1 COMPANY INCOME TAXES

Coordination centres are subject to corporate income tax. However, the tax base is determined as a percentage of certain operating costs borne by the coordination centre.

In this respect, all personnel costs and financing costs are explicitly excluded from the calculation of the forfeitary tax base.

The percentage to be applied to the remaining costs depends upon the mark-up applied by the coordination centre itself in charging affiliated companies for its services. This leaves the discretion to the centre itself, within certain parameters, to determine the formula for the forfeitary tax system. An 8% or 10% mark-up is most often used. The Tax Administration is reluctant to use a cost-plus percentage below 8%.

The mechanism may be illustrated by the example of a coordination centre adopting the principle of charging out its services on a cost-plus 10% formula. If it has total costs of BEF 100,000,000 of which financial and personnel costs represent 80%, the calculation of the tax base would be as follows:

100,000,000 - 80,000,000 x 10% = 2,000,000

On the above amount, Belgian company tax will be calculated at the normal rate, which is currently 40.17%. In the above example, the company income tax would be BEF 803,400 independently from its actual income. This represents approximately 1% of the coordination centre's total costs.

The tax base, calculated as shown above, can in no event be less than the sum of certain items identified in the law. These are non-deductible expenses and any abnormal or gratuitous advantages granted to the centre by its related group members.

The first item is normally of little importance to multinationals. Compliance with Belgian tax rules should avoid the treatment of expenses as non-deductible. This means, for example, that the centre should not make payments of commissions or other amounts without properly identifying the beneficiary of the payment and the justification for making it.

The rule regarding abnormal or gratuitous advantages obtained from other group members is of much more importance. In order to appreciate the significance of this restriction, it is necessary to recall again the original purpose for the Royal Decree 187.

Centralising of financial and management activities for group members can produce important cost savings. Such savings are shielded from income tax by the favourable rules of the cost-plus system. However, there should be no abuse of these tax concessions by artificial arrangements intended to shift to the centre profits properly belonging to other members of the group.

Such artificial transfers of income are prevented by the special rule on "abnormal or gratuitous advantages". The profits resulting from any such transactions which fail to satisfy the arm's length test will be taxable at the normal rate, to the extent such profits exceed the forfeitary tax base.

The impact of this rule may be illustrated as follows. It is assumed that the coordination centre considered earlier charges out its services to other members of the group on the basis of costs plus a profit margin of 25%. If the Belgian tax authorities find that 10% of costs is the maximum profit margin which is normal for these kinds of services, the "abnormal or gratuitous advantages" flowing from other group members to the coordination centre would represent the difference between 10% and 25%, or in other words 15%.

This excessive percentage would then be applied to the total costs incurred by the centre with respect to the services concerned, as follows:

BEF 100,000,000 x 15% = BEF 15,000,000.

Since the abnormal advantages as so calculated exceed the forfeitary tax base of BEF 2,000,000 the larger amount will become fully taxable at the normal corporate tax rate. The resulting tax would be BEF 15,000,000 x 40.17% = BEF 6,025,500.

By taxing the entire profit of any "abnormal or gratuitous advantages", the Belgian authorities intend to remove all temptations for shifting of profits towards coordination centres through transactions which are not at "arm's length".

Of course, some very important activities of coordination centres are not charged to affiliates according to any costplus formulas. This is so especially with respect to the various activities of financial coordination, such as reinvoicing, factoring, leasing and intercompany financing. It would be difficult if not impossible for a coordination centre to fix the terms of a factoring or leasing contract on the basis of a certain percentage of its operating expenses. Furthermore, when these transactions are carried out as a means of centralised hedging against the risk of foreign exchange fluctuations, the financial results for the centre will depend heavily upon such fluctuations, which are inherently unforeseeable.

For these reasons, the arm's length character of these transactions should be measured by comparing them to similar operations carried out between unrelated parties. Provided that the terms offered by the coordination centre to group members are no less favourable then those applied as between independent parties, no abnormal or gratuitous advantages should result.

2 ANNUAL TAX ON COORDINATION CENTERS

Coordination centres are subject to a so-called "annual tax on coordination centres". The annual tax amounts to BEF 400.000 per full-time employee of the coordination centre, but limited to a total amount of 4.000.000 BEF (i.e., 10 x BEF 400,000).

3 EXEMPTION FROM WITHHOLDING TAXES

Payments of dividends, interests and royalties by a coordination centre are exempt from Belgian withholding tax (currently imposed at 25% for dividends and at 15% for interest). However, with respect to interest payments, the exemption from withholding tax is not granted for interest paid to persons subject to Belgian personal income tax or to the Belgian income tax on legal entities.

All payments of interest to a coordination centre on deposits made by it with banks and other financial institutions are exempt from withholding tax. On intercompany loans, withholding tax may be avoided in application of existing provisions of Belgian law exempting from withholding payments made to professional investors.

4 EXEMPTION FROM CAPITAL REGISTRATION TAX

Another tax concession granted to coordination centres relates to the exemption from capital registration tax. This tax, normally imposed at the rate of 0.5% on capital contributed upon company formation or increases in capital, would represent a serious burden. Coordination centres often require a very large capital in order to carry out their role as group financing vehicle.

Therefore, coordination centres are entirely exempted from this tax.

5 EXEMPTION FROM REAL ESTATE TAX

A total exemption from the real estate tax, which is normally assessed on a lump-sum fixed income of any Belgian situs real property (including fixed equipment), applies to real property held and used by the centre.

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

De Bandt, van Hecke & Lagae - Brussels (32-2)501.94.75