1. General
At the end of 2023, the Belgian legislator approved a draft bill of law introducing a minimum tax for multinational companies and large domestic groups which transposes the EU Directive 2022/2523 of 14 December 2022.[1]
This reform of international taxation, commonly known as “Pillar Two”, was initially based on the BEPS (“Base Erosion and Profit Shifting”) initiative 2.0 action plan, launched by the OECD (“Organisation for Economic Co-operation and Development”). Fundamentally, the OECD wants large multinational companies with a turnover in excess of 750 million EUR to pay a minimum tax of 15%. In broad terms, this means that all profits must be subject to an effective tax of at least 15%.
[1] Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union
2. The five calculation steps of the minimum tax
The calculation of the minimum tax is carried out in five steps:
- First it should be determined whether a certain group falls within the scope of the legislation;
- Next, once a certain group falls within the scope, the qualifying income or loss per jurisdiction is determined based on the accounting data;
- Subsequently, the relevant taxes per jurisdiction need to be established;
- Afterwards, the effective tax rate is calculated, which is the ratio of the relevant taxes paid per jurisdiction to the qualifying income per jurisdiction;
- Finally, if the effective tax rate is less than 15%, a top-up tax is applied.
3. Mechanisms to levy
The minimum tax of 15% is achieved through three different levies: the domestic top-up tax, the income inclusion rule, and the undertaxed profit rule:
- The Qualified domestic Minimum Top-Up Tax (QDMTT): This levy ensures that countries themselves benefit from the proceeds of the levy. Low-tax jurisdictions need to impose a top-up tax of up to 15% if the group is under-taxed in their respective jurisdictions;
- The Income Inclusion Rule (IIR): If a particular jurisdiction has under-taxed, the jurisdiction of the ultimate parent entity must impose the levy;
- The Undertaxed Profit Rule (UTPR): This levy is imposed if certain entities would escape a levy under the domestic top-up tax or the IIR levy.
4. Belgium
The standard corporate tax rate in Belgium currently stands at 25%. As a result, the effective tax rate is above 15% in most cases. However, due to various correction mechanisms that intervene in the calculation of the tax (e.g. innovation income deduction, investment deduction, …) some companies will pay an effective corporation tax below 15%.
1. Domestic top-up tax in Belgium
The Belgian government has decided to introduce the domestic top-up tax. The domestic top-up tax provides for an additional tax of up to 15% if the group is under-taxed in Belgium. If Belgium does not tax, or insufficiently taxes, a top-up tax can be imposed abroad (assuming that the group has establishments in countries that have converted the OECD model rules).
2. Taxpayer
The domestic top-up tax and the UTPR levy are generally due by the group entities with the highest net qualifying income in Belgium. However a group can choose to designate another group company for payment. The Belgian group entities are jointly and severally liable for the domestic top-up tax and the UTPR levy. The IIR levy is due by the ultimate or intermediate parent entity established in Belgium.
3. Possible consequences for R&D Tax Incentives in Belgium
Several tax incentives, such as the innovation income deduction or the investment deduction for R&D, can result in a Belgian group entity paying less than 15% corporate tax. In case the effective tax burden is less than 15%, the domestic top-up tax is due. The Belgian entity will then be taxed up to 15% and will lose the benefit of those tax incentives. This undermines the Belgian government’s efforts to promote innovation and investment in the country.
With respect to tax credits, that provide a euro-for-euro reduction of the tax bill as opposed to deductions that decrease the taxable base on which tax is calculated, the impact is more nuanced. Indeed, using a tax credit can result in the effective tax rate being below 15%, with additional tax as a result. However, “qualifying refundable tax credits” (QRTC) that are repayable within four years receive a more favourable treatment with less impact on the effective tax rate.
To meet the criteria of a Qualified Refundable Tax Credit, the Belgian R&D tax credit will therefore become refundable within four years (instead of five years currently).
4. No rulings
The minimum tax is explicitly designated as a matter over which the Belgian Office for Advance Tax Rulings has no ruling power. The government wishes to centralize all knowledge regarding the minimum tax within one team with the necessary contacts with the OECD and tax administrations of other countries. Taxpayers will be able to contact that service informally with their questions. The Belgian Office for Advance Tax Rulings also does not want to run the risk of issuing a ruling that would turn out to be inconsistent with a later international interpretation.
5. Conclusion
Even though Belgium transposed the EU Directive in a timely manner, the Belgian tax authorities face a complex task of managing the application of the new rules from this year onwards.
Multinationals and large domestic groups potentially in scope, will have to take action to ensure a smooth transition into the new regime.
The Qualified Domestic Minimum Top-up Tax and the Income Inclusion Rule will apply for fiscal years starting as from December 31, 2023 whereas the Undertaxed Profits Rule will apply for fiscal years starting as from December 31, 2024.
Belgian tax incentives for R&D can be undermined by this minimum tax. The innovation income deduction or the investment deduction for R&D can result in a Belgian group entity paying less than 15% corporate tax, thus producing a domestic top-up tax.
Considering the purpose behind sustainable incentives, a surcharge on one’s own incentive is undesirable. The Belgian government partially meets this by reducing the refund period of the R&D tax credit from 5 to 4 years. This way the R&D tax credit qualifies as a Qualified Refundable Tax Credit that receives a more favourable treatment with less impact on the effective tax rate.
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