Profit Archives • aternio

Registered office doctrine and Belgian taxation

The real seat doctrine is now a thing of the past for Belgian companies. With the introduction of the new Companies and Associations Code (CAC), the Belgian legislator has decided to follow what is common practice in many other European countries, by opting for application of the registered office doctrine.

The radical reform of corporate law necessitated amendment of tax regulations as well, as the legislator deemed it unfair that these would change dramatically as a result.

Situation prior to the CAC: real seat doctrine

According to the old Companies Code, companies were governed by the corporate laws of the country where they carry out their main activities or conduct their administration – the ‘real seat’ of their operation.

This means that in the past, a company’s place of incorporation did not matter under Belgian law. The determining factor was whether or not the company exercises its main activities or administration in Belgium. If that was the case, the company would be governed by Belgian corporate law.

This made Belgium a less than obvious choice for foreign companies.

Situation according to the CAC: registered office doctrine

Belgium could no longer stay behind and eagerly looked across its borders for inspiration. It found that the Netherlands, for instance, managed to turn their corporate law into a significant export product – many foreign corporations found their way to our northern neighbour.

It so happens that the Netherlands applies the registered office doctrine. According to this doctrine, the corporate law applicable in the country where the company has its registered office is the law governing the affairs of the company.

With the introduction of the new CAC, Belgium has also made the resolute choice for the registered office doctrine. That is good news, as it provides freedom and flexibility for all.

However, there is no reason to become all enthusiastic yet, as the planned online company registration option has not yet materialised. As a result of this administrative flaw foreign corporations could still decide to skip the Belgian option.

Taxation and the real seat doctrine

A company is a Belgian resident for tax purposes and hence taxed in Belgium for its worldwide profits if its main operation or administrative seat is located in Belgium. This is in line with the real seat doctrine. And it does not change.

Ergo: the real seat doctrine is and remains the prevailing doctrine for tax purposes.

As a result of the introduction of the CAC, companies are now governed by the corporate law of the country where they have their registered office. Consequently, one may no longer assume that a company that has its registered office in Belgium by definition is subject to Belgian corporate tax. After all: the law requires effective management of the company from Belgium.

In principle, a company must also have legal personality in order to fall under the corporate tax system. However, a special provision already taxes foreign bodies without legal personality that make a profit in Belgium, if their form is similar to a company with legal personality under Belgian law (section 227(2) of the Belgian Income Tax Act of 1992).

New legal presumption with double evidence to the contrary

As stated earlier, one may no longer assume that a company that has its registered office in Belgium by definition is subject to Belgian corporate tax. This implies that the tax authorities would have to assess each case separately. That is simply undoable.

To solve this issue, the legislator introduced the legal presumption with double evidence to the contrary. This works as follows: save for evidence to the contrary, any company that has its registered office in Belgium is deemed to have its effective management in Belgium and therefore is deemed to be a resident for tax purposes.

This presumption can be rebutted by demonstrating that the company 1) has its real seat in another state and 2) is a resident of this other state for tax purposes.

The accounts must follow suit

The legislator had to take measures to ensure that companies that have their registered office abroad and therefore are governed by foreign laws, can be taxed in Belgium (new section 320/1 of the 1992 Income Tax Act). Consequently, every permanent office of such companies is now required to keep accounts and draw up financial statements according to Belgian law, unless they are exempt. The financial statements must be attached to the corporate tax return, unless they already have been published.

Conclusion

As a result of this reform Belgium no longer lags behind. Our corporate law is now ready to welcome more foreign companies to Belgium. However, whether we have enough of a competitive edge in terms of taxes remains to be seen.

Need more information? Contact us without any obligation.

by Liese Leman

Liability of directors and officers according to new corporate law

A lot has been written about the new Belgian Companies and Associations Code (hereinafter ‘CAC’). The CAC contains plenty of important new provisions, not least of which is the limited liability for company directors and officers. Here, the legislator has clearly reacted to the tendency of holding directors and officers increasingly liable for their actions. The new rules aim at making running a business sexy again and giving current and future directors and officers some peace of mind.

General liability

The CAC provides a general rule. It is ‘general’ because it applies to each and every legal person, regardless of their concrete form. It also applies to each member of a management body, hence to the executive manager and even to de facto directors. After all: de facto directors are the people who actually manage the company, even if they haven’t been appointed as such (by the general meeting, with subsequent publication of the appointment in the appendices to the Belgian Official Journal).

Joint and several liability

All the above-mentioned persons are jointly and severally liable for errors made in the performance of their assignment. This means that each member is personally liable for decisions or failures of the management, regardless of whether or not the management forms a board. The members of the management body are jointly and severally liable towards the company as well as third parties for any damage arising from violations of the CAC or the company’s articles of association. In other words: each director may be held liable in full for compensation of the affected party/ies involved.

Joint and several liability for mere management errors has thus been added to the former liability rules.

Is this a fait accompli for directors? Are they expected to simply go along with the new rules and accept joint and several liability for damage just like that? Absolutely not! Directors are offered the option of reporting the alleged error to the other management members (or to another supervisory body). Only in that case can a director be released from their liability for errors in which they did not play a demonstrable role.

Statutory limitations of liability

Joint and several liability is a huge thing. Based on the foregoing you could be sceptical as to what is the purpose of a company after this. And justifiably so … Were it not for the fact that the CAC also provides for explicit limitations. The Code introduces a cap on the amount for which directors can be held liable. The cap depends on two variables: the average balance sheet total and the average turnover (ex. VAT) of the last three financial years prior to the filing of the action for liability.

The reason for introducing these limitations is to allow directors to take out reasonable liability insurance. At the same time, the aim is to remove inequality between managers who get 'insurance' as employees and those who get 'insurance' via management companies.

The limitation of liability is enforceable against the company as well as against third parties. Furthermore, it applies regardless of the (extra-)contractual ground for liability. The maximum amounts also apply to all of the persons indicated combined. They apply to each fact or set of facts that may give rise to liability, regardless of the number of claimants or claims.

Is further contractual limitation possible?

The CAC stipulates that further limitations, other than these provided by law is not possible. Provisions in the articles of association and in contracts, as well as unilateral indications of intent whereby directors are exonerated or indemnified from liability beforehand, are not taken into account. This means that one cannot renounce actions for liability against directors beforehand.

Furthermore, having another entity bear the financial consequences of the directors’ and officers’ liability is also prohibited, as this would easily erode the personal liability scheme of the director. That said, third parties such as parent companies, controlling entities or shareholders do have the ability to indemnify directors.

Exclusions

But, much like medals, these rules also have a flip side, for limitation of liability does not apply in the case of:

frequently occurring minor errors;
major errors;
fraudulent intention or intention to harm;
errors in legal obligations e.g. with respect to valid registration of shares, full payment of capital and capital increase;
joint and several liability for tax debts (under certain circumstances);
joint and several liability for social security contributions (under certain circumstances).

In other words: only random light errors qualify for limitation of liability. The question whether these limitations of liability are nothing more than an empty shell seems justified.

Points for consideration for directors or shareholders?

Now more than ever it is recommended to check articles of association and management agreements beforehand and update them where necessary.

The following are key points for consideration:

the director’s assignment must be described in as much detail as possible, as for the company, the director’s liability is of a contractual nature. The preferred route would be to describe the assignment, define the errors and elaborate on the possible consequences as clearly as possible;
even though derogation from the caps on the limitations of liability is forbidden, there is no rule against fine-tuning the provisions (e.g. evidence clauses and force majeure clauses);
another possibility is to establish how joint and several liability compares between the different directors.

De juristen van aternio staan u graag bij met raad en daad om u te adviseren in deze materie. U kan ze hier contacteren.

by Eveline Smet

What is the extent of a CEO’s authority?

The person with the highest operational position in a corporation is its CEO. The CEO is in charge of the company’s executive (in other words: day-to-day) management, regardless of the title they have been given: ‘gedelegeerd bestuurder’ (managing director), ‘dagelijks bestuurder’ (executive director), ‘algemeen directeur’ (general manager) etc.

The confusion about these terms has been around for a while. In its ruling of 3 August 1984 the Raad van State (‘Council of State’) already put them all in one big melting pot. In the case before it, the Raad scrutinised the articles of association of a public limited company. The articles granted general power of representation to the ‘gedelegeerde bestuurder’ (managing director), either or not acting jointly with another director.

Despite this provision, the Raad ruled – unjustly – that the managing director could bind the company only within the limitations of the executive management. This proves that, unfortunately, even one of our highest courts of justice drops the ball from time to time.

Today, the confusion is still a fact of life. With the introduction of the new Companies and Associations Code (CAC) the term ‘zaakvoerder’ (managing director) has been eliminated for private limited companies and replaced with ‘director’. Below, we’ll try to create some clarity on the issue.

Power of representation

The CAC specifies that each director is authorised to perform all acts of management necessary or useful for realisation of the object (NL: ‘voorwerp’) (formerly the ‘goal’) of the company. The articles of association may establish that the directors form what is called a ‘collegiaal bestuursorgaan’: a multi-person management body of directors with equivalent decision-making authority whose decisions are based on consensus. Provisions in the articles of association that limit the powers of one or more directors or the management body cannot be invoked against third parties.

Each director or – in the case of a management body as described above – the management body, represents the company to the outside world, which includes representation at law. However, the articles of association may grant one or more directors the power to represent the company on their own or jointly. Such representation clause can be invoked against third parties, provided that it has been published in the Appendices to the Belgian Official Journal.

The management body may delegate the executive management of the company as well as representation of the company in this context to one or more persons, who act individually, jointly or as a board.

Case law – executive management

The Belgian Court of Cassation ruled on 26 February 2009 that in fiscal cases, a notice of objection may be filed by the executive board; but it didn’t stop there. The ruling clarifies: ‘Executive management acts are 1) acts that are required in view of the needs of the daily life of the company, and 2) acts that in view of their minor importance as well as the necessity of a quick solution, make intervention by the board of directors redundant.’.

By combining minor importance with urgency, the highest court adopted a rather unworldly interpretation of executive management, implying, for instance, that non-recurring acts of great importance do not fall under the definition of executive management – not even when they are very urgent. Thus, even if the board cannot be called together on time, the executive board still does not have the authority to act.

Partial codification of case law

The modernisation of Belgian corporate law initiated a discussion about the interpretation of executive management. After all: the law was too vague in this respect and a clarifying definition was lacking. The legislator therefore took inspiration from the case law of the Court of Cassation. He did, however, give a broader interpretation to the term executive management.

Instead of combining conditions, the legislator leaves room for interpretation. The new CAC reads: ‘Executive management comprises the actions and decisions that do not extend beyond the needs of the daily life of the company, as well as the actions and decisions that, either in view of their minor importance or of their urgency, do not justify an intervention of the management body.’

Again, the CAC does not provide a definition of the term gedelegeerd bestuurder (managing director).

In practice

It is easy to see that the new interpretation of executive management may still be at odds with how CEOs perform their duties.

However, what is undisputable is that the terms gedelegeerd bestuurder (managing director), dagelijks bestuurder (executive director) and directeur (director) all cover the same concept. All three functions include power of representation and decision-making power, but only in matters of executive management. If these directors exceed their powers, the company remains bound. However, their liability does become an issue.

Clever and cautious CEOs will want to learn from this. Many make the mistake of thinking that CEOs may enter into any type of contract unreservedly. This could be a good moment for you to check. In the event of excess of powers or in case of doubt, the solution is to have the management board approve the acts in question.

Executive management body

Prior to the CAC, only public limited companies had the option of establishing an executive management body. Due to the personal nature in a private limited company, the managing director was not allowed to delegate the daily management to someone else, a problem that was often solved by appointing a director with special powers of attorney. However, a director does not act as a body, but indeed as a mandatory as the latter’s authority does not stem from the law. Presenting the power of attorney is required. In the new CAC, the legislator has introduced the option of setting up an executive management body for private limited companies.

The provision that the executive management will be carried out by one or more individuals who act individually, jointly or as a body may be invoked against third parties, provided that it has been published in the Appendices to the Belgian Official Journal. However, limitations to the power of representation of the executive management body cannot be invoked against third parties.

Conclusion

CEOs who are granted general power of representation under the articles of association bind their company ab initio. Nevertheless, as an executive management body they must always question their own powers. After all: they risk actions for liability for any acts that fall outside executive management or that do not take into account any limitations of power under the articles of association.

Are you considering setting up an executive management body for your company? We will be happy to help you make the necessary amendments to your articles of association. Contact us without any obligation.

by Liese Leman

Tax consolidation: the first steps.

With effect from the tax year 2020, more specifically for financial years starting on or after 1 January 2019, Belgian group corporations may apply a limited form of fiscal consolidation. With this reform, Belgium finally adopts what is common practice in most other EU member states. In the Netherlands, for instance, the principle of the fiscal unit has existed since the 1950s. So, under the banner ‘better late than never’, Belgium now also is trying to charm companies with the new ‘group contributions’ tax deduction scheme.

Limited fiscal consolidation

This limited system of fiscal consolidation in the area of corporate tax allows companies to set off profits against losses. In other words, it does not involve full-grown consolidation but rather a loss transfer technique, defined as group contributions, between affiliated companies.

The Belgian fiscal legislator often excels at writing the most complex texts. And they haven’t disappointed this time (section 205/5 of the 1992 Income Tax Act). The conditions for the group contributions are quite strict and their method of operation complicated.

How It Works

Tax losses over the taxable period can be transferred between two companies by means of an agreement. The ‘group contribution’ scheme consists of a tax deduction for the company paying the contribution and an offset against tax losses for the company receiving the contribution. As an attentive reader you will have noticed that the rule can only be applied to the losses of the financial year involved. Tax losses incurred in the past do not qualify.

Contrary to the fiscal consolidation in terms of VAT through a VAT unit, the individual tax return procedure for each company does not change. Corporate tax does not provide for joint tax returns. Each company has to process the group contribution through its own tax return. The profitable company enters the group contribution in the tax return as a new deduction item in the box Uiteenzetting van de winst (‘profit statement’). The lossmaking company enters the group contribution in the box Aanpassingen in min van de begintoestand van de belaste reserves (‘negative adjustment to the opening balance of the taxed reserves’).

The following example may serve as an illustration: Company A has made a profit of 1,000; company B reports a loss of -400. Using the group contribution system, company A (user) may transfer part of its profit in an amount of 400 to company B (beneficiary). As a result, B does not incur any fiscal losses and A is taxed for an amount of only 600.

Compensation scheme

Use of the loss setoff scheme implies payment of compensation equalling the tax advantage. In our example this means that user A pays compensation to beneficiary B in an amount of 400 multiplied by the corporate tax rate.

The compensation scheme provides for an equity-neutral system: it does not involve any transfer of capital. This means that creditors or minority shareholders are not affected by the scheme. The user pays the compensation to the beneficiary in the next taxable period. The compensation does not qualify as a dividend, nor as an exceptional and favourable advantage.

The compensation is tax-neutral. For the profitable company it therefore constitutes a non-deductible professional expense (rejected expense). On the beneficiary side, it is exempt from the tax base (increase of the opening balance of the reserves).

Agreement

A key condition for application of the scheme is that the companies involved each year enter into a civil-law agreement. Such agreement can cover no more than one taxable period. A model agreement is in the making and will be published by Royal Decree. The agreement must be appended to the corporate tax return.

Among other things, this group contribution agreement must define the height of the group contribution. Said contribution may not exceed the loss that the beneficiary would have incurred in the taxable period if it had not received the group contribution. Beneficiary companies may be a party to more than one of such agreements. Under no circumstances may the sum of the group contributions included in the agreements exceed the stated loss.

Furthermore, the profitable company undertakes to compensate the beneficiary. As stated earlier, said compensation equals the tax surplus that would have been payable had no group contribution been in place.

For which companies?

The agreement may be entered into by Belgian companies (or EU/EEA companies with a permanent office in Belgium) who are subject to the common rules of Belgian corporate tax and who are affiliated via:

a direct shareholders’ relationship of at least 90% (parent company and subsidiaries); or
a common parent company (a Belgian or EU/EEA company) directly holding at least 90% of the shares of the companies involved (sister companies).

Indirect participations are explicitly excluded.

Prior to any arrangement about a group contribution, the minimum shareholding condition must have been met for a continuous period of 5 years. Period commencing on 1 January of the fourth calendar year prior to the calendar year named after the assessment year. Except in the case of liquidation, another requirement is that the affiliated companies’ financial years coincide.

Some companies are excluded explicitly, such as companies that put immovable property or any real right to immovable property at the disposal of the manager; investment companies; maritime shipping companies and diamond merchants.

Conclusion

The new fiscal consolidation is a bright light for Belgian groups of companies and multinationals. However, in view of the strict participation conditions its success is not guaranteed. Time will tell ...

by Johan Lemmens

Cross-border tax arrangements: be warned!

We have already discussed Directive (EU) 2018/822 as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. Although the various European Member States, including Belgium, have yet to transpose the directive into national legislation, the directive entered into force on 26 June 2018. The actual first notification will only have to take place from 2020 onwards.

Intermediaries and taxpayers who are obliged to report must be aware of this new and additional weapon in the fight against tax evasion. It complements the various national anti-abuse tax provisions already in place in the Member States.

What arrangements?

The Directive requires the reporting of potentially aggressive cross-border tax planning arrangements. A cross-border arrangement is one which involves either more than one Member State or one Member State and a third country.

In addition, at least one of the following conditions must be fulfilled:
a) not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
b) one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
c) one or more of the participants in the arrangement carries on a trade or business in another jurisdiction through a permanent establishment and the arrangement constitutes part or all of the trade or business of that permanent establishment;
d) one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or without creating a permanent establishment therein;
e) such a mechanism is liable to affect the automatic exchange of information or the determination of the ultimate interest.

These arrangements must be primarily, but not exclusively, for the purpose of obtaining a tax advantage (main benefit test).

Essential characteristics or hallmarks of the arrangement

In order to minimise costs and administrative burdens for both tax administrations and intermediaries, and to make the directive an effective deterrent, not all arrangements should be reported. This is only the case when the cross-border construction possesses one of the essential characteristics listed in Annex IV to the directive .

There are five categories of essential characteristics or hallmarks:
Category A - General essential characteristics associated with the main benefit test;
Category B – Specific essential characteristics associated with the main benefit test;
Category C – Specific essential characteristics relating to cross-border transactions;
Category D – Specific essential characteristics for automatic exchange of information and ultimate interest; and
Category E – Specific essential characteristics related to transfer pricing.

It is important to note that certain categories may only be taken into account if they comply with the main benefit test.

Notifications linked to the main benefit test

Category A covers arrangements with a confidentiality clause, a success fee for the intermediary or where a standard, market-ready structure or standardised documents are used.

Category B includes arrangements whereby the taxpayer uses tax losses, income is converted into capital, gifts or other categories that are taxed at a lower rate or not, or resources are pumped around (round-tripping) by means of intermediate entities without a primary commercial purpose.

In category C, three arrangements are linked to the main benefit test. More specifically, those where deductible cross-border payments are made between two or more related companies and (a) the recipient is - for tax purposes - resident in a jurisdiction that does not levy (or levies at a zero or near zero rate) corporate income tax; (b) the payment enjoys a full tax exemption in the jurisdiction where the recipient is resident for tax purposes or (c) the payment enjoys a favourable tax treatment in the jurisdiction where the recipient is resident for tax purposes.

Mandatory reporting obligation

If an arrangement contains one of the essential characteristics that occur in the other categories of C, D or E, then the arrangement must always be reported. This applies irrespective of whether the main objective is to gain a tax advantage.

Under category C, this is the case for arrangements where the same asset is depreciated in more than one jurisdiction; double taxation is claimed for the same income or capital item in more than one jurisdiction; transfers of assets take place where there is a material difference between the amount designated in the jurisdictions concerned as the remuneration to be paid for those assets or where the recipient of the cross-border payments is resident for tax purposes in a jurisdiction included in a list of jurisdictions of third countries that have been assessed as non-cooperative by the Member States jointly or in the OECD.

Category D covers those arrangements which are designed to circumvent the automatic exchange of information or where legal or beneficial ownership is non-transparent through the use of persons, legal arrangements or structures.

Finally, category E focuses on transfer pricing arrangements based on unilateral safe-haven rules; transfers are made of intangible assets which are difficult to value or cross-border intra-group transfers where the estimated annual pre-tax earnings before interest and taxes (EBIT) of the transferor(s), in the three-year period following the transfer, are less than 50 % of the estimated annual EBIT of that/those transferor(s) if the transfer had not taken place.

Which intermediary should report?

Any intermediary who conceives, offers, designs, makes available for implementation or manages the implementation of a reportable, cross-border arrangement.

An intermediary is also a person who, bearing in mind the facts and circumstances involved and on the basis of the available information, expertise and understanding necessary to provide such services, has, directly or indirectly, provided any material assistance, other assistance or advice. Any person shall have the right to provide evidence that he or she did not know and could not reasonably have known that he or she was involved in a reportable cross-border arrangement.

In addition, an intermediary must meet at least one of the following additional conditions: be resident for tax purposes in a Member State; have a permanent establishment in a Member State through which the services relating to the arrangement are provided; be constituted in, or subject to, the laws of a Member State or be registered with a professional body in connection with the provision of legal, tax or advisory services in a Member State.

Does the taxpayer have a reporting duty?

Three situations are de facto foreseen which the taxable person has to report himself.

The taxable person shall be under an obligation to report if he has at no time engaged intermediaries to carry out the cross-border arrangement. The obligation to report also shifts to the taxpayer when the intermediaries are established outside the European Union. Finally, the taxpayer will also have to take responsibility for the notification if the intermediary in question invokes a legal professional confidentiality and the intermediary operates within the limits of this professional confidentiality.

What needs to be reported?

The following information must be reported:
a) the identification details of intermediaries and relevant taxable persons;
b) the essential characteristics that require the notification of the cross-border arrangement;
c) a summary of the contents of the cross-border arrangement subject to the notification requirement;
d) the date on which the first step towards implementing the reportable cross-border arrangement has been, or will be, taken;
e) the national provisions underlying the reportable cross-border arrangement;
f) the value of the reportable cross-border arrangement;
g) the Member State of the relevant taxpayer(s) and any other Member State likely to be affected by the reportable cross-border arrangement; and
h) the identification of other persons in a Member State who are likely to be affected by the reportable cross-border arrangement, together with an indication of the Member States to which they are linked.

When will the arrangement be reported?

Depending on what occurs first, the intermediary or taxpayer shall be obliged to report the cross-border arrangements of which they are aware, possess or control within 30 days of their becoming aware:
a) the day after the reportable cross-border arrangement has been made available for implementation; or
b) the day after the reportable cross-border arrangement is ready for implementation, or
c) the moment when the first step in the implementation of the reportable cross-border arrangement has been taken.

Intermediaries who have directly or indirectly provided material assistance, other assistance or advice are also obliged to provide information within 30 days of the day after they have directly or indirectly provided assistance, other assistance or advice.

In the case of a market-ready arrangement, the intermediary is obliged to draw up a three-monthly report with an overview of the new notifiers who have also opted for the implementation of this arrangement.

Conclusion

This directive once again increases the pressure on intermediaries involved in cross-border tax arrangements. That much is clear. It remains to be seen how and when Belgium will transpose the directive. In any case, the penalties for arrangements that are not reported will be effective, proportionate and dissuasive. In addition, any intermediary who chooses to ignore the directive and its national interpretation may suffer considerable reputational damage.

by Nesrine Jelti

Can you still carry out prospecting and marketing after 25 May 2018?

Can you still carry out prospecting and marketing under the GDPR? Many entrepreneurs are racking their brains about this question. Discover the answer below.

Legal processing of personal data

According to the regulation, any processing of personal data must be done legitimately. Processing legitimately is processing that is done on a legal basis. The GDPR foresees six legal bases. These are:

defence of the vital interests of the data subject;
execution of a task of general interest or public order;
compliance with legal obligations;
obtaining permission;
executing a contract; and
legitimate interest of the controller.

Marketing and/or prospecting versus GDPR

Marketing and/or prospecting are often deemed to be almost impossible within the new obligations of the GDPR. This is not the case. The two are perfectly compatible if you take a few precautions.

The biggest problem is legitimacy, namely having the right legal basis to do marketing or prospecting. From the permissible legal bases of the regulation there are only two which you could possibly use. The defence of the vital interests of the data subject, the execution of a task of general interest or public order or the compliance with legal obligations are not applicable legal bases.

In most cases, you will not be allowed to invoke the execution of a contract as a legal basis. This legal basis only covers the processing operations that are necessary for the execution of the contract. Marketing or prospecting are not included here.

Therefore, only two possible legal bases remain. In principle, they can both be used. If you obtain permission from the data subject in a correct manner to process his/her personal data with the objective of marketing, you have a legal basis. Although this is the "safest" way, in practice this is not always achievable. Certainly, in the context of prospecting, obtaining permission will not provide a way out.

Another possible legal basis is the legitimate interest of the controller. This legal basis can be called upon for marketing or prospecting. However, you will need to make sure that the rights of the data subjects are not more important than your legitimate interest. You will always have to perform a balancing exercise, where you'll need to critically contrast your interest with that of the data subject.

Privacy Statement

In addition to the obligation of legitimate processing, you must inform the data subject about his rights and how these can be exercised. If a data subject exercises these, you must react according to the rules of the regulation. Informing the data subject about this can be done via a privacy declaration.

Conclusion

Regarding the question about marketing and prospecting being compatible with the GDPR, the answer is positive.

If you so wish, aternio can assist you with the implementation of the obligations imposed by the GDPR.

by Nesrine Jelti

Disclosure obligation of aggressive cross-border constructions for tax specialists

From 1 July 2020, tax specialists will have to disclose aggressive cross-border constructions to the tax authority. This is part of the new fight against international tax evasion. The proposal mainly reflects Action Point 12 of the 2013 international plan of the OECD on Base Erosion and Profit Shifting (BEPS).

Transparent fiscal constructions

Today, fiscal constructions are still being set up so taxable profits can be flushed through tax havens or total tax burden is significantly reduced in other artificial ways. The constructions themselves aren't always illegal, but since the Panama Papers aggressive fiscal planning is no longer justifiable to society.

Central database

On Tuesday 13 March 2018, the European Ministers of Economic and Financial Affairs (‘ECOFIN’) met to discuss the implementation of a disclosure obligation for ‘intermediaries’. This draft Directive is part of a series of measures that should help to avoid evasion of corporation tax.

Intermediaries – such as tax lawyers, tax advisers, accountants – will therefore have to disclose potentially harmful constructions to the national tax authority. European Union member states will be able to exchange this information via a central database. In addition, member states will be obliged to impose sanctions on intermediaries who do not comply with the transparency measures.

What does ‘aggressive’ mean?

Of course, the question is: what should be understood by ‘aggressive' cross-border planning’? A set of “essential characteristics” will help determine which types of constructions will have to be reported to the tax authority. This doesn't necessarily mean that a construction is harmful. It suggests it may have to be investigated by tax authorities. A lot of constructions are entirely legitimate so it is a matter of determining which ones aren't.

Implementation

Member states have until 31 December 2019 to incorporate the Directive into their national legislation. The new disclosure obligations will apply from 1 July 2020. From that date, the disclosure obligation should also come into effect in Belgium.

Member states are obliged to exchange information every 3 months, more precisely within one month after the end of the quarter in which the information was presented. This means the first automatic information exchange has to take place on 31 October 2020 at the latest.

The final Directive will be adopted by the Council acting on unanimity after consulting the European Parliament.

by Sophie Claeys

Mailbox companies more and more frequently unmasked

Panama Papers, paradise papers….few are not familiar with these terms. These so-called mailbox companies were covered by news outlets for days and by now present a well-known tax evasion construction.

Below is a short overview of how these mailbox companies are created and how the Belgian tax authority handles these, along with the consequences.

Why and what?

Mailbox companies are set up in countries with low(er) tax rates. If every country had the same tax rate these types of constructions would be useless.

So, a mailbox company is a company that is registered in a country with a low tax rate. But even though it is registered there, the reality is that it is not actually active in that country. In other words, the reality is quite different from what is presented on paper.

How is a mailbox company established?

A mailbox company is established when a company purchases an address in another country and then registers at this address. However, these are often ‘empty’ addresses, since the true offices of the company are not actually there. No real activity takes place there either, which is the reason for the term ‘mailbox company’.

Let’s illustrate this by use of an example. Someone wants to set up a company and of course wants to pay as little taxes as possible. Their solution then is to establish the company in a tax friendly country. The person purchases an address abroad and establishes the company there. (S)he him/herself does not wish to move there so (s)he runs the company from his home country. Of course no employees are employed abroad, nor is there any degree of operation there.

The company is subject to the tax rate of the country where it is registered, even though it does not engage in any activities there. If this country has a tax rate of, for example, 12,50%, then this set up abroad offers a big financial advantage as compared to establishing in Belgium where we have much higher tax rates. Even the recently approved reduced business tax rate cannot compete with the tax rates in a lot of other countries.

The scandals concerning the Panama and paradise papers don’t necessarily involve start ups as in the above example. But it works the same way. The company is registered in a fiscally advantageous country.

Fiscal watchdog on the lurk

The Belgian tax authority has been on the lurk for years. The goal is obvious. It wants to be able to tax these mailbox companies as in-country companies. Of course this requires reclassification of the mailbox company as a Belgian company.

The tax authority can accomplish this by use of the actual place of business of the company. In the event that the actual place of business does not coincide with the registered office, then this actual place of business trumps the registered office, for tax purposes.

Reality trumps (substance over form)

Case law, influenced by tax practice, has developed several points that are taken into account in determining the actual place of business. In the event one of these points is positive, the tax administration will easily come to the determination that the mailbox company is in fact a local company. This when the registered address is deemed not to coincide with the actual place of business.

Place where the majority of the Board/management lives
Authority of the local Board/ management
Place of the general meetings and counsel of the Board/management
Place where the company’s accounting is performed
Place where the company has its bank account(s)
Place where the fiscal obligations are fulfilled
Place where the company has offices

If we apply these points to our example above, then it is clear that the tax administration can easily reclassify the company. The mere fact that the sole manager lives in Belgium provides the tax authority with a possible reason to reclassify the company.

Reclassification will always be a factual matter in which all relevant facts have to be taken into account. The presence of a Belgian Board member in a foreign company does not by definition make it a Belgian company. In the event actual business activities are conducted out of the country, and the actual decisions of the business are made in such country, then the place of living of the Board member will not be decisive. So it is very much a factual matter, but we think it is important to emphasize that the Belgian tax authority keeps a strict eye on these companies.

Consequences

In the event that the tax authority wins, then the company will be deemed to be a Belgian company. This of course means that it will have to pay the applicable Belgian taxes.

Reclassification comes at a high price. Often, the Board members, shareholders and possibly even the advisors will be prosecuted for fiscal fraud, money laundering and forgery. The consequences are not to be underestimated.

Conclusion

Establishing a mailbox company is quite simple. But the consequences for doing so can be serious. As a result of increased international transparency and data exchange, it becomes increasingly difficult to stay out of the watchful eye of the tax authority.

The only feasible conclusion is: think before you begin and when you do begin, do it well. Substance over form is after all not an insignificant concept.

by Nesrine Jelti

The new innovation income deduction stimulates research and development in Belgium

As of July 1 2016, the net patent deduction has been replaced by an innovation income deduction. It allows for a deduction of 85% for innovation related income. Various related measures were strengthened and expanded. The implementation of this innovation income deduction has made Belgium the country of choice for businesses to conduct research and development.

Preface

The previous patent deduction did not meet the requirements of point 5 of the BEPS-action plan, according to the OECD (Organization for Economic Co-operationand Development). The BEPS-action plan contains worldwide coordinated agreements to prevent tax evasion. Specifically, the action plan consists of 15 action points meant to prevent base erosion and profit shifting.

The patent deduction as it existed before July 1^st 2016, left too much room for profit shifting. The goal of the new innovation income deduction is to only provide the tax advantages to the taxpayers who actually incur the research and development expenses. The innovation income deduction was implemented retroactively through the law of February 9^th 2017.

The nexus fraction

The new innovation income deduction differs from the patent deduction in several ways. Specifically, it sets forth two stricter measures. The first of these measures requires that the net-innovation-income is multiplied with the nexus fraction. The nexus fraction equals the qualifying expenses divided by the total (global) expenses.

Qualifying expenses are expenses incurred in the research and development which the business carried out itself, or which it outsourced to an unrelated business. Qualifying expenses may be increased by 30% for purposes of applying the nexus fraction.

Global expenses are the expenses that the business has incurred or taken upon itself for the development of a patent. In other words:

expenses incurred for research and development of the intellectual property right that the business conducted itself;
expenses incurred for research and development of the intellectual property right that the business outsourced to an unrelated business;
expenses incurred in the request and acquisition of the intellectual property right; and
expenses incurred for research and development of the intellectual property right that were ‘outsourced’ by a related business.

Net income

The new innovation income deduction is calculated based on the taxpayer’s net income, unlike the patent deduction which was calculated on the gross income. This is another way in which the regulation has become more stringent. The net innovation income is determined by deducting the global expenses from the gross income.

Ideally, the net-innovation-income is determined separately for each intellectual property right. However, the law allows for a concession if this isn’t possible; in that case, the net-innovation-income may be determined per group of products.

The nexus fraction is applied differently depending on the way in which the net-innovation-income is determined. Normally, the nexus fraction is applied separately for each individual property right; but, it may exceptionally be applied per group of products.

Expanded scope of applicability

The scope of applicability was expanded, in compensation for the stringent regulations outlined above. The most important is the expansion of the material scope of applicability. This is one of the reasons that this deduction is considered ‘new’ and is referred to as the “new innovation deduction”.

The expansion of the material scope of applicability means that the deduction is no longer limited to the income from patents and thereto belonging certificates. The new income innovation deduction also applies to income from breeders’ rights, orphan drugs, data-or market exclusivity and computer software with author protection rights.

The concept “patent income” was also expanded. Under the new regulations, reimbursement for damages due to the violation of an intellectual property right and amounts received due to the alienation of an intellectual property right, are also considered innovation income.

Temporary exemption

The new innovation income deduction allows one to take advantage of the exemption from the moment a request for an eligible intellectual property right has been submitted. In other words, one is no longer required to already have the intellectual property right, prior to using the deduction. This is a significant change for businesses. This is considered to be a temporary exemption, due to the fact that the request is still awaiting review. As soon as the request is approved, the temporary exemption is converted into a permanent exemption.

Retention of the deduction

The new innovation income deduction provides two additional important changes. As of July 1, 2016, the deduction will no longer be lost as a result of a tax-free contribution, fusion, a company split, or similar transaction. Additionally, deduction surpluses may be carried over to the next taxable period.

Unused deductions no longer get lost.

Transitional provisions

The new innovation income deduction is applicable retroactively. The innovation income deduction is applicable to innovation income as of July 1, 2016, despite the fact that it did not become a law until February 9, 2017. Regardless, the legislator has also provided a transitional provision. As such, the patent deduction may still be applied to patent-income obtained until and including June 30, 2012. This patent deduction has to be obtained through self-developed patents that were requested before July 1, 2016, or through improved patents and licensing rights that were actually obtained before July 1, 2016.

In addition to these conditions, the legislator also implemented an anti-misuse provision. As a result, the transitional provision is not applicable to patents obtained directly or indirectly by a related company, when the company carrying over the income would not itself benefit from a patent- or similar deduction in its country. The legislator hereby attempts to prevent profit shifting through use of the transitional provision.

Conclusion

Upon comparing the stricter measures and expansions, we can conclude that the new innovation income deduction is a valuable change.

Especially the expansion of the applicable scope will result in new opportunities for many businesses. The new innovation income deduction stimulates research and development in Belgium.

Although Belgium is known for its high taxes, this very generous tax regime highlights its progressive approach in this area.

by Nesrine Jelti

Horizontal supervision: a new approach to fiscal control in Belgium

A new approach to fiscal control is in the making in Belgium. In the Netherlands, horizontal supervision, where fiscal control is exercised based on an agreement between the tax authorities and the tax payers (or their accountant or tax advisors), has been an option for years.

As a result of this year’s Summer Agreement, horizontal supervision is also on the horizon for our country. This marks a tremendous change from the current fiscal control approach, which is solely exercised by the tax authorities and which only takes place after a tax return has been submitted.

What is horizontal supervision?

Horizontal supervision means that the taxpayers (and more likely, their accountants or tax advisors) are responsible for conducting their own own tax audits. It is based on the notion of increasing cooperation between the taxpayer and the tax authorities.

This of course, requires clear agreements between all parties involved, with clear quality standards. These agreed-upon standards then have to be followed. As such, an accountant or tax advisor will have to refuse performing services requested by the taxpayer-client if these are in conflict with the quality requirements.

Associations and their members

In implementing horizontal supervision, agreements will be made on several different levels. First of all, all-encompassing agreements will be made with the professional associations (BIBF, IAB, …). These agreements will set forth strict quality requirements. The associations will also be called upon to ensure that members effectively agree to provide the required quality.

Additionally, accountants and tax advisors will be bound by a service provider’s agreement, by which they will specifically agree to meet the quality requirements.

To ensure a proactive approach, participating members will also be called upon to engage with the tax authorities.

Participating businesses

A business can participate in the horizontal supervision approach by working with an accountant or tax advisor who meets the requirements to do so. To participate, the business will need to sign a participation form.

Of course, participating in this horizontal supervision system does not exclude a control by the tax authorities. Nothing prevents them from checking that the agreements are in fact being complied with.

Advantages of participation

There are clear advantages of participating in the horizontal control system. Participating businesses will get a clear overview of their tax situation more quickly. Also, any questions or concerns can be discussed with the tax authorities in advance. Business will have more certainty as a result.

Additionally, participating businesses should be less often subjected to fiscal control. They would only be controlled in the event they are part of the few selected. Exactly how this selection will be determined (and exercised) is to be seen.

No participation requirement

There is no requirement to participate in the horizontal supervision approach. Accountants and tax advisors can choose whether or not they want to opt in.

Businesses will also have the choice. If they would prefer not to participate, they can opt for an accountant who has also chosen not to do so. However, if Belgium approaches this like the Netherlands has, we expect increased controls for non-participating taxpayers.

Conclusion

Horizontal supervision requires mutual trust, on both the side of both the taxpayer and the tax authorities. If this mutual trust is missing, horizontal supervision is likely doomed.

by Astrid Claessens