The Belgian government has submitted a new draft bill to parliament for implementing stricter rules concerning the taxation of the undistributed income of a controlled foreign company (CFC), shifting from model B (targeting tax avoidance arrangements) to model A (focusing on taxation of passive income of low-taxed entities) in the EU Anti-Tax Avoidance Directive (ATAD).

The new draft laws stipulate reporting the existence and identification of the CFC in corporate tax returns. The new draft bill allows profits or realized capital gains to be distributed on shares later to avoid double taxation. Additionally, receiving credit for foreign taxes is allowed. Other key elements of the new rules are:

Income taxed

The non-distributed passive income of the controlled foreign company (CFC) is subject to taxation for the Belgian taxpayer in proportion to the participation in the CFC. The starting point is the (taxable) profit of the CFC as determined in accordance with the accounting and tax regulations in Belgium.

The fractions provided below need to be applied accordingly:

  1. In proportion to the part that has not been distributed
  2. In proportion to the part that constitutes passive income, which includes interest, dividends, royalties and income from the sale of shares, bonds, and options rental income, including operational and financial leasing
  3. Income from asset management, banking, insurance, investment, and other economic activities
  4. Income from the purchase and sale of goods and services
  5. in proportion to the participation in the CFC

Safe harbors

The following safe harbors are applicable:

  • A significant economic activity is exercised and backed by personnel, equipment, assets, and buildings.
  • Passive income accounts for less than one-third of the total income.
  • The Controlled Foreign Corporation (CFC) falls under the financial sector (as defined by the earnings stripping rules), and less than one-third of the passive income is derived from transactions with the taxpayer.

As per the latest draft legislation, the new CFC regulations are set to take effect in the assessment year 2024. This applies to financial years concluding on or after 31st December 2023.