Circular clarifies new CFC rules

What is a CFC?

As discussed in a previous article, a CFC is a low-taxed foreign subsidiary or entity of a Belgian company. To qualify as a CFC, two conditions must be met: the participation condition and the taxation condition.

If the CFC cannot rely on one of the exemption grounds (substance exemption, limited passive income, or financial enterprises), the undistributed passive income of the CFC will be taxed in the Belgian parent company in proportion to its participation in the CFC.

Clarifications in Circular No. 2024/C/82 of 13 December 13

Although the new law has been in effect since tax year 2024, several questions remained unanswered. For this reason, the tax administration published a long-awaited circular at the end of last year. This circular provides clarification on several points, but not all uncertainties have been resolved. Below, we highlight the most important clarifications.

Participation condition

The participation condition can only be met if the Belgian taxpayer holds at least one share in the potential CFC. This means that sub-subsidiaries or sister companies of the taxpayer cannot qualify as a CFC.

Taxation condition

This condition is met if the foreign entity is not subject to income tax, or is subject to an income tax that is less than half of the hypothetical Belgian tax.

The assessment of this condition must be done on a case-by-case basis. For European companies, the circular refers to the taxes listed under the Parent-Subsidiary Directive.

Furthermore, the circular clarifies that the domestic surcharge in the context of the minimum tax for multinational groups is not considered an income tax in the context of the taxation condition.

Regarding the calculation of the hypothetical Belgian tax, the circular provides further clarification:

•  All provisions of Belgian corporate income tax law apply (with the exception of prescribed formalities);
  

•  For companies in the European Economic Area (EEA), there is no need to convert the foreign accounting result to Belgian accounting rules;
  

• There is no need for recalculation of fiscal losses that existed before the tax year 2024.

Exemption grounds

If the foreign entity meets both the participation condition and the taxation condition, it is considered a CFC and must be reported in the corporate tax return. The exemption ground that may apply must also be indicated.

Substance exemption

The substance exemption applies to CFCs that carry out substantial economic activities, supported by personnel, equipment, assets, and buildings, as shown by relevant facts and circumstances. To qualify, the following three conditions must be met cumulatively:

1. The entity must offer goods or services in a specific market (economic activity);

2. The activity must be substantial;

3. The activity must be supported by personnel, equipment, assets, and buildings.

The circular provides additional clarification regarding situations involving companies that only offer intragroup services, holding companies, the interpretation of ‘substantial’, and the requirements concerning personnel.

Conclusion

Despite the clarifications, the new CFC regulations remain complex. If you have questions or would like more information about the CFC regime, feel free to contact us via the form below.