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Belgium Investment Incentives and Tax Advantages

PwC

Agenda

• Belgium: your gateway to Europe

• Belgium’s tax scene

• Specific tax incentives for corporates

• Incentives for expatriates

• Conclusions

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Belgium: your gateway to Europe

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Belgium at the heart of Europe

Belgium offers logistics operations

access to the largest one-day-market in Europe: main markets can be

served within 24 hours.

Brussels is home to the

NATO and European Union headquarters as

well as for many European politicians, international

lobbyists.

Over 60% of the European

purchasing power is situated within a tight 500 kilometer

radius around Belgium.

Important logistics centre and hub for goods distribution: Seaport of

Antwerp is the 2nd largest port in

Europe and the 4th largest in the

world.

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Servicing the European market

Frankfurt Warsaw

Moscow

Helsinki Oslo

Lisbon

Madrid

London

Stockholm

Prague

Road

distance Drive time Flight time

Berlin 774 7:05 1:20

Warsaw 1.328 14:52 2:00

London 309 4:45 1:05

Leeds 636 7:23 1:40

Madrid 1.604 14:45 2:30

Lisbon 2.231 20:19 2:50

Frankfurt 398 3:43 1:05

Oslo 948 17:23 1:55

Stockholm 1.506 15:59 2:10

Helsinki 1.671 28:27 2:40

Moscow 2.582 31:48 3:20

Prague 918 8:50 1:25

Daily high speed connections from Brussels to major western European cities (London, Paris, Amsterdam, Frankfurt, Koln)

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Belgium’s tax scene

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Belgium’s Corporate Tax Scene Key Belgian Tax Features

• Corporate tax rate: 33,99% (but notional interest deduction – see infra)

• Attractive holding regime

- 100% exemption of capital gains (conditions)

- 95% deduction of dividends (conditions)

- Numerous withholding tax exemptions

- Interest deduction (if arm’s length)

• Thin capitalization rule of 5/1 (but exceptions do exist, e.g. cash-pooling)

• No CFC rules

• No proportional capital duties on capital increases

• Wide tax treaty coverage (incl. Treaty with India, US, Hong Kong, China)

• Access to EU Direct Tax Directives

• Indefinite carry-forward of tax losses

• No tax consolidation (but: debt push-down planning)

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Specific tax incentives for corporates

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1. Finance Company Notional Interest Deduction (NID)

BELGIUM FinCo

ParentCo

Affiliates

Equity

ST / LT loans cash pooling (Normal yield)

Return on Equity / Financial return

3.0% 4.0% 5.0% 6.0%

NID rate for FY12/31/2012 (3%) (3%) (3%) (3%)

Taxable return on equity 0.0% 1% 2% 3%

Nominal tax rate (rounded) 34% 34% 34% 34%

Effective Tax Rate 0.0% 8.5% 13,6% 17.0%

• Applies to all companies

• Deemed interest deduction for invested equity (no cash outlay)

• NID base: Belgian GAAP equity – some adjustments to be made (e.g. investments in shares)

• NID rate: annually fixed, by reference to 10-years Belgian Government bond rate

• FY 2012-2013: capped at 3%

• NID benefits are automatic – No need for a tax ruling

• Alternatives available for high-yield financing (eg Profit Participation Loan) resulting in stable 4% ETR

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1. Finance Company Example

Balance sheet - Accounting

Intra-group receivables (Interest rate: 3,5%) 1 bio Equity 1 bio

P&L - Accounting

Operating costs 0.5 mio Interest income (interest rate 3.5%) 35.0 mio

Net Profit Before Tax 34.5 mio

Taxable Profit

Accounting profit Min: Notional Interest Deduction (FY 12/31/2013: 3%)

34.5 mio (30.0) mio

Taxable Profit 4.5 mio

Corporate Tax (@34%) 1.53 mio

Effective Tax rate 4.43 %

(*) Hypothetical example, for illustration purposes only - Based on NID rate for FY12/31/2012; and - interest rate of 3.5%

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2. Holding Company

Basic Structure

• No capital duty • Capital gain = 100% exempt • Dividends = 95% exempt • Interest on loans fully tax deductible against

5% taxable dividends and operating income

Equity / Loan No dividend WHT

No dividend WHT

(EU P/S Directive / EU-Swiss Agreement / BE-HK Treaty)

Loan

European Opco

European Opco

Swiss Opco

Hong Kong Opco

FinanceCo - Belgium -

HoldCo / Opco

Belgium

ParentCo

India

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2. Holding Company Planning opportunity – “Mixed” holding company*

Balance sheet – Accounting

Share Investments (dividend return: 9%) 800 mio

Operating assets (ROA: 10% ROA) 200 mio

Equity 200 mio

Debt (interest rate: 4.0%) 800 mio

P&L - Accounting

Interest cost (interest rate 4%) 32.0 mio Net Operating Income (ROA : 10%) 20 mio

Dividends (9% return) 72 mio

Net Profit Before Tax 60 mio

Taxable Profit

Accounting profit Min: Dividends Received Deduction (95% deduction) Min: Notional Interest Deduction (FY 12/31/2013: 3%)

60.0 mio (68.4) mio (6) mio

Taxable Profit 0.0 mio

Corporate Tax (@34%) 0.0 mio

Effective Tax rate 0.0 % * Hypothetical example, for illustration purposes only

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3. Patent Company

Basic Structure

ParentCo

Patent Company - Belgium -

Treaty HoldCo

OpCos OpCos OpCos OpCos Affiliates

OpCos OpCos OpCos OpCos 3rd parties

Patent license income

Sale of patent-based products

80% of patent income

tax exempt

or

Service (cost-plus)

Supply of goods or

Tolling

Contract developer

Contract manufacturer

License / Sale / Contribution

Initial developer

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3. Patent Company

Summary of Belgian R&D Incentives

Subject Type Description

Eligibility

R&D center owning the IP

rights*

Contract R&D

center**

Corporate Tax Incentives

R&D investment deduction

R&D Tax credit

15.5% one-shot / 22.5% spread tax credit for new R&D Center environment-friendly investments in addition to normal tax depreciation

Patent Income Deduction

80% tax exemption of patent income for patents and supplementary protection certificates developed or further improved by a Belgian company or branch via a R&D center

Notional Interest Deduction

Notional Interest Deduction for equity (Belgian GAAP share capital and retained earnings) invested in the Belgian company or branch (FY12/13 : 3%)

Other tax benefits - Advance Tax Ruling

- Foreign Tax Credit

- Dividend withholding tax exemption

- Exemption from capital duty

Employment-related incentives

Partial Withholding Tax exemption

75% payroll withholding tax remittance exemption for qualifying researchers

Expatriate tax Status

Special tax treatment for foreign executives and researchers temporarily assigned to Belgium (non-resident tax status, business travel exclusion, tax-free allowances)

Home country social security

Possibility for foreign individuals temporarily assigned to Belgium to remain under the home country social security system by virtue of Totalization Agreements or the EC Regulation (1408/71)

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4. Principal – Central Entrepreneur Excess Profit

• Potential to exempt profits that the company could not have realized if it had not been party to related-party dealings (fact dependent):

– Transfer of new activities to Belgium

– Free access to group intangible assets (e.g. marketing, product, manufacturing or other intangible assets)

– Group integration synergies

• Taxation limited to arm’s length profits

• Advance ruling required

– To be supported by economic & financial analyses

– Ruling for 5 years – renewable

– ETR of 9% achievable

Stand-alone profit

BelCo on stand-alone basis

Stand-alone profit

Belco as part of a group

Taxable profit

Tax exempt

(Belgium)

Excess profit (Abroad)

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5. Headquarters and Service Centres

Broad Spectrum of Services

• A broad range of services can be organized in the Center

• Allowed to house other (commercial) activities in the same legal entity provided they are set up as a separate “branch of activity”.

• In case of multiple activities, an ‘Activity Based Accounting’ system is required

Regional

Headquarters

Strategic Management

VP Functions

Customer

Services Call Center

Marketing

Order taking

Research

& Development

Contract R&D

Contract design

Testing & Inspection

Management

Services

Marketing

Finance / Accounting / Tax

Legal / HR / Admin

Supply Chain

Procurement

Information

Technology

Software development

Data Centers

IT Support Center

IT Call Center

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5. Headquarters and Service Centres

Basic structure

• The tax treatment of a HQ or Service Center can be ruled in advance with the Belgian Ruling Office.

• An advance tax ruling allows the HQ or Service Center to operate in a safe, low-tax, environment:

Limited taxable profit: Cost-Plus method generally accepted - Competitive mark-up % (often 3% - 6%), to be supported by a TP study

Tax position of foreign service recipients: No Belgian PE - No Belgian tax residence (no seat of effective management in Belgium)

Ruling for 5 years - renewable

ParentCo

Sub Contractors

Sub Contractors Subcontractors

(Internal or external)

HQ / SSC

- Belgium –

Subcontract Services

European Principal

Local affiliate

Local affiliate

Local affiliate

Services (cost-plus)

Local affiliate

Services (cost-plus)

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5. Headquarters & Service Centres

Belgium ranks 7 in terms of Logistics Performance

Source: World Bank Logistics Performance Index 2012

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6. Ruling (APA) Practice

• A very broad scope including transfer pricing, M&A, PE issues, VAT treatment, personal income tax, customs and excise, etc.

• Possibility to rule on global business cases

• Cooperative and constructive mindset of the ruling office

• A positive decision binds the Belgian tax authorities

• A processing time of 3 months (indicative timeframe)

• Valid for 5 years or more

• Pre-filing meetings on a “no-name” basis possible, without obligation to file a ruling request afterwards

• Commercial opportunities

• Avoid adverse tax consequences of business decisions

• Powerful ‘insurance ‘instrument

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Incentives for expatriates

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Expatriates in Belgium

Special Expatriate Tax Regime

Summary of its main features:

• Non-resident taxation

• Tax free allowances

- Limited allowances

- Unlimited allowances

• Foreign business travel exclusion

Scope of applications:

• Non-Belgian national

• Who exercises activities which are those of an executive or which require a special knowledge and responsibility

• And who works temporarily in Belgium

Application expat

regime

Belgian resident

Gross salary (A) 40.000,00 40.000,00

Less: Belgian social security

(B) -3.831,17 -5.201,71

Less: tax free allowances

-10.539,13 N/A

Subtotal 25.629,70 34.798,29

Less: travel exclusion (10%)

-2.562,97 N/A

Taxable income 23.066,73 34.798,29

Belgian income taxes

(C) -1.253,03 -6.018,08

Net remuneration

(A-B-C) 34.915,80 28.780,21

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Expatriates in Belgium

Work permit formalities – Principle – Type B work permit

Non-EEA employee → work permit is needed prior to commencement of work exemptions (e.g for meetings in a closed circle up to 20 consecutive calendar days with a

maximum of60 days per calendar year)

For Indian employees, most of the work permits are applied for and obtained based upon the following categories: • Highly qualified employees (Degrees, experience + Gross yearly salary (excl tax free allowances) of

EUR 37.721 (2012) – EUR 38.665 (2013)) • Managerial employees (Leading position + Gross yearly salary (excl tax free allowances) of EUR

62.934 (2012) – EUR 64.508 (2013)

Visa and residence permit formalities – Principle

• Indian employee coming to Belgium

entrance visa needed to be applied for at Belgian Embassy/Consulate

type of visa depends on length and purpose of stay in Belgium.

• In case stay exceeds 90 days within 6 months

Belgian residence permit needed to be applied for at local Town Hall of place of residence

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Expatriates in Belgium

Labour law and social security formalities

• Belgian legislation aimed at avoidance of social dumping: Act of 5 March 2002

imperative minimum rules (minimum wages, indexation of salaries, working hours, holiday pay and year-end premium, etc…)

• Declaration of employment needed upfront (Dimona for those subject to Belgian social security, Limosa for those on temporary – even partial - assignment from abroad)

• Belgian pay slips / individual account as well as drafting and keeping a set of other social documents

(staff register, working regulations, specific contracts,...) is required (except for a work less than 12 months and provided it is notified in advance to the social security authorities via Limosa)

• Social security treaty is concluded between Belgium and India (1 September 2009): work state principle applies exception: secondment up to 5 years (prior subjection to the Indian Employee Provident Fund – EPF) certificate of coverage to be applied for at the Indian EPF (can take up to 3 months)

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Belgium’s Credentials

MNCs that centralized key European functions in Belgium Toyota Motor Corp: European HQ, Holding, Finance, Distribution, R&D, Logistics

Mazda Motor Corp: European HQ, Holding, Finance, Distribution, Logistics

Honda: European SSC, Distribution, Logistics

Volvo Cars: European SSC, Finance, Manufacturing

Volvo AB: European SSC, Finance, Manufacturing, Logistics

Hyundai Motor: European SSC, Logistics

Procter & Gamble: European SSC, Finance, R&D, Distribution, Manufacturing

Coca Cola: European SSC, R&D, Logistics

Campbell Soup: European SSC, Manufacturing

Levi Strauss: European HQ, Holding, Principal, Finance

Samsonite: European HQ, Holding, Distribution, Manufacturing

Nike: European Logistics

VF: European principal, Distribution

Bose: European HQ, Finance, Marketing, Logistics

Hewlett Packard: European Finance, SSC

Google: European Datacenter

Agilent: European Finance

American Standard: European HQ, Holding, Principal, Distribution

Johnson &Johnson: European R&D, manufacturing

GlaxoSmithKline: European R&D

Pfizer: European Logistics, Distribution, R&D

DHL: European HQ, Finance

UPS: European HQ, Finance

Fedex: European HQ, Finance

Masco: European HQ, Finance, Holding, Principal

A. Schulman: European HQ, Holding, Finance, Manufacturing, Distribution

Lubrizol: European HQ, Principal, R&D, manufacturing

Air Liquide: European Finance, SSC

Dupont: European Finance

McCain: European Finance

Exxon-Mobil: European Finance, SSC

BP: European Finance

Statoil: European Finance, SSC

BASF: European Finance, SSC

Bayer: European Finance, SSC

Arcelor Mittal: European SSC

Solutia: European HQ, Holding, Finance, Principal

Cytec: European HQ, Holding, Principal

Avery Dennison: European SSC, Finance

Georgia-Pacific: European SSC, Finance

British American Tobacco: European SSC, Finance, Manufacturing

Beckton Dickinson: European SSC

Ineos: European HQ

Goodyear: European SSC

Bridgestone: European SSC, Holding, Distribution

Barry Callebaut: European SSC, Finance, principal, Distribution

Basell Lyondell: European SSC

Fiskars: European HQ, European SSC

Caterpillar: European SSC

Staples: European SSC, Principal

Avnet: European SSC, Principal

Electrolux: European SSC, Principal, Distribution

Neways: European HQ

Toyoda Gosei: European HQ, Holding

Sato: European HQ, Holding, Distribution

Toyota Tsusho: European HQ, Holding, Distribution

Panasonic Batteries: European HQ, Distribution

Alcon: European Finance

Adecco: European Finance, SSC

SWIFT: Global HQ, Global operating center

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Conclusions

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• Belgium has very strong internationally orientated profile – focus on investors

• Especially good business environment (i.e. tax incentives) for:

- Knowledge-intensive companies

- Green-field investments

- Companies with high export performance

- Intra-group financing and holding

- HQ/SSC/Maritime transportation and logistics

• Various incentives for expatriates working in Belgium

Belgium is an excellent hub to operate from in Europe!

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Contact Details

Pascal Janssens

Partner

Direct: +32 3 2593119

Mobile: +32 476 875224

Fax: +32 3 2593299

Email: pascal.janssens@pwc.be

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