A Box of Smooth Dark Belgian Chocolates

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The expansion of a family business into new jurisdictions is a complex project requiring careful research and planning. The establishment of a subsidiary operating company raises issues such as the new marketplace, the legal and regulatory operating requirements, the availability of resources essential to the business, product distribution and the employment market.

Clearly, the ultimate objective is to maximise the returns to the parent and in this respect it is also important to give careful consideration to the holding structure for the subsidiary to minimise the potential for withholding taxes on distributions to the parent. Worldwide, there is a complex network of tax treaties governing the distribution of dividends, interest and royalties which impact upon group companies and any group structure should take this into account in strategic planning. There are a number of countries which have good tax treaty networks and which have adopted tax legislation for holding companies with a view to encouraging business development.

One such jurisdiction is Belgium. As a member of the European Community, Belgium is subject to the rules of the Parent/Subsidiary Directive on the distribution of dividends between companies located within the European Community. A holding company formed in Belgium with subsidiary operating companies established in other European Community countries may therefore receive dividends without deduction of Dividend Withholding Taxes provided the holding company holds a minimum 25% interest in the subsidiary for a minimum qualifying period of twelve months.

In the case of a subsidiary operating company formed in a non-European Union country or within the European Union (but not qualifying under the EU Parent/Subsidiary Directive), withholding taxes on dividends paid to the Belgian parent may be applied, although these may be substantially mitigated where the target country has concluded a double taxation treaty with Belgium.

With regard to the tax treatment in Belgium in relation to dividends received by holding companies, where the Belgian company holds a minimum interest of 5% of the shares of the subsidiary or the value of the investment is at least BEF50 millions, the Belgian Participation Exemption rules apply and consequently only 5% of the dividend income is subject to corporate income tax, although there are specific qualifying rules. The effective corporate income tax in Belgium is 40.17% although it is anticipated that under Belgian corporate tax reform the rate will fall to between 30% and 35%.

On the sale of a subsidiary, any capital gains arising are, by way of exception, not assessed to Belgian corporate income tax.

Whilst dividends paid by a Belgian holding company to non-resident investors are subject to a 25% Dividend Withholding Tax, this may be mitigated by tax treaty which, in some cases, reduces the level to 5%, for example, the Belgium-Mauritius treaty. Belgium currently has seventy-two double taxation treaties.

Whilst the Fiduciary Services Group is unable to provide tax planning advice on individual structures, which should always be sought from a professional tax adviser, we are able to provide the formation and management expertise for holding companies.

Oh, and the box of smooth, dark Belgian chocolates? Well, the title was only to tempt you to read the article!