Because of its outstanding geographical situation and infrastructure, Belgium is an ideal location for the temporary storage and subsequent distribution of goods throughout Europe as well as Africa and the Middle East. As a result, many international groups have established "distribution centers" in Belgium for the centralization of their warehousing and distribution activities.
The attractiveness of Belgium as a prime location for distribution centers is further enhanced by the favorable tax treatment of such centers. Belgium provides for a special tax regime, based on a simple cost-plus system, under which a distribution center's taxable income can be calculated as a percentage of the center's operating expenses, and under which the Belgian tax administration agrees not to question the center's transfer pricing with group members.
This special tax regime is complemented by a favorable treatment in respect of customs duties and V.A.T. With respect to customs duties, a distribution center can establish a customs warehouse, which means that goods can be stored without payment of customs duties. With respect to V.A.T, no V.A.T. will be due in Belgium on goods which are stored in a customs warehouse.
Hereafter, a more detailed description of these tax advantages is provided.
II. CORPORATE INCOME TAX STATUS
Depending upon the way in which a distribution center will be organized, as well as on the activities which are being considered, a Belgian distribution center could either take advantage of a special tax regime, based on a simple cost-plus system, or be totally exempt from any income tax in Belgium.
A. SPECIAL TAX REGIME
The special tax regime applicable to Belgian distribution centers is governed by the administrative circular of November 30, 1994.
This circular substantially improves the treatment of Belgian distribution centers as compared to a previous circular of August 9, 1989 (as amended by the circular of May 5, 1994).
1. Conditions
In order to benefit from the special tax regime, the distribution center must (i) take the form of a Belgian resident company or of a Belgian branch of a foreign company, (ii) limit its activities to those specified in the circular, (iii) perform its activities solely for the benefit of group members (the so-called "intra-muros" requirement), (iv) not assume any substantial commercial risk and (v) file an application with the Central Tax Administration.
Besides these simple requirements, no other conditions need be satisfied. In particular, there are no requirements as to the size or multinational character of the group applying for the special tax regime.
a. Legal form
The distribution center must take the form of a Belgian resident company or of a Belgian branch of a foreign company. The company may be a newly constituted company or an existing company. Thus, existing warehousing and distribution operations may qualify for the special tax regime, provided that they limit their activities to those permitted under the circular.
b. Authorized activities
The distribution center may carry out any or all of the following activities:
(1) purchase of products in the name of the center or in the name and for the account of group members and resale of those products to group members;
(2) storage, management, packaging, transportation and delivery of products (in case of transportation and delivery of products to third party customers of group members, the transportation and delivery must be made for the account of the group members);
(3) certain usual forms of handling as permitted in a warehouse exempted from customs duties and V.A.T. (see below at III.E and IV.B), including, among others, repairing, cleaning, sorting, labeling, marking and testing of products;
(4) collection of orders and preparation and sending of order confirmations (without the center itself accepting orders from third party customers);
(5) preparation and sending of sales invoices;
(6) fulfilling financial, bank, administrative and fiscal (V.A.T., customs and excise tax) formalities in connection with the activities listed above.
From (1), it follows that a distribution center may reinvoice products purchased from group members or non-group members to other group members. Unlike the case of Belgian coordination centers, the reinvoiced products may be purchased from non-group members.
However, a distribution center may not sell products to non-group members. Therefore, invoices for products purchased by group members from a distribution center and resold to non-group members must be established in the name and for the account of the reselling group members, and payment of the invoices must not be made in the hands of the distribution center.
c. "Intra-muros" requirement
The above-mentioned activities may only be performed for the benefit of companies of the group. For these purposes, the term "companies of the group" includes all related companies having at least 50 percent common ownership.
d. Absence of commercial risk
The distribution center must not assume any substantial commercial risk.
e. Application formalities
Prior to the establishment of a distribution center or in the course of the financial year preceding the one for which the distribution center wishes to apply the special tax regime for the first time, an application must be filed with the Central Tax Administration, Direction II/1. The application should mention the location of the planned distribution center, the planned activities and information regarding the group filing the application.
2. Tax Treatment Of Distribution Centers
The special tax treatment of Belgian distribution centers consists in the fact that they are allowed to set their taxable income at five percent of certain operating expenses, while the Belgian Tax Administration agrees not to make any intercompany pricing adjustments.
a. Certainty regarding transfer pricing
Technically, the special tax treatment of Belgian distribution centers is embodied in a "safe harbor rule" which states that if the book profits of a distribution center are equal to 105% of its operating expenses, the Belgian Tax Administration will not make any intercompany pricing adjustments. However, if the book profits exceed 105% of the operating expenses, the taxable basis of the center will be equal to the higher book profits.
In other words, distribution centers are allowed to set their intercompany prices at such a level that the resulting book profits equal five percent of their operating expenses, without risk of an intercompany pricing adjustment by the Belgian tax administration.
In order to prevent abuses, the circular requires that the purchase price of products purchased by a distribtion center from Belgian group members be fixed at a level which allows the seller to realize a normal profit mark-up.
b. Determination of cost basis
The operating expenses to which the 5% profit mark-up is applied include all expenses borne by the distribution center, except for (i) the purchase price of products that have been resold to group members during the taxable period, (ii) charges invoiced to the distribution center for services obtained from third parties (provided that the price charged for the services includes a normal profit mark-up), (iii) non-deductible expenses (including non-deductible Belgian taxes), and (iv) reserves, provisions and reserve funds that are to be considered as taxable reserves.
c. Computation of tax
Once the taxable profit is determined on the basis of cost plus five percent, this minimum profit may be further reduced by tax adjustments available to other companies.
The computed taxable income will be subject to the normal rates of corporate income tax (presently 40.17% i.e. 39% + 3% crisis surcharge).
3. Duration Of The Special Tax Regime
Rulings granting the special tax regime are valid for five years, with the possibility of renewal. A request for renewal must be made in writing to the Central Tax Administration, Direction II/1.
B. FULL TAX EXEMPTION UNDER TAX TREATIES
1. Principle
The availability of the special tax regime does not preclude foreign companies from obtaining a full tax exemption for a Belgian distribution center on the basis of tax treaties. The tax treaties concluded by Belgium invariably provide that a company resident in the treaty partner shall be taxable on business profits derived in Belgium only if those profits are derived through a permanent establishment in Belgium. Accordingly, if a Belgian distribution center is set up and operates in such a way that no permanent establishment is deemed to exist in Belgium under the applicable tax treaty, the center may be totally tax-exempt. Importantly, the Belgian Tax Administration is known for its rather liberal application of the tax treaty provisions in this regard.
2. Conditions
Most tax treaties concluded by Belgium are patterned after the O.E.C.D. Model Tax Treaty. Under Article 5 of that Treaty, the term "permanent establishment" is deemed not to include, among others, (i) the use of facilities for the purpose of storage, display or delivery of goods belonging to the enterprise, (ii) the maintenance of a stock of goods belonging to the enterprise for the purpose of storage, display or delivery, (iii) the maintenance of a stock of goods belonging to the enterprise for the purpose of processing by another person, (iv) the maintenance of a fixed place of business for the purpose of purchasing goods, or (v) the maintenance of a fixed place of business for any combination of the above activities provided that the overall activity resulting from the combination has a preparatory or auxiliary character.
Hence, a company residing in a treaty partner will be deemed not to have a permanent establishment in Belgium and be exempt from Belgian income tax if (i) it has the exclusive enjoyment of facilities as owner, tenant or otherwise, (ii) it uses such facilities for the storage, display or delivery of goods, and (iii) the ownership of the goods remains with the company.
A company residing in a treaty partner would also be deemed not to have a permanent establishment in Belgium if (i) it maintains in Belgium a stock of goods in the facilities of a third party, (ii) the ownership of the stock remains with the company, and (iii) the stock is maintained for purposes of storage, display or delivery and/or for the purpose of processing the goods in Belgium by a third person who is not a dependent agent of the company and who does not perform a complete cycle of operations for the account of the company.
Finally, no taxable permanent establishment will be deemed to exist in Belgium if a company resident in a treaty partner maintains a fixed base which engages in purchasing goods for the company, in addition to using facilities for storage, display or delivery of goods belonging to that company.
3. Comparison With Taxable Distribution Center
Tax-exempt distribution centers are an attractive alternative to taxable distribution centers. However, the range of activities which a tax-exempt distibution center is allowed to perform is less broad than those of a taxable distribution center.
The main differences between a taxable and a tax-exempt distribution center are the following:
- while a taxable center may perform its services for the benefit of all members of the group, a tax-exempt center may only render services to the company having the fixed base;
- a taxable center may purchase products in its own name in order to sell those goods to members of the group. Since this activity constitutes a complete cycle, a tax-exempt center will be excluded from performing such an activity;
- while a taxable center may be incorporated as a resident company or a branch, a tax-exempt center can only take the form of an establishment of a foreign company that is a resident of a country with which a tax treaty has been concluded.
Notwithstanding the above, one may conclude that, depending upon its needs, a company which intends to establish a distribution center in Europe should not in advance rule out the possibility of setting up a tax-exempt distribution center in Belgium.
The content of this article is intended to provide general information on the subject matter. It is not a subsitute for specialist advice.
De Bandt, van Hecke & Lagae - Brussels (32-2) 501 94 11
