9 July 2004 saw official introduction of the arm's length principle into Belgian tax law, a change that not only confirms this internationally accepted yardstick, but also increases Belgium's appeal for hosting foreign investors.
Taxation in Belgium now limited to arm’s length profits
Belgian tax law now stipulates that Belgium will refrain from taxing profits that a Belgian tax-resident company would not have realised had it not been party to related-party dealings.
As the cost structure (or the profit potential) of a member of a multinational group of companies will normally differ from that of a stand-alone entity, its profit will normally also be higher. Applying the arm's length principle, this profit differential, which does not result from the functions performed and risks assumed by the respective entities, should not be allotted to the Belgian group member.
As such, Belgian tax law allows for unilateral adjustment of the Belgian tax base similar to the corresponding adjustment in article 9 of the OECD Model Tax Convention. The underlying assumption is that the "excess profit" forms part of the profits of the foreign related party.
Practical application via a unilateral advance pricing agreement ("APA")
The part of profit that is deemed to derive from related-party dealings (and hence is exempted in Belgium) and how the "part-of-the-profits-of-the-foreign-related-party" condition should be interpreted will need to be agreed up front with the Belgian APA Commission.
APAs – granted for renewable periods of 5 years – are based on a detailed functional, economic analysis of the relevant Belgian activities with a view to determining a profit level commensurate with the company's functional and risk profile.
Opportunities for Multinational Companies
Belgian tax law may offer opportunities for international groups with sufficient substance in Belgium, as an APA could mean that Belgian operations are only taxed on a (benchmarked) profit with the profit from group synergies falling outside the Belgian tax net, thus reducing the group's effective tax charge.
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