In order to avoid double taxation on foreign-source royalty income, Belgian beneficiaries are entitled to a foreign tax credit (FTC) to offset foreign withholding tax (WHT) paid abroad, where:
the royalty income has been subject to an actual tax charge abroad
the beneficiary uses the royalty-generating asset in Belgium for business purposes, i.e. the royalty income is subject to taxation in Belgium.
Benefits
Except in case of royalty income eligible for the patent income deductionthe FTC is equal to 15/85 of the net frontier amount of the royalty (i.e. after deduction of foreign WHT), irrespective of the actual WHT rate in the source country.
Except in case of royalty income eligible for the patent income deduction, the 15/85 fraction applies even if the WHT is less than 15%, other than where an exemption applies in the source country. In case of royalty income eligible for the PID, the actual foreign tax treaty applies which can still lower the effective tax rate of patent income.
The flat-rate FTC can therefore be tax-beneficial in the hands of a Belgian recipient of the royalty, without tax losses, where the FTC claimed in Belgium exceeds the actual WHT levied in the source state.
Example
The overall effective tax rate is 26.22%.
In the example, 16.76 is the maximum creditable amount, i.e. the amount that the Belgian beneficiary can credit against its Belgian income tax liability (any excess cannot be carried forward, unless “EU freedom” arguments are invoked), even though the foreign tax only amounted to 5.
Belgian royalty structure - FTC Tax Planning Opportunity
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