Co-ordination Centres:

Belgian Co-ordination centres were examined by the European Commission as possibly breaking State Aid rules, and as part of the Code of Conduct Committee's examination of 'unfair tax competition'.

The Belgian authorities prepared legislation during 2002 to bring the co-ordination centre regime into compliance with EU rules, and agreement was finally reached with the EU in 2003 after a case in the European Court of Justice. Changes to the regime took effect from 2004; key fiscal changes are indicated below.

Fiscal Advantages of Co-ordination Centres

Co-ordination Centres enjoy the following fiscal advantages:

) Corporate Income Tax on Profits: Although the co-ordination centre pays normal Belgium corporate income tax rates of up to 33.99% (including the 3% so-called crisis surcharge) what differs is that instead of the co-ordination centre being taxed on its trading profits it is taxed on between 4%-10% of its total "business expenses" (with the percentage being a matter for negotiation with the fiscal authorities). Until 2004, salary and financial costs were excluded from "business expenses" for the purposes of the assessment. Thus a co-ordination centre which had high business profits, high financial and salary costs but low business expenses (other than salary and financial costs) would pay considerably less corporation tax than other Belgian corporate entities.

ii) Withholding Taxes: There are no withholding taxes imposed by law on outgoing dividends, royalties or loan interest remitted by a co-ordination centre unless the recipient is a resident individual or non-profit making exempt company. In Belgium withholding taxes stand at between 15%-25% so the absence of a withholding tax levy on the activities of co-ordination centres is a substantial fiscal concession.

iii) Share Capital Duty: Until 2004, co-ordination centres were exempted from payment of capital duty on any issue or increase of share capital. This duty currently stands at 0.5%. From 2004, a duty of 0.25% will be imposed on co-ordination centres. The duty was abolished in 2006.

iv) Real Estate Taxes: In Belgium real estate taxes are based on a notional net rental value as determined by the tax authorities. They include a regional tax, a provincial tax and a communal tax. These taxes vary according to the region, the province and the commune in which the real estate is located and whilst their payment can be deducted from profits it cannot be credited against corporate income tax (i.e. it gets the least favorable fiscal treatment). As a rule of thumb the sum total of these property taxes amounts to approximately 25%-30% of a property's annual rental value such that this tax is considered a significant business expense. Co-ordination centres are exempted from real estate property taxes (unless the property is leased to group members) which gives them a considerable fiscal advantage over other Belgian corporate entities.

v) Corporate Income Tax on Outgoing Dividends: 5% of the dividends received by a Belgian corporate shareholder from a co-ordination centre are taxed at the standard corporate income tax rate of 33.99%. Even then the Belgian corporate shareholder will not be taxed on dividends received unless he holds at least 5% of the share capital of the co-ordination centre. This concession applies to all "qualifying" Belgian holding companies and is not unique to co-ordination centres. (For further information see the section entitled Belgian Holding Companies).In the case of non-resident shareholders any corporate income tax payable on dividend income remitted by a co-ordination centre to the non-resident shareholder is a question for the domestic tax laws of the jurisdiction in which the non-resident corporate shareholder resides.

vi) Work Permits & Special Income Tax Allowances: Foreign executives and researchers employed by co-ordination centres are exempted from the requirement to obtain work permits and enjoy special income tax rates and concessions (For further information see the section entitled Special Expatriate Fiscal Regime).

(

N.B. co-ordination centres are now subject to a 400,000 Belgian franc annual tax per employee up to a maximum of 4m Belgian francs. Nonetheless this tax has had little impact on the number of centres being established. By 2002 more than 400 of them had been established.)

Pre-conditions for Qualification as a Co-ordination Centre Co-ordination centre status is only granted to very large industrial conglomerates which are able to meet the following pre-conditions:

i) Multinational Group: The entity applying to set up a co-ordination centre must be part of a multinational group with subsidiaries in at least 4 different countries for a period of at least 2 years before the request for co-ordination centre status is submitted. A 20% cross shareholding is sufficient to make a company a member of the group.

ii) Minimum Turnover & Equity Requirements: The multinational group must have:

Total Consolidated Equity: A total consolidated equity of at least 1 billion Belgian francs (US$30m) of which the non-Belgian portion must be either 20% of the total group's consolidated equity or a lesser percentage with a value of at least 500 million Belgian francs (US$15m).

Total Consolidated Turnover: A total consolidated turnover of at least 10 billion Belgian francs (US$300m) of which the non Belgian portion must amount to at least 5 billion Belgian francs (US$150m) or a lesser amount which constitutes not less than 20% of the group's total consolidated turnover.

iii) Minimum of 10 Employees: By the second year of operations the co-ordination centre must have at least 10 employees.

iv) Royal Decree: co-ordination centre status is granted by Royal Decree for an initial period of 10 years renewable thereafter. A written request must be submitted to and the approval obtained of the Ministers of employment, economics, finance and small businesses. The request must contain details of all planned activities.

Restricted & Permitted Activities:

i) Restricted Activities: Co-ordination centre companies are restricted in what activities they can carry out . For example:

Holding Companies: They cannot hold shares in other companies i.e. they must be subsidiaries and not holding companies.

Industrial or Commercial Activities: They cannot carry out industrial or commercial activities.

Banking, Insurance or Financial Services: They cannot be companies in the banking, insurance or financial services sectors

ii) Permitted Activities: Co-ordination centers can provide "financial and business" services to their group companies. Financial and business activities include the following:

Leasing: By purchasing and leasing assets to other group members all the group leasing income is received in a tax-free environment.

Re-invoicing: By purchasing off one group member at a low price and selling to another group member at a high price profits can be retained in a tax free environment (subject to transfer pricing rules, evidently).

Financing Activities: The co-ordination centre can become the hub for financing, insurance and re-insurance activities, achieving economies of scale and the centralisation of profits from loan interest and insurance in a tax-free environment.

Centralisation of Group Activities: Centralisation of administrative, accounting, purchasing and advertising activities of all the group members, with members being billed for services provided and with the income from these services being received in a tax free environment.

Special Expatriate Fiscal Regime:

Belgian personal income taxes are very high and act as a major disincentive for the recruitment of foreign employees. Accordingly the Government has granted a special expatriate fiscal regime for foreign employees with a specialist skill, an academic background and management expertise who are required by a co-ordination center or other Belgium corporation. The purpose of these incentives is to encourage multinationals to invest in Belgium by minimizing salary costs for foreign executives.

Although in theory the assignment given to the foreign employee must be temporary, in practice the special tax regulations apply for an unlimited time period. The application for non-residential fiscal status should be applied for within 6 months of arrival. The foreign executives must prove that their primary economic interests are maintained outside Belgium.

The special expatriate fiscal regime has the following attractive characteristics (NB separate rules apply if the executive is paid on a gross basis):

Activities Conducted outside Belgium: That portion of income that relates to activities conducted outside Belgium is not taxable in Belgium since the applicant qualifies for taxation as a non-resident.

Moving Expenses: Any income which represents the re-imbursement by the employer to the employee of moving expenses is not taxable in Belgium.

Losses Incurred on the Sale of a Car or House: Any income which represents the re-imbursement by the employer to the employee of losses incurred by the employee on the sale of a car or house (where such a loss was necessitated by the employee move to Belgium) is not taxable in Belgium.

Cost of Living Allowance: Any increase in income received by the employee from the employer so as to compensate for a higher cost of living in Belgium is not taxable in Belgium. This amount is limited to 5% of the gross salary which was paid to the employee in the foreign jurisdiction or 100,000 BEF whichever is the higher.

Housing allowance: Any accommodation provided by the employer to the employee is not considered a benefit in kind and will not be taxable in Belgium. The same applies where the employer provides the employee with a housing allowance. The amount must not exceed 12% of the employee's gross salary.

Tax Allowance: Any sum provided by the employer to the employee to compensate for the higher tax rates payable by the employee than would have been payable in the foreign jurisdiction is not taxable in Belgium.

Maximum Value of Allowance: The total deductible fiscal allowance (excluding non-recurring expenses and recurring expenses listed below) is fixed at a maximum amount. The maximum fiscal allowance is:

11,250 euros: If the employee works for a commercial or industrial company 29,750 euros: If the employee works for a co-ordination center or research laboratory.

Children School Fees Allowance: Any income provided by the employer to the employee to cover childrens' school fees whether in Belgium or abroad is not taxable in Belgium. The amount is unlimited and is not included in the 11,250 euro (or 29,750 euro) limit on allowances.

Travel Expenses: Any income provided by the employer to the employee to cover travel expenses incurred by children traveling abroad to school is unlimited and not included in the 11,250 euro (or 29,750 euro) limit on allowances.

One-off relocation expenses: Any income provided by the employer to the employee to compensate for one-off relocation expenses is not taxable in Belgium, is unlimited and is not included in the 11,250 euro (or 29,750 euro) limit on allowances.

Return Visits to Home Country: Any income provided by the employer to the employee to cover return visits to the home country is not taxable in Belgium.

Emergency Trips: Any income provided by the employer to the employee to cover emergency trips is not taxable in Belgium.

Passive Income: Passive income is not taxed (ie investment income).

Belgian Holding Companies:

Belgium has a corporate income tax rate of 33.99% (including a 3% so-called 'crisis surcharge') and has never been considered a financial center. However in order to attract the headquarters of foreign multinational companies Belgium accords favorable tax treatment to entities known as "co-ordination centers". It also offers a low-tax regime to expatriate employees with specialist skills, and has a relatively benign holding company taxation regime.

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Belgium is a fiscally attractive jurisdiction in which to locate a holding company:

Withholding Taxes On Incoming Dividends:

As a member of the EU Belgium is governed by the provisions of the EU's Parent-Subsidiary directive, whose effect is that where a Belgian holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 12 months, or engages to do so, any dividends remitted by the EU subsidiary to the Belgian holding company are free of withholding taxes.

Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place) Belgian holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Belgium from the subsidiary jurisdiction.

Belgium has 66 double taxation treaties in place. (Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

Corporate Income Tax on Dividend Income Received:

The Belgian corporate income tax rate stands at 33.99%, including a 3% so-called 'crisis surcharge'. Nonetheless dividend income received by a Belgian company is subject to a substantially reduced level of corporate income tax in two situations:

EU Subsidiary: Where the provisions of the EU parent-subsidiary directive apply dividends received by a Belgian parent corporation from an EU subsidiary are exempt from any further corporate income tax. The EU parent-subsidiary directive applies if both the parent and subsidiary corporation are resident for fiscal purposes in the EU and the parent corporation owns at least 25% of the shares of the subsidiary for a minimum period of at least 12 months.

Non-EU subsidiary: Under domestic legislation known as the "Belgian Participation Exemption rules" where a Belgian parent corporation receives dividend income from a non-EU subsidiary, only 5% of the dividend income is subject to the Belgian corporate income tax rate of 33.99% with the other 95% of dividends being tax-exempt provided that the Belgian holding company holds at least 5% of the foreign subsidiary's shares (or has a shareholding valued at 50m BEF). Unlike other jurisdictions there is no time limit on how long the shares must have been held for this exemption to apply. Furthermore the 5% minimum shareholding requirement does not apply in the case of investment by banks, insurance companies or broking companies.

(By way of comparison a Danish holding company is only exempted from corporate income tax on incoming dividend income if it has held at least 20% of the shares in the foreign subsidiary for a minimum period of 12 months and provided the foreign subsidiary is not deemed a "Controlled Foreign Corporation").

Subsidiaries resident in certain jurisdictions which have a considerably more favorable tax regime than that applying in Belgium are disqualified for the purposes of the 5% rule, with the effect that dividend income received by Belgian parent corporation from such subsidiaries will be taxed at the normal corporate income tax rate. The Belgian tax authorities have published a list of jurisdictions disqualified for the purpose of this rule and included amongst this list are all offshore jurisdictions. Thus dividend income received by a Belgian parent corporation from an offshore subsidiary will be subject to the normal corporate income tax rate. Other categories of company whose foreign income will be taxed include:

Foreign Source Income Not Taxed: Dividend income received by a Belgian holding company from a corporation resident in a jurisdiction in which foreign source income is not taxed will be subject to the normal Belgian corporate income tax rate. Other than corporations resident in offshore jurisdictions this list would include corporations resident in Costa Rica, Hong Kong, Malaysia, Singapore and Oman.

Non-discriminatory more Favorable Fiscal Regime: Dividend income received by a Belgian holding company from a subsidiary resident in a territory with a non-discriminatory but more favorable fiscal regime would be subject to the normal Belgian corporate income tax rate. Surprisingly this would include companies incorporated in territories such as Hong Kong.

Holding & Finance Companies: Dividends received from holding and finance company subsidiaries resident in a territory which has a tax system considerably more beneficial than that available in Belgium are subject to the normal Belgian corporate income tax rate. Other than corporations located in traditional offshore tax havens this list would include companies located in Luxembourg, Liechtenstein & Uruguay.

Companies Benefiting from Discriminatory Tax Systems: Since 1998 dividend income received by a Belgian parent corporation from a subsidiary located in a territory which has discriminatory fiscal laws are subject to normal Belgian corporate income tax rate. This would for example include companies registered in those offshore jurisdictions which have high levels of tax for resident corporations but negligible rates for non-resident corporations.

Companies in Free Trade Zones: Dividend income received by a Belgian parent corporation from a subsidiary located in and trading from a territory which is a free trade zone are taxed at the normal corporate income tax rate. This would include companies located in Madeira and the United Arab Emirates.

NB: Belgian participation exemption rules apply to EU companies which do not meet the EU Parent-Subsidiary Directive criteria in that either the Belgian parent corporation does not have a 25% shareholding or alternatively does have such a shareholding but not for the minimum period required.

Capital Gains Tax on the Sale of Shares:

In Belgium capital gains are deemed corporate income and are taxed at the normal rate. By way of exception capital gains realized by a Belgian parent corporation on the sale of shares in an EU on non-EU subsidiary are exempt from corporate income tax in Belgium irrespective of the size or duration of shareholding. Capital losses on the sale of shares are not tax deductible. (N.B. A Danish holding company by contrast is only exempted in Denmark from capital gains tax on the sale of shares in a subsidiary if it has held the subsidiary's shares for a minimum period of 3 years and provided the subsidiary is not deemed a "Controlled Foreign Corporation").

Withholding Taxes on Outgoing Dividends:

Dividends paid by Belgian subsidiaries to EU parent corporations are exempt from Belgian withholding taxes provided the EU parent corporation has held 25% of the shares in the Belgian subsidiary for at least 12 months. If the parent corporation is not an EU entity or if these conditions are not otherwise satisfied then a standard withholding tax rate of 25.75% applies on outgoing dividends unless that rate has been reduced (usually to 15% or less) by the provisions of a double taxation treaty. Belgium has 66 double taxation treaties in place. (Denmark has 78 and the UK has 110).