What follows is an overview of some general principles relating to the start up of activities in Belgium by a foreign company without a formal branch in Belgium.
1. General tax issues
1.1. Corporate income tax
1.1.1. Existence of a tax PE in Belgium
According to article 5 of the double tax treaties Belgium has concluded, a tax permanent establishment generally is defined is a fixed place of business wherein the activities of an enterprise are wholly or partially carried out. This includes f.e. a place of management, a branch, an office, a factory or workshop,.. (= material PE).
Further also the presence in Belgium of employees who are acting on behalf of an enterprise and who have the authority to conclude contracts in the name of the enterprise and habitually exercise that authority, give rise to a permanent establishment (= personal PE).
If however the activities of the foreign enterprise in Belgium are limited to certain activities of a ‘preparatory’ or ‘auxiliary’ nature, no PE arises.
1.1.2. Taxation of PE’s in Belgium
Foreign PE’s are taxed in the corporate non-resident income tax at a rate of 33,99% on their taxable income. The taxable basis is determined as for resident companies.
The starting point is the profit as shown in the accounts of the PE. On this profit, some ‘corrections’ are made so as to arrive at the taxable result f.e. taxation of excessive depreciations and hidden provisions, disallowed expenses like car cost, restaurant and representation costs, income tax, fines, … On the other hand some deductions can be claimed f.e. prior losses,…
In some cases, it is possible to determine the taxable income on the basis of a cost plus method meaning that the profit of the PE consists of a percentage applied on the operational costs of the PE. To apply this cost plus method, it is advisable to request an advanced tax ruling from or agreement with the Belgian tax authorities. This cost plus basis is also corrected with f.e. disallowed expenses. Please note that in Belgium a cost plus method is usually only accepted for companies that merely have a supporting function within a group and to which no specific turnover can be allocated.
Yearly, a non-resident corporate income tax return will need to be filed.
According to article 7 of the double tax treaties Belgium has concluded, in general the profits/costs of a PE must be allocated to the PE as if the PE was an independent and autonomous enterprise performing the same or similar activities under the same or similar conditions. Further, the PE must receive an at arm’s length compensation for intra-group services rendered.
In this respect, it is important to determine the functions and risks of the PE as well as to have a transfer pricing documentation.
If a cost plus method is used, it needs to be demonstrated that the percentage used is at arm’s length.
1.2. Personal income tax and social security
1.2.1. Tax residence
Income tax is levied on the worldwide income of Belgian residents and on the Belgian source income of non-residents. Residents are individuals who are domiciled in Belgium or have their seat of fortune in Belgium. Residency status is determined based on the facts and circumstances. A rebuttable presumption exists that individuals enrolled in the National Register of the Population are resident in Belgium for tax purposes.
Foreign employees that only work temporarily in Belgium and that keep their domicile and seat of fortune abroad, will be taxed in the non-resident income tax.
1.2.2. Income obtained in Belgium by non-resident employees
According to article 15 of the double tax treaties Belgium has concluded, the general rule is that an employee is taxable in his country of residence except when he works in another state. In the latter case, the work state can tax.
1) the employee’s stay in the work state does not exceed 183 days during any period of 12 months/the calendar year/…. (to verify in each treaty) AND
2) the employee’s salary is paid/born by an employer or a permanent establishment of the employer that is not a resident of the work state
the residence state keeps its taxation rights.
Vice versa if the employee’s stay in the work state exceeds 183 days OR his salary is paid/born by an employer or permanent establishment of the employer in the work state, the work state can tax.
If therefore the foreign company is considered to have a permanent establishment in Belgium and the salary of the foreign employees relating to these Belgian activities will be charged/allocated to the Belgian permanent establishment, the employees will become taxable in Belgium, irrespective of the number of days they actually work in Belgium. In other words, the employees will become taxable in Belgium as from day 1. As the employees will only work temporarily in Belgium and will keep their domicile abroad, they will be considered as non- residents for Belgian tax purposes.
The foreign company should therefore register as an employer in Belgium and withhold the necessary professional withholding taxes on the employee’s salaries. To determine if personal deductions can be taken into account, for each employee, it will need to be determined whether he has earned more than 75% of his worldwide income in Belgium or not during the taxable period (on a calendar year basis). To verify this 75% rule, also their foreign earned income, although tax exempted, must be reported in the tax return.
Annually (= calendar year basis) an individual tax return must be filed.
1.2.3. Social security
The basic principle is that social security is due in the work state. In case of temporary posting foreign employees from EU or countries with which Belgium has concluded a social security agreement can however stay subject to their home country social security system provided a form A1 is completed. Please however note that this is only possible for employees that already worked in their home country for the foreign company and not for new hires.
The foreign company will also need to file a ‘Limosa’ document.
1.3.Value added tax
1.3.1. Taxable transactions by a non-resident supplier
When one starts to undertake taxable VAT transactions in Belgium, meaning that the delivery of the goods or the services rendered are located in Belgium, Belgian VAT is due and in principle a Belgian VAT number must be requested.
However, for non-Belgian suppliers, a reverse charge system applies. This means that no VAT should be mentioned on the outgoing invoice and that it is up to the Belgian customer to declare (and deduct) the Belgian VAT in his own VAT declaration. This also means that the non-Belgian supplier in principle must not register for VAT purposes. Please note that the reverse charge system can only apply provided the Belgian customer has a Belgian VAT number and must file periodical VAT returns.
When the reverse charge system applies, the invoice must mention the reason for the VAT exemption as follows : ‘Exempted from VAT article 51§2,5 Belgian VAT code’.
In any case, also the VAT number of the supplier and the client must be mentioned.
If the non-Belgian supplier that is not registered for VAT purposes in Belgium f.e. purchases goods/services from a Belgian supplier on which Belgian VAT is applicable, the incoming Belgian VAT can be reclaimed on the basis of the 13th EU-directive.
The reverse charge system however does not apply between two direct registrations i.e. two foreign enterprises with a Belgian VAT-number. This means that if the foreign company works with a foreign subcontractor with a direct VAT registration in Belgium, the invoices must mention Belgian VAT. The general VAT rate in Belgium is 21%.
In case the foreign supplier cannot apply the reverse charge system, he must request a Belgian VAT-number. This is the so-called direct VAT registration.
1.3.2. VAT compliance (taxpayer’s registration + periodical VAT return)
When one starts to undertake taxable VAT transactions, one should register for VAT purposes and a VAT number must be requested.
Further the following periodical formalities must be fulfilled:
- Submitting of a VAT return: if the turnover is lower than EUR 2.500.000 per year, this must be done each quarter; if the turnover is higher than EUR 2.500.000 per year, this must be done each month; this return has to be sent to the Belgian VAT administration before the twentieth of the quarter/month following on the end of each quarter/month; the VAT due, if any, has to be paid within the same time span; when you are ending up with a VAT amount in your favor on your quarterly VAT return, a reimbursement can be asked for; this reimbursement will be done within 3 months after the VAT declaration has been filed..
- Quarterly EU declaration: every quarter, the EU-sales have to be reported to the Belgian VAT Administration.
- Annual VAT listing of Belgian tax payers: every year all sales within Belgian must be reported to the VAT administration; this is the so-called ‘client-listing’.
2. Other formalities
2.1. Company number
In case the foreign company has no formal establishment (branch) in Belgium, it is not required to request a company number. A company number will however be provided upon the registration as employer or upon the registration of the work (see below).
2.2. Registration as employer for social security and income tax purposes
If the foreign company employs workers in Belgium that are taxable in Belgium, it will need to register as employer with the tax authorities to pay the necessary withholding tax on the salaries. Therefore a company number will be provided.
If the foreign company employs workers in Belgium that are subject to Belgian social security, it will also need to register as employer for social security purposes.
When someone from abroad comes to Belgium for temporary/partial employment, the Limosa notification must be done prior to the commencement of the activities in Belgium. This can be done electronically on www.limosa.be
If the foreign company works with foreign subcontractors, the foreign company also needs to verify whether the subcontractors have fulfilled the Limosa notification for employees employed in Belgium by them.
2.4. Form A1
As mentioned above, for foreign employees that stay subject to their home country social security system, a form A1 must be completed that they must carry with them.
If the foreign company works with foreign subcontractors, it also needs to verify whether the subcontractors have fulfilled the A1 formalities for employees employed in Belgium by them.
2.5. Labor regulations
An employer who posts workers to Belgium is required, for the work performed in Belgium, to observe the working, pay and employment conditions laid down by Belgian law, regulations, administrative or conventional provisions that are subject to penal law.
This amongst other relates to:
- working hours and rest periods: the labour organisation, that is to say the normal limits of working hours, overtime, work
on Sundays, nightwork, work on public holidays;
- minimum rates of pay: minimum wages fixed by collective agreements made mandatory by Royal Decrees;
- temporary work: the set of rules that determines cases where temporary work is authorized and rules framing this
type of work;
- provision of labor force: rules that determine the conditions of the supply of workers for a user;
- equality of treatment: non-discrimination principles, especially between men and women
- health, safety and hygiene at work;
- protective measures with regard to pregnant women;
- social documents enabling the control by the inspection services of matters with relation to the directive 96/71/EC
concerning the posting of workers.