Treasury Hot TopicTax rulings in Belgium - Secure the tax position of your treasury center

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Philippe Dedobbeleer, Belgian Ruling CommissionDavid Ledure, PwC

Agenda

PART I: Functioning of the Ruling Commission

PART II: Flavour of treasury centre rulings

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PART I: Functioning of the Ruling Commission

1. Introduction2. History (in short)3. Legal provisions4. Pre filing5. Formal Demand6. Figures7. Guidelines

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Introduction

1

Organisation

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History

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2. History (in short)

• 01.01.2003: creation of the legal base for a generalised system for advance decisions (law: 24th of December 2002)

• 2005: Installation of the Autonomous Office (law: 21 of June 2004) entitled to issue all advance decisions in tax matters (direct and indirect taxation)

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Legal provisions

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3. Legal Provisions

Advance decision:

a legal act whereby the Office for Advance Decisions determines, in accordance with the provisions in force, how the legal provisions will apply to a particular situation

or transaction that has not yet produced any fiscal effect.

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Pre filing

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4. Pre filing

• Could be described as a meeting prior to the introduction of a formal demand

• Is an option - no obligation

• Can be held with tax advisers on an anonymous base (identity of the applicant is not revealed)

• Can lead to the introduction of a formal demand (possibly adapted to meet with the remarks made in the meeting)

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4. Pre filing

• Is very useful in complex operations or transactions and when different taxes -direct and indirect - are involved (ex: mergers and acquisitions);

• Gives a first impression to the client of the point of view of the Office;

• The local tax officer is not informed.

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4. Pre filing

Request:

• E-mail, letter or fax• indicates that it concerns a pre filing• Brief description of the intended operation or transaction• Indicates the taxes or tax sections concerned

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4. Pre filing

• The case is allocated to a member of the board • Appointment of a coordinator• Formation of a team to deal with the issue• The team leader is the main contact point• The same team deals eventually with the formal demand• The allocation depends on

the language of the pre filing requestthe taxes or sections of taxes involved

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4. Pre filing

• Possibility to have one or more meetings;• Informal and constructive atmosphere• Is very to the point / useful / practical

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Formal demand

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5. Formal Demand

• E-mail, letter or fax• Strong preference for paperless filing (e-mail)• Explanations and information in English are accepted –

the Office can require translation of relevant items of the formal demand

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5. Formal Demand

The law requires that the formal demand contains;

• the applicable tax sections for the taxes involved;• the identity of the applicants and of the parties involved in

the operation or transaction;• description of the activities of the parties involved;• description of the intended operation or transaction;• extended motivation;• the fact that there is a formal demand going on in an other

country or not (duplicate of the formal demand or decision to enclose)

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5. Formal Demand

It is preferable that the client adds as much as information (documentation, explanations, motivation, …) as possible with the formal demand or with the request of pre filing. That gives the team a clear and clean preview of the operation or transaction.

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5. Formal Demand

Very flat structure

FOR EACH DEMAND :

•Responsible member of the board•Appointment of a coordinator•Formation of a team•Team leader = responsible for the demand

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5. Formal Demand

Within 5 working days after the receipt of the formal demand:

• Acknowledgement of the receipt• Communication of the coordinator, team leader and team

member(s) to the client.

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5. Formal Demand

Within 15 working days after receipt of the formal demand:

• first meeting with the applicant(s)

◦ informal and constructive◦ in-depth examination of the case◦ cooperation

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5. Formal Demand

• In matters on principles: responsible member of the board is present

• Proposition of a time schedule for the treatment of the demand

• Possibility to have more than 1 meeting• More written info can be required• The Office can request an opinion from the central tax

administration

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5. Formal Demand

PROPOSITION OF DECISION

• The responsible team submits a proposition of decision to the board

• Team leader: responsible for the drawing up of the proposition (every team member is responsible for his own part)

• Coordinator: supervises the team and explains/defends the teams position to the responsible member of the board

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5. Formal Demand

The responsible member of the board validates the proposition and defends the proposition at the meeting of the board

Target period

decision within 3 months

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5. Formal Demand

THE BOARD

• In principle: meeting every Tuesday

• In principle: the decisions are taken by unanimous consent

• Autonomy

• The chairman/woman has a decisive vote

• The chairman/woman and a member of the board sign the decision

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5. Formal Demand

The decision binds the Fiscal Administration except when:

• the applicant gave an incomplete or non-correct description of the operation or transaction

• the applicant didn’t comply with the conditions or engagements of the decision

• modification of the applicable legislation

The decision is valid for 5 years (exceptions are possible)

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5. Formal Demand

AFTER THE DECISION

• The decision is notified to the applicant

• The local tax inspector receives a copy for verification of the correct implementation of the decision

• Publication of the decisions on a no-name base (except: justified requests for non-publication)

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5. Formal Demand

A report is presented to the Parliament every year (anonymity of applicants and parties concerned – statistics - the report is not made public)

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Figures

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6. Figures: Requests for pre filing meetings

2005 250

2006 575

2007 642

2008 689

2009 742

2010 866

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6. Figures: Formal Demands

2005 375

2006 570

2007 553

2008 465

2009 500

2010 576

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Guidelines

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7. Guidelines

• Indicates the point of view the Office has towards some particular questions in consequence of earlier demands, jurisprudence, new (European) legislation, legal doctrine, experience …

• Value: indicative. Not binding to the Administration. Only an instrument to facilitate the filing of a demand

• Published on the website www.ruling.be

• Evolution

• Until 30.09.2009: public consultation concerning guide line – drafts on specific topics.

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Conclusion

Collaboration is absolutely necessary

MISSION :

To be at service in a

quick and flexible way

to our clients

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PART II: Flavour of treasury centre rulings

1. WHT exemption for intra-group financing companies

2. Waiver of NID3. Waiver of debt4. Transfer Pricing

The subsequent slides represent PWC’s interpretation of some published rulings

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WHT exemption for intra-group financing companies

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WHT exemption for intra-group financing companiesWHT on interest payments

• Standard Belgian rate of 15%

• Various exemptions available (based on domestic, international and European law)

Domestic exemption for intra-group finance companies

• Interest payments by a qualifying intra-group finance company to a non-Belgian tax-resident affiliate are fully exempt from WHT

Non-resident

Belgian FinCo

Loan

Interest paymentWHT ?

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WHT exemption for intra-group financing companiesIntra-group finance company

Legal conditions

• Belgian tax residence or Belgian permanent establishment

• Part of a group of associated companies

• Only activities for the benefit of group companies (‘intra-muros’)

• Services of an exclusively or predominantly financial nature (e.g. lending and borrowing)

• Only funded by companies for own or group companies’ financing

• No substantial participations held

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WHT exemption for intra-group financing companiesIntra-group finance company (cont’d)

Ruling office clarifies

• Services of an exclusively or predominantly financial nature?

• Personnel? Financing activities do not necessary need the involvement of many personnel

• In practice tested via financial indicators (e.g. financial assets / total assets; financial revenue / total revenue).

• E.g. decisions no. 500.111, 800.304, 800.371, 800.459 and 2010.151

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Waiver of NID

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Waiver of NID

Belgian NID

• NID provides for tax deduction on adjusted Belgian GAAP equity

• Efficient use of NID may result in very low ETR on financing activities, e.g. if interest rate is close to NID-rate

But monitor anti-abuse!

• Some countries have anti-abuse legislation targeting structures which result in low ETR

• E.g. - CFC legislation (e.g. Germany and Italy)- Denial of interest deduction (e.g. Sweden)

Non-resident

Belgian NIDco

Loan

Interest payment

ParentCo! CFC !

! Interest deduction !

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Waiver of NID

Solution

• By waiving part of the right to NID, the ETR can be managed

• Waived NID is permanently lost

• Quid: sufficient for anti-abuse-country?

Accepted by Belgian tax authorities?

• Yes!

Parliamentary question no. 15066 dd. 17/4/2007

Circular letter no. Ci.RH421/574.945 dd. 9/10/2008

Separate box provided in corporate income tax return

Ruling decisions no. 700.306, 700.329, 700.444 , 800.280, 900.234 and 900.472

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Waiver of debt

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Waiver of debt - Principle

Creditor (BelCo)

• Deductible if conditional(i.e. return to better fortune) (section 49 BITC)

• Sufficient net equity needed

Note: Foreign grantor: return to better fortune is not required

Debtor (BelCo)

•Exceptional profit

• Compensation with carried forward tax deductions if not abnormal/gratuitous benefits (section 207, 2° BITC)

Advice Ruling Office dd. 22 June 2009

• Financial support to group companies to safeguard reputation of group (going concern) is acceptable

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Waiver of debt - Example decision

Facts

• B is loss making and negative net equity

• Financial engagement of A to B

• B is still in going concern as a result of engagement of A

• A grants loan to B

Transaction

• Conditional waiver of debt (capital + % accrued interest) by A to B

Decision

Exceptional profits for B

Compensation of losses in respect of B

Tax deductible professional expenses in respect of A

Decision no. 2010.143 dd. 27 April 2010

BelCo A

BelCo B

100%

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Transfer pricing

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• In most recent ruling decisions, specific attention is given to the individual credit profile of the borrower

• However, if it can be supported by factual elements, such individual credit profile can be influenced by implicit group support.

• Various pricing sources can be taken into account to determine the credit spread / interest rate (group’s funding transactions, quoted bonds, etc.)

Long term financing

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BelgCo provides various intragroup financing activities, including long term funding• Interest rate = Group’s cost of funding + margin based on

the characteristics of an borrowing entity (the borrowing entities are divided into 7 categories).

• Credit risk classification based upon ‘CreditModel’ of S&P, from AAA to CCC

• Ruling indicates credit risk classification takes into account “group solidarity”

• New affiliates receive the CCC credit rating to start• Margin determined based on a yearly average Fair

Market Yield Curve (Bloomberg) • Each year, the yearly average spreads are updated

Long term financingDecision 2010.159

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• BelCo grants long term credit lines (maturities between 1 and 10 years)

• Spreads applied reflect risk profile of borrower.

• The risk profile is based on a credit scoring model that takes into account:

• Amount of equity

• Profitability

• Debt leverage

• Importance of operational activities

• The financial analysis will be based on US GAAP (for US group entities) and IFRS figures (non-US group entities)

• Scope of the ruling does not cover the decision on the maturity of the credit line (this decision has to be motivated to the local tax inspector).

Long term financing Decision 900.185

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The ruling covers the spread to be applied to the cash pool activities

• Currency risk: BelCo has concluded an agreement with an external bank to hedge currency risk.

• There are no internal comparables, except the “master account”. Therefore, the spreads are based on the master account conditions.

Cash pool activitiesDecision 900.185

CPLParticipant

excess cash : Euribor 1 month - y Bps

cash shortfall: Euribor 1 month + y Bps

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Factoring servicesDecision 900.406

XY

Factoring services• Pre-financing accounts

receivable• Administrative support

• Transfer of insolvency risk• Transfer of currency risk

Pre-financing feeInterbank rate (depending on currency) plus spread derived from cash pool’s master account

Insolvency risk feeCredit risk derived from insolvency risk client portfolio of last 4 years. A credit margin is subsequently derived from quoted bonds.

Currency risk feeNo separate fee as this risk is covered by using the inter-banking offering rate specific to the currency of the trade receivable

Administration fee20 Bps of administration fees based on external comparable

Factoring fee =

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Factoring servicesDecision 900.406

Factoring fee is updated on a yearly basis:

[ Reference interest rate + pre-financing margin + Insolvency risk fee ]

* (Average Days Outstanding /360)

+ administration fee of 20Bps

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Formal guarantee feeDecisions 900.252/2010.159

Bank (L)

XOther group members of the group

loanFormal guaranteeFor loans or credit lines

Guarantee fee

Interest payments

• Formal guarantees are provided within the group by X

Þ Ruling for the payment of a guarantee fee for the formal guarantee provided by X

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Formal guarantee feeDecisions 900.252

The guarantee fee =

•Interest rate applied if no guarantee (based on estimated risk profil of subsidiary

Minus

• Interest rate effectively applied by the bank

Other ruling (2010.159) also makes explicit reference to implicit group support to determine the stand-alone rating

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• Various group entities have entered into a credit line contract with an external bank.

• The various entities are draw from this credit line. All these entities are jointly liable (cross guarantee)

• A commitment fee is due by the parent company on the total undrawn amount

• Individual credit limits are determined for each group entity.

• The commitment fee is recharged (without mark-up) to the various group entities in proportion of their individual credit limits.

Commitment feeDecisions 900.252/2010.159

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Thank you!

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