Belgian tax authority clarifies new rule on deduction of foreign business losses

By Moïse Gnakouri, Doctoral researcher, Catholic University of Louvain, Brussels

The Belgian tax authority, in a circular dated November 3, provides a detailed commentary on new provisions in the Belgian income tax code regarding the deductibility of foreign business losses. The new provisions entered into force on July 10 after being submitted to the Belgian Parliament in May and approved on June 27.

A principle with an exception

After a review of the context and the relevant legal provisions, the circular lays down the principle of non-deductibility of business losses incurred in an establishment located outside the Belgian territory.

However, in accordance with the legal provisions commented on, the circular sets out an exception to this principle of non-deductibility of foreign business losses. This exception is subject to a number of conditions. In fact, departing from the above-mentioned general principle, foreign business losses are allowed to be deducted if the business losses are “definitive” and they are incurred in a member state of the European Economic Area that is party to a tax treaty with Belgium.

The circular also provides some clarifications on what is meant by “definitive” business losses and how this deductibility exception should be applied according to the double taxation avoidance mechanisms provided for in the tax treaties signed with Belgium.

Notion of definitive business losses

Based on article 206 of the Belgian income tax code, the circular specifies that definitive business losses are those business losses that exist at the time when the company definitively ceases its activities in a European Economic Area member state or at the time when the company no longer holds any assets in that member state (in case that company does not have a permanent establishment there).

However, these business losses will only be considered as definitive losses if no deduction of any kind is granted in the member state in which the foreign establishment or the assets concerned were located.

On the other hand, losses are not definitive losses if they can still be deducted or offset against income from other activities in the state of residence of the foreign establishment or assets at the time of cessation of activities. In addition, if, after the cessation of activities of a permanent establishment, the losses are recouped by another permanent establishment of the company or to a related enterprise that is active in the same state, these losses are not definitive.

An anti-abuse provision: the recapture rule

The circular specifies further that if the company that deducted the definitive foreign business losses resumes, within three years of the deduction, the activities in the member state where the foreign asset or the foreign establishment that incurred the loss was located, the amount equivalent to the deducted business loss will be added to the taxable base of the Belgian company for the year of resumption of the activities.

How the foreign loss deduction rules are applied

If the treaty signed by Belgium with the European Economic Area’s member state provides for an exemption of profits in Belgium, business losses are not deductible except in the case of definitive losses, as mentioned above. In contrast, where the treaty signed by Belgium with the European Economic Area member state provides for a reduction of profit tax, business losses incurred by the foreign establishment are deductible from the taxable base in Belgium only in proportion to the taxation of these profits in Belgium.

Tax treaties providing for a mixed system of profit exemption and tax reduction are considered as profit exemption tax treaties.

Finally, the circular provides some clarifications on the treatment of prior foreign business losses incurred during a taxable period that began before January 1, 2020.