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.
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.