28 June 2017
Local tax holiday doesn’t have to stand in the way of the Belgian participation exemption
Africa offers a lot of business opportunities for Belgian entrepreneurs and is clearly on the rise. Apart from the many business aspects the Belgian entrepreneur needs to be prepared for, there are undoubtedly also a large number of tax areas of attention that shouldn’t be neglected. Hereafter we gladly whip through a non-exhaustive catalogue of tax considerations with you in view of our experience in many relevant business cases.
When a Belgian entrepreneur wishes to access the African market, it is to begin with very useful to know whether Belgium has entered into a double tax treaty with the countries concerned. That is important because the purpose of a double tax treaty lies particularly in the avoidance of double taxation or at least in the reduction to the maximum possible extent, as will be shown below.
In this respect we can report that Belgium currently has a double tax treaty in force with the following African countries: Algeria, the Democratic Republic of Congo, Egypt, Gabon, Ghana, Ivory Coast, Mauritius, Morocco, Nigeria, Rwanda, Senegal, Tunisia and South Africa.
Many African countries go to great lengths to attract foreign investments. And they obviously play the trump cards they hold in the areas of logistics, port facilities, subsidies etc. But also fiscal politics will contribute to work up foreign investors’ appetite to develop business in a certain country.
When a prospective investor intends to feel out the market he will initially probably wonder which local corporate income tax rate he would be subject to. Therefore, the entrepreneur will most likely make a comparative summary of local corporate income tax rates in the various countries he has on his radar. Taking that into consideration, we hereby list the standard corporate income tax rate of a number of African countries (unlike specific rates which might e.g. apply to the extractive industry):
Corporate income tax rate
|Algeria||19% – 26%|
|Central African Republic||30%|
|Democratic Rep. of Congo||35%|
|Libya||20% (plus 4% jihad tax)|
|Morocco||10% – 31%|
|South Sudan||10% – 25%|
However, and for a proper understanding, the standard “nominal” corporate income tax rate is one thing but the “effective” tax rate is another. Needless to say, only the latter tax rate will have a real impact on the local P&L and on the cash flow position.
And that’s exactly why prospective investors are usually attracted with so-called tax holidays. It basically means that local businesses are granted a reduction or elimination of (corporate income) tax during a specified period. It goes without saying that the necessary financial oxygen is thus generated to support a relaunch of the African project.
The following is a succinct overview of a number of practical examples of African local tax incentives:
You must realize, however, that the focus should not be solely on Africa. After all, your home country and operating base are very likely to remain Belgium and it is therefore worth considering that someday the African-sourced profit after tax will have to be flowed back to Belgium, either by means of recurrent dividends or by means of a realized capital gain on the sale of the shares of your African operational company.
In practical terms, when a Belgian company holds a foreign subsidiary the net income of the African subsidiary will likely flow back to the Belgian company under the form of a dividend. The tax treatment will then be as follows: the said dividend will probably be subject to withholding tax in Africa. Beware, this foreign withholding tax will indeed be deductible for Belgian corporate income tax purposes but cannot be offset against Belgian corporate income tax. In other words, this foreign withholding tax is partly a cost for the Belgian parent company and ideally you will keep it as low as possible or even at 0% in a dream scenario. Hence the importance of the effect of a double tax treaty. For illustrative purposes, the treaty with Rwanda provides for a 0% dividend withholding tax while under the treaties with among others the DRC, Ghana, Mauritius, Tunisia and South Africa a 5% dividend withholding tax upper limit can be negotiated.
In Belgium the net amount of the dividend at the border is in principle subject to a 33.99% corporate income tax rate. However, in accordance with Belgian legislation 95% of the dividend will be exempted from tax if the Belgian shareholder holds a 10% minimum participation in full ownership for at least one year. The maximum tax in Belgium is therefore 1.7% (or 5% * 33.99%). When the Belgian company has for example deductible (interest) expenses or tax losses, they can be offset against 5% of the dividend and the effective tax rate may even go below 1.7% (even to 0%). Moreover, the African subsidiary needs to be subject to “normal” taxation, more about it later in this article. The subsidiary also needs to have a sufficient and relevant level of local substance in terms of office space, infrastructure and personnel.
For illustrative purposes, the following is a numerical example where we assume a 5% local dividend withholding tax:
5% withholding tax:
Net at the border:
95% participation exemption:
33.99% Corporate Income Tax:
Effective tax rate/cost:
When the Belgian company would realize a capital gain on the African shares, for example as a result of their disposal, then a net capital gain would be 100% tax exempt in Belgium if the Belgian shareholder has held those shares for more than one year. Moreover, if the Belgian shareholder qualifies as “large” for Belgian company law purposes, then the capital gain will be subject to tax in Belgium at a rate of 0.412%, which would at least be the minimum tax base for the Belgian parent company in that financial year.
In order to enjoy the advantage of the said Belgian participation exemption for realized capital gains on shares, the underlying dividend for those shares needs to qualify for the participation exemption.
Because the participation exemption essentially aims to avoid “double taxation”, the key question arises whether a local tax holiday that the African subsidiary might enjoy entails a piori that a dividend or a capital gain on shares is either way subject to corporate income tax at a rate of 33.99%? Indeed, as already mentioned above, the participation exemption depends on the fundamental precondition that the foreign subsidiary is subject to a “normal income tax”.
A generalized (positive or negative) answer to this question is not available. Every case always needs to be judged on its own merits to determine whether a local tax regime’s characteristics can be reconciled with the participation exemption conditions in Belgium
However, based on extensive experience in our dealings with the Belgian tax authorities – and the ruling commission in particular – in such matters we can state that the Belgian tax administration is favourably disposed towards a foreign tax holiday when the approach and purpose consist in encouraging the local economy and employment alike. Furthermore, without going into detail, a local tax “relief system” can be reconciled with the Belgian participation exemption when such local regulation meets the following characteristics:
The currency risk is certainly a concern of undeniable significance. It is something that needs to be considered not only from a financial and operational point of view but definitely also from a tax perspective. Indeed, when currency exchange results, whether or not realized, are reflected in the Belgian company’s financial statements then these certainly have an impact on your tax bill at the end of the ride. Very briefly summarized, the tax treatment would be as follows:
When currency management – also from a tax perspective – becomes quite a job, then the choice of a certain currency, other than the EUR, as a functional currency may be considered to respectively keep and deposit the financial statements and annual accounts in Belgium. In practice this would mean that the Belgian company in question does not have to translate its transactions into EUR and will thus not face exchange results. To this end the company will have to demonstrate that the currency involved – e.g. the South African rand or the USD – is decisive for its daily operations. In terms of form the company concerned will have to apply in Belgium for the necessary approvals in that regard.
The good news is that using a functional currency, other than the EUR, also works for Belgian tax purposes. After all, when the company has the necessary approvals and although the corporate income tax return still has to be submitted in EUR, it can translate all amounts at the initial and closing state of its financial year into EUR at the same exchange rate as opposed to the functional currency (e.g. USD). All possible exchange results are thus contained.
In a broader business context it would be recommended to think ahead about “how easily” cash can be transferred abroad. For many countries have foreign currency restriction rules in place or even foreign currency freeze regulations. This is among others the case in Burundi, Cameroon, Ghana, Libya, Mozambique, Namibia, Nigeria, Sierra Leone, South Africa, Tanzania and Zimbabwe. Please note that in Angola you even pay a 10% withholding tax on money transfers abroad.
It was already pointed out above that a dividend distributed by the African company to its Belgian parent company will most likely be subject to a local withholding tax which therefore presumably results in a permanent tax cost at the level of the Belgian parent company.
Buy also interest (because of debt financing from Belgium) or royalties (because e.g. a license relative to a trademark or patent is granted from Belgium) paid by an African company to a Belgian beneficiary will most probably be subject to a local withholding tax. We reiterate and emphasize once more that a prevailing double tax treaty will likely reduce this withholding tax, even down to 0% in certain cases.
However, for “interest” and “royalties” the application of a local withholding tax is not always a negative factor when the Belgian beneficiary is actually subject to corporate income tax in Belgium. This can be explained in particular by the fact that the Belgian company can then claim a foreign tax credit (“FTC”) in Belgium (the so-called FBB or forfaitair gedeelte van de buitenlandse belasting/quotité forfaitaire de l’impôt étranger (QFIE)). Very simplified this FTC is usually about 17% of interest or royalties after deducting local withholding tax and this amount can be deducted from Belgian corporate income tax due. However, an excess FTC (i.e. when the FTC exceeds the 33.99% corporate income tax) cannot be carried forward to subsequent financial years nor can it be reimbursed by way of a notice of assessment. In practice and summarized, when the local withholding tax on interest and royalties is less than 15% the use of an FTC will most likely result in the Belgian company enjoying a positive tax arbitrage.
Apart from the above we wish to point out that many countries (also beyond the African frontiers) also apply a withholding tax to certain income other than the classic “dividends”, “interest” and “royalties”. In practice you often see the application in particular of a withholding tax on “(technical) service fees” among others. And the tax obstacles thereof are twofold:
In short, the actual application of a local withholding tax on, say, a (technical) service fee often comes as a very unpleasant surprise to the Belgian beneficiary and this cost is rarely budgeted in advance … That’s why it often leaves a bitter aftertaste! However, there are ways to partly or fully reduce this withholding tax on (technical) service fees, e.g. under the Belgian double tax treaties with Algeria, Gabon, Ivory Coast, Senegal and South Africa, be it that this needs to be assessed on a case-by-case basis. Also, sometimes a French intermediary company (with sufficient and relevant substance of course) is established because of the extensive double tax treaty network with Africa. And finally not so long ago a multilateral tax treaty was signed between Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo in the context of the West African Economic and Monetary Union. The treaty entered into force on 1 January 2010 and provides in our opinion a 0% withholding tax rate on technical service fees invoiced between these respective countries. Countries like e.g. Senegal and Ivory Coast par excellence could act as a Regional Services Hub in that respect.
For illustrative purposes we hereby list a non-exhaustive overview of such “special withholding taxes” unleashed by certain African countries:
Object of withholding tax
% withholding tax
|Algeria||Technical service fees||24%|
|Benin||Service and management fees||12%|
|Botswana||Management and technical fees||15%|
|Burkina Faso||Various fees||20%|
|Cameroon||Technical service fees||15%|
|Central African Rep.||Various fees||15%|
|Congo Brazaville||Service fees||20%|
|Dem. Rep. Congo||Service fees||14%|
|Equatorial Guinea||Various fees||10%|
|Ghana||Service fees||7.5% – 15%|
|Ivory Coast||Service fees||20%|
|Kenya||Technical service fees||20%|
|Liberia||Management (consulting) fees||15%|
|Madagascar||Technical and management fees||10%|
|Mauritania||Technical service fees||15% (<6 months)/25% (>6 months)|
|Niger||Technical service fees||16%|
|Nigeria||Management (consulting) fees||5%|
|Sierra Leone||Contractor fees||10%|
|South Africa||Management (consulting) and service fees||15%|
|South Sudan||Various fees||15%|
|Tunisia||Management fees (consulting fees)||15%|
|Zambia||Management (consulting) fees||10%|
|Zimbabwe||Technical, managerial and consulting fees||15%|
Above we mainly discussed the situation where a Belgian parent company has a subsidiary – so a separate legal entity – in the African country in which it wants to develop business. However, an alternative may be that the Belgian company has a legal branch or permanent establishment in that country. Both (respectively legal and fiscal) notions refer to an operational antenna in that working state which legally belongs to the legal entity of the Belgian company and develops its core business in that country. Precisely for this reason the net income that can be allocated to the permanent establishment will be subject to tax in that country and will be fully exempted from corporate income tax in Belgium when our country has entered into a double tax treaty with that country. When that country does not have a treaty with Belgium, the “African net income” will be fully subject to tax in Belgium at 33.99% corporate income tax. Corporate income tax paid in that country, if any, can be deducted from the taxable base in Belgium.
However, from a local tax point of view careful consideration should be given – and this often gets neglected – to the question whether there is a so-called “branch profit remittance tax” in that country. This is a local withholding tax which is unleashed on the working capital of the permanent establishment vis-à-vis the Belgian head office assuming that this working capital will be reimbursed to the Belgian head office. This could best be compared to a local withholding tax on dividends that a local “subsidiary” would distribute to its Belgian parent company. However, contrary to a withholding tax on dividends, branch profit remittance tax is in principle never capped by a double tax treaty, let alone an exemption exists! And therefore this tax is usually a permanent tax cost for the Belgian company …
As a palliative we can report that, when branch profit remittance tax is owed abroad, it will be deductible for Belgian tax purposes. For illustrative purposes, we hereby list a non-exhaustive overview of countries whose tax law is characterized by branch profit remittance tax:
Branch profit remittance tax
From a company law point of view special attention should be drawn to a specific concern when working with a legal branch or permanent establishment in West and Central Africa in particular. OHADA (acronym for Organisation pour l’Harmonisation en Afrique du Droit des Affaires) is an international organization of 17 West African countries. OHADA was created in order to pursue legal and economic integration. The OHADA treaty is made up today of Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, the Comores, Congo-Brazaville, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, Togo and finally its newest member since 2012 the Democratic Republic of Congo. The latter in particular can be of interest to Belgian enterprises because of obvious historical ties and local presence.
Article 120 of the Companies Uniform Act provides for the obligation to attach the branch of a foreign company to a new or pre-existing legal entity of one of the Member States within two years, i.e. the lifespan of a branch is limited to two years, unless exempted from that obligation. As from 30 June 2014 an exemption may only be granted for a non-renewable two year term, bringing the maximum deadline for incorporation to four years. After this maximum lifespan the branch needs to be converted into a subsidiary. The rationale behind this is that after two or maximum four years the local presence would become of a lasting nature and needs to be locally embedded. In the event of failure to comply with this provision, the removal of the branch from the Trade and Personal Property Credit Register may be declared. Also a deemed liquidation of investments could be enforced. This new framework has brought an end to the practices of some Member States which allowed foreign companies, through exemptions, to maintain their branches after the initial two year period set by OHADA, by granting renewals by order. Anyway, many multinationals have already misjudged this yet so unambiguous guideline (both before and after 2014).
The aforementioned requirement actually only applies if the branch (or branches) is held by a foreign company, i.e. a company that is not established in OHADA, e.g. a European, American, South African or Asian enterprise/multinational. However, if the head office of the branch(es) is located in, say, Senegal or Ivory Coast the lifespan will be unlimited. A technique sometimes used in practice after having reached the maximum lifespan is the “rehanging” or relocation of branches held by a non-OHADA enterprise to a pre-existing OHADA subsidiary or to a new one specifically set up for that purpose, e.g. by way of a transfer of a universality of goods. A country that is used occasionally for this purpose is Ivory Coast because it also has a developed holding regime similar to the EU model of the participation exemption, among others a 95% exemption of inbound dividends subject to certain conditions (e.g. minimum holding period of two years, 10% participation).
Your business in Africa will of course not just fall from the sky: you as a company director and your team will have to roll up your sleeves and get to work, whether or not physically in Africa and whether it be short term or long term. It goes without saying that the “way in which” and the “duration” will have an impact on the tax and/or social security bill of yourself and your staff. This consideration thus also has an impact on the global payroll cost of your enterprise.
In practical terms, when a person is a Belgian “tax resident” he should in any event declare his worldwide income in his Belgian personal income tax return. This applies in particular also to foreign professional income collected by this person, even though it would also be subject to tax in the working state. The amount to be declared in Belgium is the foreign professional income after deduction of both foreign tax and social security contributions.
Obviously it is not intended that the person in question will be taxed twice on the same income, i.e. both in the working state and in the home country Belgium. In jargon this is called juridical double taxation, which refers to circumstances where a taxpayer is subject to tax on the same income (or capital) in more than one jurisdiction. Now, in order to grant “relief” of such double taxation Belgium uses the principle of exemption with progression reserve when foreign professional income finds its origin in a country with which Belgium has entered into a double tax treaty, i.e. the foreign income will be taken into account to determine the marginal tax rate applicable to the other income taxable in Belgium. Also for that reason the foreign income needs to be declared in Belgium. However, in order to reduce double taxation the Belgian personal income tax, thus calculated, is then reduced by a fraction consisting of the foreign income divided by the worldwide income. This is the “exemption with progression reserve” in question.
This essentially amounts to a rule-of-three. Consequently, the foreign professional income will usually not be 100% exempted from Belgian personal income tax. A 100% exemption in Belgium will mainly occur only if the worldwide income of the person in question consists exclusively of foreign income.
Precondition to enjoy the advantage of this Belgian personal tax relief rule is the subject to tax test of this professional income. However, the wording of the double tax treaty will have to show on a case-by-case basis if this requires an actual or a theoretical tax abroad.
When an employee receives a foreign professional income, this person will in principle be liable to tax in his home country (in this case Belgium) at progressive personal income tax rates.
However, in accordance with the provisions of a double tax treaty the work state may also tax this income if one of the following conditions is met:
In the last two cases the remuneration borne in the work state will likely only be actually subject to tax here in proportion to the number of days physically spent by the employee in the work state for professional purposes.
When a Belgian company has employees that are liable to tax in the work state then it very likely will need to register as an employer in that work state and possibly also has to ask for a VAT number. In those circumstances that Belgian company will very presumably also have a taxable permanent establishment abroad.
In the case of a company director the fiscal analysis will be completely different. Indeed, double tax treaties generally stipulate that a natural person who is a Belgian tax resident, but also holds a mandate as a company director at a foreign company, will be taxable on the director’s fee in the country in which that company has its registered seat. In other words, the number of days physically spent abroad by the company director is much less relevant. This is not entirely illogical in itself. After all, a physical presence on the ground is not an absolute must to be involved in the strategic policy of a foreign company as a company director.
Please note that certain treaties stipulate that when a company director assumes the operational management of the foreign company rather than the strategic management, the aforementioned “employee” article of the treaty comes into play. This means that one of the three conditions of the aforementioned 183 day rule needs to be met to become liable to tax in the work state.
The focus of the aforesaid considerations is clearly on direct taxes. However, there are also various indirect taxes that may arise and that need to be taken into account, such as VAT (refunds), sales tax, goods and services tax (GST), customs duties and possibly also excise duties. From experience you may know that there is often a lot of cash involved and therefore indirect taxes also deserve your undivided attention.
From the above it certainly goes to show that in addition to the many business opportunities there are also numerous unreclaimed fiscal diamonds up for grabs in Africa. But, as so often, you should look before you leap and you would do well to proactively fine-tune the structuring of your business plans bearing all of the above in mind. Your discussions with both the local and the Belgian tax authorities will run much more smoothly afterwards.
Kurt De Haen
PKF-VMB Tax Consultants