condition), and when
  • the foreign company is, under the provisions of the legislation of the State or the jurisdiction in which it is established, either not subject to income tax or subject to an income tax which amounts to less than 50% of the corporate income tax that would have been due if this foreign company would have been established in Belgium (the so-called ‘taxation’-condition).

If the new CFC rules apply, they will result in undistributed profits of the CFC that ‘arise from artificial constructions set up with the essential aim of obtaining a tax advantage’ being attributed to the Belgian parent company. An ‘artificial construction’ is deemed to exist when certain assets or risks can be identified that are owned by the CFC, whereas the related strategic decisions are taken by the Belgian company or by its employees.  

Belgium has opted not to allow the set-off of the tax paid by the foreign company. Furthermore, the inclusion of the foreign company’s profits in the Belgian company’s corporate income tax base is not limited to the percentage of the shareholding in this foreign company. As a result, Belgium’s CFC-legislation tends to facilitate double taxation at various levels.

Dividends that subsequently are distributed by the CFC will benefit from a 100% participation exemption up to the amount of foreign, undistributed profits already taxed in Belgium.

Benelux perspective

VlagNL NETHERLANDS

In 2017, a preliminary proposal for public consultation regarding the CFC rules based on ATAD I was launched.

The proposed Dutch CFC rules would apply to any taxpayer’s controlled foreign entities and permanent establishments.

A controlled entity is present if the taxpayer directly or indirectly has a share interest (together or without an affiliated entity or individual) of more than 50% in an entity that is not subject to a profit tax that results in a “realistic levy” under Dutch standards.

The legislative proposal is based on model A of ATAD. Based on model A (passive) income of a CFC (e.g. interest, royalties, dividends and capital gains on shares) will be included in the taxable income of the Dutch parent company unless the CFC carries on a substantive economic activity, supported by staff, equipment, assets and premises.

However, the consultation document explicitly invites comments about whether or not the transactional approach of model B would be preferable.

Recently, the introduction of model A has been reconfirmed by the Dutch State Secretary for low taxed jurisdictions or non-cooperative countries.

More details should follow from a further legislative proposal that is expected in the coming months.

VlagLUX LUXEMBOURG

Luxembourg law does not currently include CFC rules.

Luxembourg will implement ATAD I rules, including CFC rules, in its domestic law by 31 December 2018. Draft legislation has not been published yet and hence it remains to be seen which of the options, as laid out in ATAD, Luxembourg will select.

 

Cross-border relocation of assets and cross-border corporate migration

In accordance with Article 5 ATAD, Belgian tax legislation already provided for exit taxation on unrealised capital gains in the event of the outbound transfer of the corporate seat, outbound merger and outbound transfer of assets from a Belgian permanent establishment (it being understood that, for outbound corporate migration and mergers, a tax-neutral regime - hence, no ‘exit taxation’ - applies (i) provided the Belgian company is migrated/merged into (a company established in) the EU, and (ii) to the extent that the assets remain connected to a Belgian permanent establishment). Also in line with ATAD, a deferred payment facility is available for the exit tax in the event of migration/transfer to another EU member state or, if a mutual assistance agreement is available, to a non-EU EEA-member state.

The scope of the exit tax and the deferred payment facility is now broadened to include unrealised capital gains in the event that a Belgian company transfers assets to a foreign permanent establishment, provided the profits of that permanent establishment are treaty-exempt in Belgium.

The amended legislation also provides that, in the event of an inbound transfer of assets and an inbound corporate migration carried-out as from 1 January 2019, Belgium will, in principle, accept the market value as the tax base of the assets (‘step-up in basis’). A complex set of rules determines how this ‘market value’ will be determined, including under which circumstances the value established by the exit state for exit tax purposes will (in line with ATAD) be considered reflecting the market value of the assets. No step-up in basis is granted in respect of assets transferred or corporate migrations from a jurisdiction that is qualified as a ‘tax haven’.

Benelux perspective

VlagNL NETHERLANDS

The exit tax set out by ATAD I is already included in Dutch tax legislation and, as such, the law does not have to be amended. However, currently a deferral spread over a 10-year period applies for corporate and personal income taxes. Under ATAD I, this deferral should not be for more than 5 years for corporate income taxes. We anticipate a proposal in the coming months to shorten the deferral to five years (the 10-year period will most likely be retained for personal income tax purposes).

VlagLUX LUXEMBOURG

Luxembourg tax legislation already provides for exit taxation on unrealised capital gains in the event of outbound transfer of the corporate seat, outbound merger and outbound transfer of assets from a Luxembourg permanent establishment, as well as a deferred payment facility for the exit tax in such events when the transfer is within the EEA or in a country with which Luxembourg has an agreement for the exchange of information.

Luxembourg will implement ATAD I rules, and will, to the extent required, accordingly adapt its exit taxation rules in its domestic law by 31 December 2018. Draft legislation has not yet been published.

 

Phase 3: 2020

Belgian (permanent) establishment definition broadened

The domestic law definition of a Belgian (permanent) establishment has been broadened to make it compliant with new Article 5, §6 of the OECD Model Tax Convention, which has been adopted in line with BEPS action 7.

The objective is to counter certain forms of ‘artificial’ avoidance of permanent establishment status, e.g. by using commissionaire structures, or in situations where contracts are negotiated in Belgium, but formally completed/approved abroad.

Already before the corporate income tax reform, a representative of a foreign company could be qualified as a Belgian establishment, irrespective of whether he has the authority to conclude contracts in the name of the foreign enterprise. An exception applies, however, for ‘independent agents’ acting in the ordinary course of their business.

As from 2020, the scope of this exception is reduced. A person acting (almost) exclusively for one or more enterprises to which that person is ‘closely related’, will no longer be considered ‘independent’ from such enterprises. As a result, the presence/activities in Belgium of such a person may constitute a Belgian (permanent) establishment of such enterprises.

A person is considered ‘closely related’ to an enterprise if, based on the relevant facts and circumstances, one has control over the other, or if both are under the control of the same persons or enterprises.

In any event, a person will automatically be considered ‘closely related’ to an enterprise if one of them has a (direct or indirect) stake of more than 50% in the other, or if a third party has such a stake in the person and the enterprise concerned.

Benelux perspective

VlagNL NETHERLANDS

In terms of text, the definition of a ‘permanent establishment’ has not been changed in the Dutch tax legislation. However, the OECD Model Tax Convention is used in the Netherlands to give further interpretation to the ‘permanent establishment’ concept. As a consequence, the new Article 5, §6 of the OECD Model Tax Convention will broaden the cases in which a Dutch permanent establishment is considered to be present.

VlagLUX LUXEMBOURG

There are currently no indications that the definition of ‘permanent establishment’ under Luxembourg national law could be changed in the future.

Nevertheless, the concept of ‘permanent establishment’ is usually tied to the notion of ‘permanent establishment’ as developed by the OECD and therefore follows its development.

 

Foreign permanent establishment losses

Under current legislation, losses incurred by a Belgian company in a permanent establishment that is situated in a treaty jurisdiction, are in principle deductible against profits that are taxable in Belgium. However, such a deduction is subject to ‘recapture’ in a subsequent taxable period when (to the extent that) the tax losses are utilised in the jurisdiction of the permanent establishment.

From 2020 onwards, foreign permanent establishment losses must in principle be disregarded for the purpose of determining the Belgian taxable base, unless if such foreign losses have been incurred in an EEA jurisdiction and can be qualified as ‘final losses’.

Foreign permanent establishment losses will be considered ‘final’ when the Belgian company definitively terminates its activities previously carried-out abroad through the foreign permanent establishment, without having obtained any deduction whatsoever for these losses in the EEA member state where the establishment was situated.

By contrast, foreign permanent establishment losses will not be considered ‘final’ if they remain available for being off-set against profits realised in the EEA member state in which the tax losses were incurred, either at the level of other establishments, or as a result of their being taken over by another person.

In the event that, within three years from the closure of the permanent establishment, the Belgian company restarts its activities in the same EEA member state, then the initially deducted ‘final’ permanent establishment losses must be ‘recaptured’, i.e. included in a taxable base for the taxable period when the activities are started up again.

Permanent establishment losses that were deducted under previous legislation in principle remain subject to ‘recapture’.

Benelux perspective

VlagNL NETHERLANDS

In 2012 the Dutch legislator changed the tax treatment of foreign permanent establishments such that foreign losses can no longer be offset against the Dutch tax base. This amendment aligns the treatment of permanent establishments with the treatment of foreign subsidiaries that fall within the scope of the participation exemption regime.

Based on the amended permanent establishment rules, both foreign profits as well as foreign losses are excluded from the Dutch corporate tax base. Similar to the Belgium system that will be introduced from 2020, the loss incurred upon the termination of a permanent establishment is deductible from the Dutch corporate tax base under certain circumstances.

VlagLUX LUXEMBOURG

When the permanent establishment is located in a country with which Luxembourg concluded a double tax treaty, losses incurred by that foreign permanent establishment are usually disregarded.

In the absence of a double tax treaty, losses of the foreign permanent establishment remain deductible for the calculation of Luxembourg corporate income tax. However, for municipal business tax purposes, losses of the foreign permanent establishment are disregarded.

 

If you require more information, please contact your trusted adviser at Tiberghien or contact the editor of this publication:

Ivo Vande Velde, Counsel
ivo.vandevelde@tiberghien.com

 

For more information on Luxembourg tax developments, please contact:

Michiel Boeren, Counsel (Luxembourg office)
michiel.boeren@tiberghien.com

Maxime Grosjean, Senior Associate (Luxembourg office)
maxime.grosjean@tiberghien.com

 

For more information on Dutch tax developments, please contact:

Kristel Tijsterman, Partner (Atlas Tax Lawyers, the Netherlands)
kt@atlas.tax

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