The Belgian Program Law of 1 July 2016 has, amongst others, broadened the scope of application of the already existing reporting obligation for payments to tax havens. From a practical perspective, the main consequence of this enlarged scope is that Belgian companies and permanent establishments will soon have to disclose to the Belgian tax administration any payments they make to Hong Kong based persons or entities, provided that the total amount of tax haven payments made during a certain taxable period exceeds 100.000 EUR.
As of 1 January 2010, payments made by Belgian companies (and by Belgian permanent establishments of foreign companies) to persons or entities that are established in “tax havens” are subject to a special reporting requirement, provided that the total amount of such payments that has been made during a certain taxable period exceeds 100.000 EUR. This reporting has to be done using a special tax form that has to be annexed to the relevant entity’s annual corporate income tax return.
Failure to comply with this special reporting obligation is sanctioned with the relevant (unreported) payments not being tax deductible. And even where this reporting obligation has been duly complied with, the tax deductibility of the relevant payments is subject to an increased burden of proof, which implies that such payments are only deductible if the taxpayer can demonstrate that the payments are made in the context of an “actual and genuine transaction” and to the benefit of entities that do not qualify as “wholly artificial arrangements”.
Up until recently, the Belgian Income Tax Code defined the notion “tax haven” as either:
- a jurisdiction that, during the entire taxable period in which the relevant payment was made, has been considered by the OECD Global Forum as a jurisdiction not having substantially and effectively implemented the OECD exchange of information standard (first category); or
- any jurisdiction that either does not have a corporate tax system or that applies a nominal corporate income tax rate that is lower than 10% (second category).
At this point in time, there are no jurisdictions that are being considered as “tax havens” on the basis of the first rule. With respect to the second category, the Belgian Royal Decree implementing the Income Tax Code contains a list of jurisdictions that qualify as “tax havens” on that basis. This list (which was last updated by a Royal Decree of 1 March 2016) currently includes 30 jurisdictions, most of which are typical tax havens such as the Bahamas, Guernsey, Jersey, the Cayman Islands, the British Virgin Islands, etc.
Hong Kong (soon) also “in scope” of the reporting rule
Since Hong Kong is not blacklisted by the OECD and applies a nominal corporate tax rate of 16.5%, payments to Hong Kong based persons or entities have thus far never been “in scope” of the aforementioned special reporting rule.
This is, however, about to change since the Belgian Program Law of 1 July 2016 has, among other things, broadened the scope of the second category of “tax havens” by providing that a.o. jurisdictions that exclusively tax “off-shore” or “on-shore” income also qualify as such. Hong Kong’s territorial corporate tax system clearly fits this new (enlarged) definition, meaning that going forward it will also be considered as a tax haven for the purposes of the above-mentioned Belgian reporting rule.
Consequences and timing
The most obvious consequence of the amended reporting rules is that Belgian companies (and Belgian permanent establishments of foreign companies) will have to closely monitor the amount of payments they make to Hong Kong based entities (and other targeted “tax haven” jurisdictions) in order to determine whether for a certain tax year they will be held to perform a special tax reporting or not. It is likely that payments to all types of Hong Kong resident entities will fall within the scope of the reporting rule, irrespective of whether the relevant beneficiary effectively applies the off-shore tax regime or not. Complying with the reporting rules is of the utmost importance since failure to do so implies that the tax deductibility of the relevant payments (e.g. management fees, interest payments, royalty payments, etc.) will be disallowed. It is worth noting in this respect that payments that, by nature, are not tax deductible (e.g. dividend payments) are also to be taken into account in determining whether the 100.000 EUR threshold has been reached or not.
It will also become more important to ensure that the Hong Kong recipients have a sufficient level of substance, so as to mitigate the risk that the Belgian tax administration would successfully take the position that the latter qualify as “wholly artificial arrangements” (in which case the tax deductibility of the relevant payments could still be disallowed, even where the reporting rule was duly complied with).
There is still some uncertainty with respect to the exact date on which the new (broadened) reporting rules will enter into force. In a worst case interpretation, certain companies and permanent establishments may even be held to report payments they have made in the course of calendar year 2015 (to be reported in the corporate income tax return that, as a matter of principle, has to be filed by the end of September 2016). Whether or not this will be the case depends on when exactly the Belgian government will issue the Royal Decree that formally indicates Hong Kong as a targeted “tax haven” jurisdiction.