Permanent establishment in Belgium?

Tax game rules to do business in Belgium

Entrepreneurs which are actively building on the expansion / growth of their business are often considering setting up activities abroad, also considering increasing mobility and globalization. In this respect, caution is important. Often these activities abroad generate additional tax obligations. This is the case when activities of a foreign company is generating the existence of a permanent establishment in Belgium.

Belgian tax authorities are actively investigating the presence of permanent establishments on the Belgian territory (based on VAT-listings and other leads). The qualification of your activities in Belgium as a permanent establishment may have serious consequences. Your turnover is known (based on invoicing to Belgium), whilst it’s way more difficult to prove the related expenses a couple of years later. This may lead to double taxation.

Whilst a proactive analysis and potential recognition of a permanent establishment in Belgium may also create opportunities.

When exists a ‘permanent establishment’ in Belgium?

Belgium has concluded double tax treaties to avoid double taxation with most other countries. In these treaties, the rules about the existence of a permanent establishment are described.

In general, a ‘permanent establishment’ exists when there is a ‘fixed place of business’ through which the business of an enterprise is wholly or partly carried on. E.g.: a place of management, a branch, an office, a factory, a work place …

In summary, such ‘permanent establishment’ exists when :

  • An enterprise has a fixed place / location in Belgium, where employees are executing the main activities of the enterprise; or
  • Employees working in Belgium are mandated to act and have the authority to concluded contracts on behalf of the enterprise.

The notion of ‘permanent establishment’ is more and more determined based on the economic concept. Where it is determined in which country is playing a crucial role in the different aspects of the activities of a company.

Which obligations are generated by the permanent establishment in Belgium?

All gain generated by activities through the permanent establishment are in principle taxable in that country. In order to allow foreign, Belgian tax authorities to have insights in the profit realized on its territory, foreign enterprises need to comply with reporting obligations. E.g. proper bookkeeping needs to be complied with in order to determine the result of the permanent establishment, to prepare and file the local corporate tax return. Next to that, also the annual accounts of the headquarter company needs to be provided.

These extra obligations of course generate extra expenses for the company. However this ensures transparency regarding the part of the profit realized in Belgium – taxable in Belgium and the other part of the profit realized outside of Belgium – which may be taxed in the home country. Following this approach, the risk of double taxation may ab initio be mitigated.

Also obligations in the home country

In the home country, the worldwide profit of the company needs to be reported, including the result of the Belgian permanent establishment. Based on the double tax treaties, the home country will provided a tax mechanism to avoid home country taxation on the profit generated and taxed through the Belgian permanent establishment. The home country tax administration will be able to see and verify the profits allocated. Hence, the reason why it’s important to correctly allocate turnover and expenses between the headquarter in the home country and the permanent establishment in Belgium.

Or establish a daughter company in Belgium?

The losses incurred by the Belgian permanent establishment may be used to reduce the profit realized in the home country. This is the reason why in the early years abroad it’s often chosen to recognize a permanent establishment abroad.

Once the Belgian activities become more stable or when the Belgian activities entail more risk which is better separated from the headquarter company, the establishment of a Belgian (daughter)company is a more preferred option. The accounting and tax obligations are similar than these of a permanent establishment.

Employment abroad: also consequences for your employees

The secondment of foreign employees to Belgium to set up or maintain a local activity in Belgium may also have consequences for the taxation of these employees. These will not only become taxable in Belgium as soon as they exceed 183 days in Belgium. In case of having a permanent establishment in Belgium, these employees will become taxable in Belgium as of day 1. Their remuneration related to Belgian activities will become taxable in Belgium.
Considering the Belgian tax rates and a number of beneficial tax regimes, this Belgian taxation is not necessary disadvantageous. Further, the simultaneous employment of these employees in different countries may lead to salary splits for certain employees. In this respect, it’s crucial to upfront verify the social and other formalities.

Conclusion

Often foreign enterprises are active on the Belgian territory without realizing they (might) have a permanent establishment in Belgium. During the last months, we noticed a significant increase in the number of investigations of the Belgian tax authorities regarding the existence of permanent establishments in Belgium. These tax audits may lead to de facto double taxation in the hands of the foreign entity.

Therefore, being well-informed before or at the start of setting up activities in Belgium is crucial. Because it may reduce the risk of being exposed to a permanent establishment abroad and the related (double) taxes. Sufficient reasons to take a wise decision and consult a tax consultant before starting a project abroad.

Interested or additional questions? Feel free to contact us.

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International employment – plans thwarted by COVID-19?

Since March 2020, the Corona virus has changed the world drastically. Also organizations have taken measures to reduce/limit the spread of the virus. The most obvious measures were reducing international travel and obligate home working for all employees. This impacted the work pattern of everybody and in particular the international working employees. In international employment situations, this could have an impact on the applicable social security regime. As well as the tax treatment of employment income of these employees.

Applicable social security regime

Belgian government decided that periods of home work on the Belgian territory as a result of the Corona virus, should, by way of exception, not be considered for the determination of the applicable social security legislation in an international context. As a result, these ‘home office working days’ will not have an impact on the determination of the competent social security regime.

In other words, the Corona measures will normally not impact foreign employees in Belgium. Yhey may remain under their home country social security. Same goes for employees seconded to Belgium who spent their time in their home country during the lock-down period.

Last week Belgian government extended the exceptional measures till the end of the year, i.e. December 31, 2020. The increased use of teleworking will not be considered for the determination of the applicable social security regime.

Taxation of employment income – place where the employment should have been executed

Early April 2020, the OECD published their position regarding international employment that the professional income of employees (also where government has stepped in to subsidize the keeping of an employee on a company’s payroll) should be attributable to the country where the employment used to the exercised.

Based on this recommendation, Belgium concluded bilateral agreements with the Netherlands, Luxembourg, France and Germany. Employees who worked from home during the Corona measures can remain taxable in the country where they worked prior to the outbreak of the COVID-19. This of course only applies for home working days due the pandemic. In addition, these agreements were initially concluded till June 30, but have meanwhile been extended till August 31, 2020. Further extension may be expected…

These bilateral agreement are extremely important for all employees working cross border and / or in a salary split situation. For example, for the period that Belgian employees working in a Belgian-Dutch split situation were not able to work / be physically present in the Netherlands – due to the Corona measures –, Belgium will respect that the Netherlands are entitled to tax the employee’s remuneration related to working days who should have been executed in Belgium. Of course, this assumes that the physical presence requirement before and after the COIVD-19 measures is met.

Important remark: At this moment in time, this type of COVID-19 agreements are only concluded with the 4 above mentioned countries. For other countries, the general principle of taxation in the home country applies.

Application COVID-19 agreements

In order to benefit these COVID19 agreements, the following documentation may need to be provided towards the Belgian tax authorities:

  • An employer’s attestation mentioning the number of home working days, exclusively linked to the COVID-19 measures;
  • The proof of effective taxation of the remuneration related to these home working days in the country where these activities should have been performed.

The employer’s attestation (in the framework of the COVID-19 agreements) need – for each individual employee – to mention the following:

  • All relevant information to fully identify the employee (name, first name , address, birth date);
  • The nature of the function executed by the employee;
  • An overview of the number of home working days exclusively linked to the COVID-19 measures;
  • If applicable, an overview of the number of home working days as foreseen in the employment agreement;
  • An overview of potential sickness, vacation and/or recuperation days;
  • A declaration on honor that the attestation is “true and sincere”;
  • Date and signature of the employer, as well as the co-signature of the employee concerned.

In conclusion, a thorough analysis for your tax situation and tax residency is important before starting to file your tax return in Belgium, as well as in your home country. An adequate qualification is crucial to complete the right tax return form (resident of non-resident), apply the correct tax rules and anticipate the different tax consequences.

However, if you would have questions/remarks as regards the applicable social security regime, the application Belgian tax treaties, as well as the application of the COVIS-19 agreements, feel free to contact us.

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Belgian tax return not yet filed?

Time for action: appoint your tax consultant before August 31, 2020.

Your Belgian tax return needed to be filed on paper by June 30, 2020 at the latest. In case you filed your tax return via tax-on-web, you could do this till July 16, 2020. What if this has not yet been done?

Your Belgian tax return via a tax consultant

If you also missed this deadline, your may appoint a mandate holder (tax consultant, accountant, …). Firstly, your tax consultant will create a mandate and will subsequently assist you in the preparation and filing of your Belgian tax return. Secondly, your tax consultant will submit this via tax-on-web.

❗ Important remark! Your tax mandate has to be created before August 31, 2020. The period to timely submit your tax return yourself has meanwhile expired. As of early September, the Belgian tax authorities will start to send reminder letters. This parallel procedure (including the risk on penalties and tax increases) may better be avoided. Hence, time to take action today and contact your Belgian tax consultant. If your tax consultant files your return, you still have time till October 22, 2020.

If you’re filing your tax return late, tax penalties and tax increases may apply. In addition, the Belgian tax authorities may impose an ex officio tax assessment, which may be very disadvantageous…

Also if you received a proposal for simplified tax return and / or you disagree with the content, a tax consultant may help you out. Also in this scenario a mandate should be created, after which your proposal for simplified tax return can be amended by your tax consultant.

Should you file a Belgian resident income tax return?

Most Belgian residents automatically received a tax form on paper (in their mailbox) or via the tax-on-web portal. If you would have not received such form, this does not mean that you do not have a Belgian tax filing obligation. Everybody how has not received a tax form, should assess him/herself whether he/she has a tax filing obligation and if so, he/she has the legal obligation to request this form at the Belgian tax authorities.

You need to request a Belgian tax form yourself, if:

  • You became of age (i.e. 18 year) in the course of 2019 – even if you’re studying, income from vacation work, student work, alimony received, dividends, … should be reported in a Belgian tax return;
  • Your received income in Belgium (e.g. salary, pension, rental income, …) and you resided abroad, or was in Belgium for a limited period in time.

In the latter scenario, you should not file a Belgian resident income tax return, however a Belgian non-resident income tax return should be filed. This return, Belgian source income needs to be reported and taxed. In particular, foreign employees / self-employed persons working in Belgian in the construction sector, industry, but also services sector. For them, a thorough analysis as regards taxability of their income is recommended. If not, there is a risk that their income is double taxed in their home country, as well as in Belgium …

For the filing of such Belgian non-resident income tax return, there is still some time left. This income (income year 2019, tax year 2020) should be filed at the latest on the following dates on:

  • November 5, 2020 – in case of filing on paper;
  • December 3, 2020 – in case of filing via tax-on-web;
  • December 3, 2020 – in case of filing via tax-on-web via your tax consultant;

Are you resident or non-resident taxpayer in Belgium?

In most cases it is rather obvious whether you are a Belgian tax resident or non-resident. In some cases this is however less straight forward. You are a Belgian tax resident taxpayer when the center of your vital and economic interests are located in Belgium. Or if your ‘seat of fortune’ is located in Belgium. In all other cases, you qualify as a Belgian non-resident taxpayer;

Simple criteria for most of us, however not that straight forward in some situations, such as when you:

  • have an opportunity to move and work abroad for 2 year for your employer;
  • are planning to enjoy your well-deserved retirement around the Mediterranean Sea. Or planning a 12 month vacation trip around the world;
  • are still working in Belgium, visiting the love of you life every weekend in London or Paris.

A thorough analysis for your tax situation and tax residency is important before starting to file your tax return in Belgium, as well as in your home country. An adequate qualification is crucial to complete the right tax return form (resident of non-resident), apply the correct tax rules and anticipate the different tax consequences.

If you would have questions/remarks as regards Belgian tax residency, taxability in Belgium or if you would like to receive a risk assessment, feel free to contact us.

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