Multinational groups are increasingly seeking to concentrate customer services in regionwide Service Centers. In a recently published administrative circular (Circular Ci. RH.421/483.766 of July 26, 1996), the Belgian Tax Administration has responded to this trend by providing a procedure for granting advance pricing agreements to fix the tax base for such Service Centers for a five-year renewable period.

An authorized Service Center may take the form of either a resident Belgian company or the Belgian branch of a foreign company. The status may be requested on behalf of a newly-created entity or on behalf of a company or branch already in operation.

A distinguishing feature of the new circular is the broad and open-ended scope of intra-group activities which it includes. The new circular can be applied to a Call Center, set up to provide easy access by telephone for group customers seeking information on available products and services or looking for a rapid solution to technical problems. The circular will also allow a Customer Service Center to accept customer orders, on the basis of preexisting price lists. In addition the circular covers a broad range of intra-group administrative and managerial functions, such as data collection and retrieval and communications network services.

The advance pricing agreements will be based on either a cost plus or a resale minus formula, depending upon the nature of the activities to be carried out by the Center. In an effort to further reduce the tax cost and increase the competitivity of the new Service Centers, the Belgian tax administration has excluded salary and all other personnel-related charges from the cost-plus formula as well as most charges invoiced to the Center by third parties. This means that for labor intensive Call Centers, only a small portion of total operating costs will be taken into account for calculating the taxable margin.


With respect to sales-oriented activities, the circular distinguishes between "active" intervention in sales and "passive" sales operations.

When intervening in an active manner in sales operations, a Service Center may act in its own name to accept orders from customers, provided that the price and other conditions of sale have been previously established by the group. After accepting the order, the Service Center may send out order confirmations and invoices to clients, as well as carry out all other administrative, financial and tax formalities related to the sale. This makes it possible for the Service Center to serve as a Central Reinvoicing Company for sales to group customers.

When operating as an active sales intermediary, a Center will often enter into commissionnaire agency agreements with members of the group. Under a commissionnaire contract, the Center will sell to customers in its own name, but the sales proceeds will accrue to the group members, who will also bear most or all of the risks of sale. The income of the Service Center will be restricted essentially to the commission it earns by selling on behalf of the group members.


Under this heading a Service Center may contribute to group members' sales activities by collecting orders from customers and sending out sales confirmations to customers, but may not negotiate or accept orders. This makes it possible for the Service Center to serve as a Central Order Processing Unit.

The Center, when acting in this passive manner, will identify the group member on whose behalf it acts. Again, it may perform all administrative, financial and tax formalities related to the sale.


A Service Center may provide information and assistance to clients. It may function as call center to inform the public of the availability and delivery terms of products. The Center may operate a Help Line to provide customer assistance by telephone to solve technical operating problems for products sold by group members.


A Service Center may be authorized to carry out a large variety of activities for group members falling under the general heading of "preparatory or auxiliary". Included under this heading is centralized purchasing for the account of group members. The Center may also carry out scientific research and maintain a data bank for purposes of calculating "travel miles" for customers of an airline company. The Center may centralize communications with group members or with third parties, such as public authorities. Communications involving customer sales are, however, excluded under this heading. Preparatory or auxiliary activities are not supposed to add value to the group's goods or services sold to customers.


Although authorizing a wide variety of activities, the circular excludes activities which are purely commercial, such as telemarketing and active solicitation of customers. Active intervention in the process of manufacturing is also excluded. The activities of a Service Center are defined as being essentially immaterial, as distinguished to the handling and storage of raw materials, components and finished products which may be authorized under the Distribution Center Circular of November 30, 1994.

A Service Center may bear only a limited business risk. When accepting orders in its own name on behalf of group members, the agreement with the group members should provide for their acceptance of the commercial risks involved in the sale, such as customer default, warranty claims, etc.


A Service Center qualifying under the circular may obtain a cost plus ruling which will fix the minimum tax basis for a five year period. Technically speaking, the ruling stipulates that the tax administration will not challenge the arm's length character of the Center's dealing with affiliated companies provided that its net profits reach a given percentage of operating costs. Naturally, if the Center's results exceed the minimum tax base provided for in the ruling, the higher reported profits will be subject to the corporate income tax. The ruling is therefore in the nature of a "safe haven".

The costs which enter into consideration for the cost plus calculation are the Center's own operational costs, with the exclusion of the very important category of personnel costs. This excluded category is broadly defined to comprise all employee-associated costs such as salary, fringe benefits, the company's social security contributions and the employer's premium for extra-legal insurance. The costs of services (such as telecommunications) provided by third parties are also excluded from the mark-up, on condition that these charges are at arm's length and that the services are of a kind which could have been invoiced directly to group members.

The profit margin to be calculated on the basis of the Center's operating costs will be fixed on a case-by-case basis depending upon the nature of the activities involved. The circular stipulates that such a profit mark-up may vary between 5 and 15%.

An example of the cost-plus method, as applied to a Service Center carrying out centralized communications activities of a preparatory or auxiliary nature, is shown below. The Center is assumed to have the following costs:

    operations and overhead:         50,000,000
    telecom charges                  60,000,000
    personnel costs                  90,000,000

                       Total        200,000,000

On the above costs, only "operations and overhead" enter into the calculation of the taxable profit. Assuming that the ruling obtained by the Center fixes the profit margin at 5%, the calculation of the minimum profit would be as follows

      50,000,000        operating and overhead
    = 2,500,000

Since personnel costs and telecom charges are excluded, the effective tax base is less than 2% of the Center's fully loaded costs. The tax itself, calculated at normal statutory rates, is equal to less than 1% of costs.


An alternative formula available under the circular is the so-called resale minus method. This formula calculates a taxable commission fixed as a percentage of sales when the Service Center functions actively in sales operations. This formula will apply when the Center, acting on behalf of group members, sells in its own name to customers.

The commission fee of the Center will be fixed as a percentage of sales, irrespective of whether such sales are booked by the Center (as commissionnaire) or booked directly by the group members on whose behalf the Center trades. This commission may in no case exceed 5% of sales.

The application of the resale minus method can be shown by the following example, taken from the tax administration's circular. The circular cites the hypothesis of a Service Center selling services to customers in its own name on behalf of group members. The Center's contractual agreements with group members provide for the transfer to the members of the Center's commercial risk. The tax administration fixes the minimum tax base as 1.5% of sales. Sales revenues amount to 2 billion.

The calculation is as follows:

       2,000,000,000         sales revenues
       x .015

     = 30,000,000            tax base

The intercompany transfer prices of the Service Center will not be challenged by Belgian tax authorities provided the Center's reported income from its activities as commissionnaire do not fall below 30,000,000.

It may be possible to combine the cost plus and resale minus formulas when a Center combines both passive and active operations. In such case, operating costs are apportioned on the basis of the nature of the activities developed within the Center.


A ruling may be obtained from the Central Tax Administration, after an examination of the precise activities to be developed within the Center.

If a center will be actively involved in sales as a commercial intermediary, the applicant should provide to the tax administration precise information on the risks which the Center will bear. For this purpose, copies of the commercial contracts between the Center and its affiliates should be provided whenever appropriate.


The latest circular of the Belgian tax administration is intended to complete a series of special measures designed to attract international groups to establish centralized services in Belgium. The first measure, dating from 1982, is the Royal Decree on Coordination Centers. This legislation has been a great success, attracting over 350 of the world's largest multinationals. Although authorized activities are very broad, coordination centers are especially interesting for intragroup financing services, such as loans, leasing and factoring. To qualify, a group must satisfy a number of conditions relating to size and international character, and it must hire at least the equivalent of 10 full-time employees within the first two years of operation.

The second special measure, the circular on Distribution Centers of 1994, is focused essentially on intra-group services involving physical handling, storage and shipment of goods. A qualifying group does not have to meet any criteria as to size or international character, nor does the Center have to hire any minimum number of personnel. The ruling obtained under this circular is based on a cost plus 5% formula. Distribution Centers may have only very limited contacts with customers of group members.

The new Service Center circular, by contrast, authorizes much more extensive customer contacts. A qualifying Central Reinvoicing Center may sell in its own name as commissionnaire, so that customers can enjoy "one stop shopping" for all group products and services. This flexibility responds to growing demand for European-wide customer contact points, which can centralize all client-related dealings from preliminary information on technical specifications and delivery terms right through confirming acceptance of orders and even extending to post-sales technical advice and "help line" services.

The unique feature of the new system is that trading profits on sales to customers are not subject to Belgian taxation. Such commercial profits are recorded on the books of other group members, while the Belgian Center merely records a service or commission fee or else, when functioning as commissionnaire, passes on the trading income to affiliated companies for whom it acts as undisclosed agent. Because of its low tax cost, great flexibility and the transfer pricing security which it affords, the Belgian Service Center seems destined to play a central role in many corporate reengineering programs which are now being implemented in Europe.

The content of this article is intended to provide general information on the subject matter. It is not a substitute for specialist advice.

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