Increased focus of belgian tax autorities on foreign companies with local activity in Belgium
As a result of amended Belgian and international tax rules, the Belgian tax authorities have recently set up an <strong>audit action</strong> regarding foreign companies doing business in Belgium. In doing so, the tax authorities wish to identify which foreign companies with activities in Belgium could have a taxable presence (so-called “permanent establishment”).
Numerous foreign companies are currently confronted with an extensive questionnaire. Based on this questionnaire, the Belgian tax authorities want to find out where the contract negotiations took place, who conducted these negotiations, whether there was a fixed place of employment, home office, how long a certain installation- or construction project was in place on Belgian territory, …
In some cases it doesn’t stop there… In practice, we notice that the tax authorities do not hesitate to collect information from third parties, for example the Belgian clients.
Every foreign company with activities in Belgium is therefore advised to (re)evaluate the possible presence of a Belgian permanent establishment. We are happy to familiarise you with the new fiscal playing field for permanent establishments.
Broadening of the concept “permanent establishment”
Due to certain developments at international level – the OECD BEPS Action Plan – the concept of a “permanent establishment” has been largely broadened. As a result, the fiscal playing field has changed and more companies that operate cross-border may now trigger a permanent establishment in Belgium.
In most cases, these new rules will apply as from 2020. However, in practice we have noticed that the Belgian tax authorities currently already align themselves with the new rules.
1. Your company has a dependent agent in Belgium
Up until now the presence of a dependent agent in Belgium only resulted in a taxable permanent establishment if he/she had the authority to conclude the contracts. In practice, contracts were often negotiated in a substantial manner by the dependent agent, but concluded by the foreign company (so-called “rubber stamping”). This is, of course, a thorn in the side of the tax authorities.
In order to prevent these type of situations, a taxable permanent establishment will now already be present as from the moment a dependent agent has a “significant influence” on the conclusion of the contract.
2. Your company performs construction or installation works in Belgium
Building- or construction works performed in Belgium can only give rise to a permanent establishment if the project exceeds a duration of 12 months (a number of double taxation treaties concluded by Belgium state a shorter period).
In practice, contracts relating to construction projects appear to be regularly split up into several contracts, deliberately or not. Because the contracts were split up, the separate projects did not reach the duration period and therefore there was no permanent establishment present.
In order to address this kind of potential abuse, it has now been determined that “related activities” performed by affiliated companies on the same construction site or for the same project should be considered as one in order to determine the duration.
This new rule means that an enterprise group can no longer prevent the presence of a permanent establishment by splitting up its contracts for a construction project. If related activities are carried out for the same construction or installation project by different group companies, this must be justified by business (non-tax) motives.
2.1 Is your company the main contractor?
It is important to note that even in case the main contractor subcontracted all parts of a project, the main contractor can still have a permanent establishment present in Belgium. Time spent by a subcontractor on a Belgian construction site, will be attributed to the main contractor in case the main contractor has the site at its disposal during the time the subcontractor executes its work.
2.2 Is your company a subcontractor?
However, the abovementioned fact that time spent by a subcontractor is attributed to the main contractor, does not exclude the potential presence of a permanent establishment on behalf of the subcontractor. In case the subcontractor has access to the site, this may trigger the possible existence of a Belgian permanent establishment.
2.3 Your company has a fixed place of business at its disposal in Belgium
Even though a foreign company has a fixed place of business at its disposal in Belgium, this does not automatically mean that it constitutes a taxable permanent establishment. The law provides a so-called “negative list” with exceptions.
For example, an establishment used exclusively for the storage, display or delivery of goods or merchandise belonging to the enterprise does not constitute a taxable permanent establishment.
What is new is that these exceptions only apply if they are of a preparatory or auxiliary nature. This means that the activity cannot form a substantial part of the activity of the company as a whole.
Increased focus from the tax authorities
In order to identify the foreign companies with a taxable presence in Belgium, the tax authorities are currently sending an extensive questionnaire to foreign companies with a Belgian company number.
As already mentioned, in some cases it doesn’t stop there… In practice, we notice that the tax authorities are also inclined to collect information from third parties. Tax authorities can send a request for information to your Belgian clients. With the help of this request for information, the tax authorities want to find out where the contract negotiations took place, who conducted these negotiations, whether there was a construction site, …
What can your company do?
Given the revised rules and the increased focus of the tax authorities, we advise you to (re)evaluate the possible presence of a Belgian permanent establishment.
If there is a taxable permanent establishment in Belgium, the next step is to determine the taxable basis and to file the non-resident tax return. The taxable basis should be supported on the basis of the OECD transfer pricing guidelines. It is important to note that the taxable basis allocated to the Belgian taxable permanent establishment may be deducted from the taxable basis abroad (tax residence of the company), in order to avoid double taxation.
In addition, there may be important consequences for the taxation of your employees.
How can we help you?
Would you like to verify whether your company has a taxable Belgian permanent establishment? Did your company receive a questionnaire from the tax authorities? Does your company need assistance with formulating an answer? Does your company need help in determining the taxable basis of the Belgian permanent establishment? Do you wish to check your underlying transfer pricing file?
We are happy to help!
Publication date: 14 February 2020