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PART II. —METHODS OF TAXING FOREIGN AND NATIONAL ENTERPRISES

A. FOREIGN ENTERPRISES

1. DEFINITION AND GENERAL PRINCIPLES

If an individual not domiciled or resident in Belgium, or a foreign company whose principal establishment is not situated in Belgium, controls or possesses in the country one or more establishments, such establishments are, for purposes of applying the co-ordinated laws on income taxes, deemed to be foreign enterprises.

In principle, a foreign enterprise is liable to schedular taxes only if it has in Belgium one or more establishments dependent upon it. The tax is levied on the total profits from all operations conducted by or through these establishments (Article 27, paragraph 4), the tax on income from land and buildings being imposed only on income from real property situated in Belgium.

I. (a) If income is earned by a foreign enterprise operating in Belgium, but belonging to an individual, the whole of the profits realised in the country from all operations conducted by or through the Belgian establishments is liable to tax, which is collected from the owner of the enterprise.

(b) and (c) The same applies when income is earned by a foreign enterprise belonging to a legal entity (partnership or company). Only the profits earned by or through Belgian establishments are subject to tax, which is collected from the company or partnership.

On the other hand, if the foreign firm is represented in Belgium by a partnership or company in such a way that the latter in law and in fact directs or conducts operations only on behalf of the said firm, the latter is regarded as having an establishment in the country.1

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If, however, the partnership or company deals in its own name with Belgian customers, selling to or buying from them goods or articles produced by or delivered to the foreign firm, the Belgian company or partnership is regarded as an independent organisation and the Belgian revenue authorities disregard any activities of the foreign firm.

This provision does not, of course, cover cases of fraud or collusion.

II. It follows from the above principles that, if income is earned by a foreign company or partnership having no establishment in Belgium, the company or partnership is not taxable in Belgium on income earned there.

If the enterprise has establishments in Belgium, if does not matter whether income is earned there or not; the foreign enterprise is in any case liable in respect of the total profit resulting from all operations conducted by or through those establishments,2 whatever results the general balance-sheet may show.

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2. TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

By virtue of its impersonal character, the tax on income from personal property is imposed on dividends at the source, as and when they are received in Belgium and irrespective of the status or nationality of the person presenting the coupons and whether the latter are of Belgian or foreign origin.

Thus in the case of dividends paid by Belgian share companies, tax at 22 per cent1 is deducted at the source by the body which owes the income, and the beneficiary, whether Belgian or foreign, an individual or a legal entity, and whether domiciled in the country or not, receives the income net.

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As regards dividends paid by foreign share companies, whether their head office is in Belgium or not, tax at the reduced rate is withheld at the source by the body paying these dividends in Belgium, unless it is shown that the tax has already been deducted in Belgium by a previous intermediary (Article 23 of co-ordinated laws).

If this dividend is received directly abroad by an individual, company or partnership with a fiscal domicile in Belgium, the amount must be included in the tax declaration which the beneficiary has to make annually to the competent Controller of Taxes. In this case, tax at 6 per cent is levied in accordance with an assessment list and is collected direct from the beneficiary in Belgium (Article 20, paragraph 1, item 4, and Article 50, paragraph 2, of co-ordinated laws).

(b) INTEREST

Two different cases must be considered:

(1) Interest which a foreign firm owes through its establishment in Belgium or to a creditor domiciled in Belgium.

If the foreign firm has an establishment in Belgium which pays the interest, the tax on income from personal property is paid at the full rate of 15 per cent by the debtor company, which, however, may recover the tax on the interest due. Exemption, however, is granted in respect of interest on deposits or debts of a professional character and if it is duly established that the said interest is entered in the accounts of the beneficiary establishments in Belgium.2

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If the foreign firm has no establishment in Belgium, the recipient of the said interest, domiciled or resident in Belgium, must mention it in his annual declaration (see (a) above) with a view to its assessment to tax at 6 per cent.1

(2) Interest which a Belgian firm owes to a foreign firm.

In this case, tax at 15 per cent1 is collected by deduction at the time of paying the interest and subject to the right to withhold the tax from the taxable income.

A special regime, however, applies to mortgage interest. Interest from mortgages on real estate situated in Belgium is exempt from tax up to the amount of the cadastral income from such property.

(c) ROYALTIES FOR USE OF PATENTS AND COPYRIGHTS AND OTHER FORMS OF PERSONAL PROPERTY

Patents

If the patent is simply licensed, personal property tax is deducted at the source by the Belgian debtor at the time of paying the royalty for the licence.

If the patent is not conceded, but operated by a foreign enterprise direct, the profits from its use are treated as professional income and are liable to professional tax on the basis of an annual declaration by the recipient of such income.

Professional tax is applied to subsequent profits from the sale or surrender of a patent when the recipient of the income is domiciled for fiscal purposes in Belgium. The principle of this, however, has been questioned and jurisprudence has not given a definite ruling on the matter.

Copyrights

These are regarded as professional income and taxed as such. The royalties are received either direct by authors or through special non-commercial associations (sociétés civiles) having no legal entity.

In 1928 the revenue authorities entered into negotiations with these companies and it was agreed that professional tax should be collected by them at the time of distributing royalties to authors or their assigns, whatever the nationality of the recipients. For purposes of simplicity, and in order to avoid adjusting the tax to the situation of the innumerable recipients of these royalties, it was decided that the tax should be at a uniform rate of 1 ½ per cent.

It is paid into the State Treasury at the end of each quarter.

As regards beneficiaries who are neither domiciled nor resident in Belgium, this payment is regarded as final.

Recipients, however, who are domiciled or resident in Belgium are treated like other taxpayers and must include in their annual declaration the amount they have received in royalties. In order to comply with the fiscal requirements, the persons or companies that collect and distribute royalties forward to the revenue authorities at the beginning of the year individual forms for the authors on whose behalf they have paid royalties during the previous year, with the Christian name, surname and domicile of each author and the total amount of royalties paid and tax withheld. On the strength of these forms, the authorities are able to adjust the fiscal position of all those who have to make the annual return. The latter, it should be added, must contain not only royalties paid in Belgium, but those received from abroad.

Royalties received by authors direct without the intermediary of any distributing organisation must, of course, also be included in the annual declaration.1

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Other Income from Personal Property

Personal property tax is payable by deduction at source on income from leases and concessions of all personal property.

If the letting of property is in the nature of a business, professional tax is due on the annual profits from these operations.

(d) RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

The tax, assessed on cadastral income, is levied upon the income from all real estate in Belgium. A foreign enterprise, whether or not it has a Belgian office or business centre where the income is received, is liable to this tax in respect of any real estate it possesses in Belgium.

Income from real estate abroad which is paid in Belgium is liable to personal property tax (note 2, page 50). Accordingly, income of this kind received by the Belgian establishment of a foreign enterprise (company, partnership or individual), is liable to this tax (at 6 per cent);1 the tax is collected on the basis of the annual return of income.

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Mining royalties were abolished in 1925.

On the other hand, a special 10 per cent tax1 is levied upon the lease of hunting and fishing rights and is payable by the lessees or recipients of such income, provided that the latter amounts to at least 100 francs. The tax is deducted at the source.

(e) GAIN DERIVED FROM THE PURCHASE AND SALE OF REAL ESTATE, PERSONAL PROPERTY AND SECURITIES

Purchase and Sale of Real and Personal Property

A foreign enterprise — individual, partnership or company — which has no domicile or establishment in Belgium, but from time to time realises a profit from the purchase and sale of real estate in Belgium, is not taxable on this score. Nor is an individual foreigner who, being domiciled or resident in Belgium, occasionally sells property at a profit. On the other hand, the revenue authorities regard as professional income liable to professional tax on industrial and commercial income any profit of this kind realised in Belgium by a foreign company having an establishment in the country. The reason for this is that, in the case of companies, all operations, even when only occasional, are considered professional.

Purchase and Sale of Securities

The profit obtained by an individual from the sale of a security bought some time before at a lower price is not regarded as income. On the other hand, profits from speculative transactions by professional speculators, such as stockbrokers, are so regarded.2

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In the case, therefore, of stockbrokers and other dealers in stocks and bonds, no difficulty can arise; all profits from transactions of any kind in securities invested in their commercial enterprise must be included in their accounts and figure in the balance-sheet, whether they are cash transactions, dealings for settlement or contango operations.

On the other hand, transactions effected by stockbrokers or dealers in stocks and bonds on their own private account are only taxable if they are contango operations or dealings for a settlement, these being clearly speculative transactions.

Since any appreciation of the assets of a company is regarded as profit, the tax is payable on all profits—including profits from the purchase and sale, occasional or otherwise, of securities—realised by or through the Belgian establishment of a foreign company.

(f) SALARIES, WAGES, ETC

Remuneration of this kind paid in Belgium by a foreign enterprise is liable to deduction of professional tax at the source at the official rates. The tax, however, may be remitted on payments to persons whose work on behalf of the Belgian establishment is done entirely abroad. But any expenses of this kind are excluded from the Belgian accounts, the law allowing of no deductions from general overhead or administrative costs except expenses of this kind incurred in the Belgian establishments themselves (Article 27, paragraph 4).

(g) INCOME FROM A TRUST

The case of income from a trust is not provided for by the law, and the revenue authorities have not as yet been called upon to apply the rules to these bodies.

In any case, a distinction must be made according to the nature of the corpus of the trust. If it is real estate, tax will be collected on the income from real estate situated in Belgium; if it is securities or debts, the income therefrom will be liable to tax and deducted at the time the income is paid or, in the case of income paid abroad, in virtue of a declaration. When such income is distributed by the trustee to the beneficiary, it will be regarded as having already been taxed, under Article 52 of the co-ordinated laws, and no further tax will be levied.

(h) INCOME FROM CARRYING ON A BUSINESS OR INDUSTRY THROUGH

Since a foreign enterprise is taxable in Belgium if it has any kind of establishment in the country, there can be no doubt as to the liability of a foreign firm operating in Belgium under the conditions referred to under paragraphs (4) and (5) above.

As explained in Part I, on page 56, the word “establishment” must be understood in a wide sense to include head office, branch, agency, or any public and known representation by authorised agents.

Accordingly, the following have been regarded as establishments of a foreign company: an office employed exclusively in purchasing material and engaging staff for head offices in other countries and in settling the cost of orders and payment of salaries in Belgium; a local agency of a foreign railway company engaged in selling coupons, subscription books and circular tickets for journeys involving use of the company’s lines; a warehouse for the storage of goods, and a forwarding office possessed in Belgium by a foreign company. Similarly, a foreign firm with subsidiaries in Belgium was deemed to have an establishment in that country when it kept on the premises of those subsidiaries a stock of goods which the company itself insured against fire. A foreign firm is further taxable in Belgium if it has a fixed agent there, whether a depositary or not, who deals on behalf of his principal. Finally, a foreign company is held to have an establishment in Belgium if its name appears on the stationery which its agent uses for his correspondence, or in the form of advertisements, a plate or sign, or in any other manner.

The rules applicable to commission agents and brokers, commercial travellers or agents with power of attorney (paragraphs (1) to (3) above) depend essentially upon the circumstances of the case.

As a general rule, if the commission agent or broker simply takes orders and passes them on to the foreign firm, without intervening in any way in the transactions between the firm and its customers (delivery of goods, payment of invoices, judicial disputes, etc.), the revenue authorities consider that there is no Belgian establishment and the foreign firm is therefore not liable to tax on profits derived from the orders thus received. The commission agent or broker must not mention the firm he represents on his stationery or by any plate or sign at his premises.

The operations of a foreign commercial traveller in Belgium do not of themselves constitute an establishment justifying the taxation of the foreign firm. Subject, however, to exceptions provided for in international conventions, such traveller is liable to a minimum professional tax of 200 francs, which he has to pay before carrying on his business in Belgium (Article 27, paragraph 4, (3) and (4)).

On the other hand, an agent with a power of attorney which allows him to engage the name of the foreign enterprise, to participate in the delivery of goods and the collection of payments, to take judicial action on behalf of the enterprise, etc., is deemed to constitute a foreign establishment, the activities of which are assessable to tax.

B. NATIONAL ENTERPRISES

For the purpose of this study, a national enterprise is one whose domicile, in the case of an individual, or head office or principal establishment, in the case of a company or partnership, is in Belgium.

Such enterprise is taxable in Belgium, not only on all profits earned in the country, but on those earned abroad; the latter, however, are taxed at reduced rates (Article 34, paragraph 1, item 4, and article 35, paragraph 7, of co-ordinated laws) and are exempt from additional tax by provinces and communes.

Tax is assessed on the total results of the enterprise (Belgian and foreign offices), which means that profits and losses are balanced against each other, so that, if the total operations result in a deficit, no tax is payable.

To ensure the execution of these legal provisions, national enterprises have to attach to their annual declaration, not only the general accounts, but a copy of the separate balance-sheet and profit-and-loss account of the foreign establishments (Article 54, paragraph 1 (3), of the laws above-mentioned). These separate accounts include all income, of any kind whatever, derived from foreign sources.

TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

The tax on income from personal property is levied at the rate of 6 per cent1 on foreign dividends received by the Belgian company; the tax is deducted at the source by whoever pays this income in Belgium. If it is paid directly abroad, it must be mentioned in the annual return made by the enterprise to the competent Controller of Taxes, who then collects tax at 6 per cent direct from the company.

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(b) INTEREST

Interest (on bonds, debts, deposits, loans, etc.) from a foreign source is also liable to tax on income from personal property at 6 per cent, according to the method mentioned under (a).

(c) to (h) INCOME OTHER THAN DIVIDENDS AND INTEREST

See what has been said above (pages 69 et seq.) in connection with foreign enterprises, noting, however, that the income in question is taxable at reduced rates if earned and taxed abroad.

If the national enterprise is directed by an individual, professional tax alone is due, a reduced rate being applied to that part of the tax corresponding to profits earned and taxed abroad.

In the case of partnerships, the legal entity is liable to professional tax on profits placed to reserve, income of foreign origin being taxed at a lower rate than income of Belgian origin. Active partners are liable to professional tax on the sums distributed to them, including any interest on capital they have invested in the partnership. A reduction of rate is allowed in respect of parts of these sums which represent profits taxed and earned abroad. Sleeping partners (bailleurs de fonds or commanditaires) pay tax on income from personal property, subject to the same reduction of rate on foreign income.

The same principle (reduction of rate) applies to profits placed to reserve by share companies (sociétés anonymes) and limited partnerships with share capital (sociétés en commandite par actions); in the case of distributed profits (dividends), personal tax is imposed at a reduced rate on that proportion of income from shares corresponding to profits earned and taxed abroad.

C. TREATY PROVISIONS

1. GENERAL REMARKS

Belgium has concluded bilateral Conventions for the avoidance of double taxation with the Grand-Duchy of Luxemburg, France and Italy. Ratifications have so far been exchanged with the Grand-Duchy and Italy.

The texts of these Conventions are not uniform, for the fiscal systems of the four contracting States are in certain respects so different that no one solution could be found wholly acceptable to each of them.

Nevertheless, the provisions are substantially the same as far as concerns liability to tax on income from land and buildings, the taxation of the income of industrial, mining, commercial or agricultural enterprises, income from labour, fees of directors and auditors of share companies, public and private pensions and annuities.

The taxation of income from securities is not dealt with in the Convention with the Grand-Duchy of Luxemburg owing to fundamental differences in the fiscal treatment of such income by the two countries. It was omitted from the Convention with Italy because the interests affected are of very secondary importance. On the other hand, the question has been amply treated in the and private Convention with France.

DEFINITION OF FISCAL DOMICILE

The Conventions define fiscal domicile as follows: The fiscal domicile of individuals is the place where they normally reside — that is, where they have a permanent home. Companies and partnerships having a separate legal entity are domiciled for fiscal purposes in the place where they have their real head office; the fiscal domicile of other legal entities is their real centre of direction or management.

From the standpoint of Belgian law, therefore, the conception that determines the fiscal domicile of individuals is residence (see page 49); in the case of companies and partnerships with a separate legal entity, the determining factor is their real head office, which is usually synonymous with the principal establishment as laid down by Belgian fiscal law. The real centre of direction or management, constituting the fiscal domicile of other legal entities, likewise coincides with the principal establishment as understood by Belgian jurisprudence.

From this point of view, the Conventions do not introduce any essentially new principle into co-ordinated Belgian law.

2. TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

In principle, the Belgian tax on income from personal property is collected from dividends at the source at the full or reduced rate according to their Belgian or foreign origin.

The Conventions with France and Italy provide that income from shares and similar forms of participation shall be taxable in the country where the real head office is situated.1

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As an exception, however, to this rule, the Franco-Belgian Convention prescribes that income from securities (public debentures, shares or other certificates issued by companies, bonds or other loan scrip) is liable to impersonal tax in the State where the beneficiary has his fiscal domicile, to be collected according to the laws of that country. In this case, however, the State will deduct from this tax the tax already paid on the same income in the other country.

In view of the present incidence of taxation in France and Belgium, it was agreed that this provision should be applied as follows:

As regards Belgium, and in so far as the general tax rate on income from foreign securities does not exceed 12 per cent,1 this tax will not be payable on income from French securities accruing to persons having their fiscal domicile in Belgium. Should the general rate exceed 12 per cent, it will be reduced by 12 per cent in respect of these securities. As regards France, the general rate of the tax on income from foreign securities will be reduced by 12 per cent in the case of Belgian securities.

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Further, French share companies having their fiscal domicile in France and a permanent establishment in Belgium may, when making their annual return in Belgium, apply to be treated like Belgian share companies; in this case, the tax on dividends is assessed on a fraction of the Belgian profits equal to the ratio between the distributed profits of the company and its total profits, provided, however, that the sum assessable to the taxes on professional and personal property income does not exceed the total Belgian profits.

A French company which asks for this treatment will have to pay: (i) the tax on income from personal property at the full rate applying to share income on the portion of Belgian profits determined by the above-mentioned ratio; (ii) professional tax at the ordinary rates on the remainder of those profits, whereas, at present, the whole of the taxable profits earned in Belgium are liable to professional tax at 10 per cent.

At the same time, the total income liable to personal property and professional income taxes may not exceed the Belgian profits.

(b) INTEREST

Under ordinary law, personal property income tax is payable in Belgium, by deduction at source or on an annual return, in respect of all interest paid or received by a person who has his domicile or residence in Belgium.

The Conventions concluded with France and Italy depart from this principle when they lay down that income of this kind is taxable in the country where the person owing the income is situated; no attention is thus paid to the domicile of the recipient.

If, however, the debtor has permanent establishments in both countries and if one of these establishments contracts a loan or receives a deposit in the strict course of its business, the tax is collected by the State in which the establishment is situated.

(c) COPYRIGHT ROYALTIES

Under the Conventions, copyright royalties are taxable in the country where the beneficiary has his fiscal domicile.

Consequently, professional tax can no longer be collected in respect of copyright royalties paid in Belgium to persons whose fiscal domicile is in the Grand-Duchy, France or Italy.

(d) RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

Contrary to the rule of Belgian fiscal law, whereby income from real estate received abroad by a person domiciled or resident in Belgium is liable to personal property tax, the Conventions concluded with the Grand-Duchy of Luxemburg, France and Italy provide that the income from real property, or the property itself, is taxable only in the State where the property is situated.

(e) SALARIES AND WAGES

Normally, remuneration paid in Belgium, including the fees of directors of share companies, is subject to deduction of professional tax at source; further, remuneration received abroad by a person domiciled or resident in Belgium is liable to professional tax on the basis of an annual declaration. The tax, however — which is fixed by the Belgian commune where the taxpayer is domiciled or resident — is computed at a reduced rate if the income is earned and taxed abroad.

The Conventions lay it down as a rule that the fees of company directors and of others discharging similar functions are taxable in the State in which the enterprise has its real head office.

The various payments to salaried workers and wage-earners are taxed in the country in which the taxpayer is working.

The salaries of the public servants of one country who exercise their functions in the other are taxed only in the country which pays them.

Finally, public and private pensions are taxed in the country which owes this income, annuities in the country in which the recipient has his fiscal domicile.

Accordingly, tax will in future be collected, in respect of the income mentioned above, by one State only: in the case of directors, etc., of share companies, by the country in which the enterprise has its real head office; in the case of salaried workers and wage-earners, by the country where they do their work; in the case of public servants, by the country which pays them; in the case of pensions, by the country which owes them and, in the case of annuities, by the country in which the recipient has his fiscal domicile.

(f) INCOME FROM THE CARRYING-ON OF A BUSINESS OR INDUSTRY

National Enterprises operating abroad

According to Belgian law, a national enterprise which has establishments abroad is liable to tax in respect of all its Belgian and foreign profits, but profits earned and taxed abroad are taxed in Belgium at a reduced rate.

Under the Conventions, industrial, mining, commercial and agricultural enterprises are taxable in each State only in proportion to the income earned by permanent establishments therein.

This is a modification of the Belgian regime, since it exempts from tax in Belgium profits realised in the Grand-Duchy, France and Italy by Belgium enterprises which have establishments in those countries.

Foreign Enterprises deriving Income from Belgian Sources

It was explained on page 56 that a foreign enterprise is taxable in Belgium if it has any kind of “establishment” in that country, the term “establishment” being interpreted in a very wide sense to cover anything between a centre of operations and some recognised public representation by authorised agents.

The Convention concluded by Belgium with the Grand-Duchy of Luxemburg restricts the term to somewhat narrower limits. By permanent establishment are to be understood centres of effective management, branches, factories, workshops, agencies, shops, offices and depôts. The fact that an enterprise established in one of the two contracting States maintains business relations with the other country through a really independent agent or company (broker, commission agent, subsidiary, etc.), does not imply that the enterprise has a permanent establishment in the latter country.

Subject to this same reservation, the Conventions concluded with France and Italy define the term “permanent establishment” so as to include purchase and sales offices and any other fixed installation of a productive character. On the other hand, the Convention with France provides that offices which merely buy goods to supply them to one or more selling or processing establishments of the enterprise in the other country shall not be taxable — subject, of course, to reciprocity.

3. PROVISIONS RELATING TO THE COMPLEMENTARY PERSONAL TAX

The question of complementary tax did not arise in connection with the Grand-Duchy of Luxemburg, which has no such separate impost. Nor was it dealt with in the Franco-Belgian Convention.

The Convention with Italy, however, lays down that a taxpayer is liable to complementary tax only in the country where he has his fiscal domicile.

If a person domiciled in Italy has a second residence in Belgium, he is fiscally domiciled in both countries, and the Convention provides that in that event he would be liable to complementary tax in Belgium in proportion to the length of his visits to that country, whereas, under Belgian law as it now stands, personal tax would be due for the whole year.

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