Belgium proposes tax bill on foreign loss deductions

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

The Belgian government submitted a draft bill to the parliament (the Chamber of Representatives) on May 27, 2021, that would make changes to the Belgian income tax code regarding the conditions for deducting losses realised by foreign establishments.

The purpose of the draft bill is to correct or clarify certain rules introduced by the corporate income tax reform law of 25 December 2017. In this law, the rules regarding the deductibility of foreign losses were revised so that, in principle, losses incurred in a country with which Belgium has concluded a double tax treaty are no longer included in the tax base.

As a result of the 2017 tax reform, as of 2018, losses realised by foreign establishments cannot be deducted, except if they are final losses realised in a member state of the European Economic Area.

The reform also introduced a so-called recapture provision, which aimed to counteract the effects of double loss deduction. In practice, the aim of this provision was to neutralise losses incurred in a previous taxable period in a country with which Belgium has concluded a double tax treaty when these losses are deducted a second time, so as to avoid a double deduction of losses.

However, the recapture provision only applies to the extent that these losses were actually set off against income that is taxable in Belgium under the domestic law and treaty provisions, i.e., profit of Belgian origin or profit of foreign origin that was not exempted by a double tax treaty.

The wording of this provision has caused some confusion. As a result, the current draft bill would revise the wording of this provision without fundamentally changing the philosophy behind it.

In addition, the draft bill clarifies that if the company starts up activities again in the state where the losses were incurred within three years after the deduction of the final losses, only the amount of the final losses that was set off against the profit taxable in the previous taxable periods must be included in the taxable base.

If adopted, the new law will come into force in 2022. However, the Belgian government has stated that the current provisions of the Belgian income tax code relating to the conditions for deductibility of foreign losses should be interpreted in accordance with the draft law.