Belgium has become an attractive country to invest in for companies having their headquarters in Hong Kong and their production plants in China, but also for European companies intending to invest in Hong Kong and Asia.

We remind in fact that the Belgian Government managed to enforce two important fiscal measures improving significantly Belgium's investment environment, and this, both for Asian and European investors.

First, on June 30, 2005, the Belgian Official Gazette introduced a new Belgian Tax Law including deductions for venture capital. Belgium then became the first country in the EU to provide such law. In support for the measure, Belgian officials abolished the 0,5% proportional capital duty.

Second a double taxation treaty and protocol between Belgium and Hong Kong has entered into force on December 10, 2003.

Belgium been a precursor of such initiatives within the EU, observers expect some other European countries to follow its steps. Considering that M&A operations are becoming more popular, we wish to provide a general summary of the legal aspects related to the said measures. Moreover, we will also focus on the opportunities these measure aim to create. Please note that this article is not aimed at giving tax advice.

The ‘‘Notional Interest Deduction''

As from fiscal year 2007, this new law allows all companies incorporated in Belgium (save exceptions) to deduct a fictitious interest on their net assets from their taxable profits; in other words they can deduct annually from their taxable income an amount equal to the interests they would have paid on their aggregated equity in case of long-term debt financing.

The ‘‘Notional Interest Deduction'' is calculated by applying an interest rate to the adjusted calculated equity. The rate of the ‘'Notional Interest Deduction'' is determined every year on the basis of the average interest rate for 10-year Belgian Government linear bonds. For the year 2006, the rate was fixed at 3,442 %.

The Belgian Government mainly wants to ensure equal tax treatment of loan and equity capital using the following measures:

1. a general reduction of the effective corporate tax rate for all companies, and a higher after-tax return on investment;
2. encouragement of capital intensive investments in Belgium and an incentive for multinationals to examine the possibility of assigning activities such as intra group financing, central procurement and factoring to a Belgian entity;
3. continuing opportunities for tax-efficient, equity-funded, inter-company financing from Belgian companies.

The ‘'Notional Interest Deduction'' applies to all companies subject to Belgian Resident or Non-resident Corporate Income Tax . However it does not apply to companies benefiting from a special regime such as Belgian coordination centres, investment companies, shipping companies, cooperative companies with employee participations in the capital and profits, or companies established in a re-conversion zone.

The ‘'Notional Interest Deduction'' is calculated on the basis of the equity as stated in the company's balance sheet of the specific period. Based on Belgian accounting law, ‘'equity'' includes capital, shares premiums, revaluation gains, reserves, carry forward of profits and losses (+/-) and capital investment subsidies. Capital Equity shall be adjusted by eliminating certain items, such as the net book value of the company's holding of its own shares, the net value of fixed financial assets consisting of participations and other shares, the net book value of real estate or entitlements used by directors, their spouse or their children.

Double Taxation Treaty between Belgium and Hong Kong

This treaty will translate itself into tax savings for Belgian and Hong Kong¹ investors doing business in each other's country, giving then various special tax rights and provisions for tax relief in case of double taxation.

The most significant measure consist in reducing withholding taxes on dividends, interests and royalties between Belgian and Hong Kong mother and sister companies, eliminating or lowering their rate.

With respect to the tax treaty ratified between Belgium and Hong Kong, as from fiscal year 2004 the following maximum withholding tax rates were foreseen:

•  5% of withholding tax on dividends in case of a minimum holding of 10%
•  15% of withholding tax on dividends in other cases
•  10% on interests
•  5% on royalties

Besides, foreign investors should be aware that Belgium has a very favourable company holding regime: i.e. the participation exemption (“DBI”): under certain conditions, no taxes are charged on the profits (dividends and liquidation profits) for holding of a Belgian company in a Belgian or foreign subsidiary company.

Does Belgium represent for Asian investors a possible gateway to the EU?

The aforementioned benefits are enhanced through Belgium's extensive network of double tax treaties with EU and non-EU countries, and also through the EU parent-subsidiary and interest-royalty directives, which are significantly reducing withholding taxes.

In practice, Hong Kong companies heading for investments in the European Union and willing to repatriate their return on investment back home can gain substantial tax advantages by first incorporating a holding company in Belgium and then investing through this company in other companies spread all over the European Union. Some Chinese companies, for example, have already understood the interest to consider Hong Kong and Belgium as gateways to the European Union.

Hong Kong: an attractive investment location for Belgian and European investors?

The new tax treaty creates also a number of fiscal opportunities for Belgian companies with interests and investments in Hong Kong. With respect to the tax treaty, Belgian companies receiving dividends from Hong Kong companies can benefit, under certain conditions, from a participation exemption or from a special tax credit, in the case the participation exemption cannot be applied.

One possibility is for a Belgian company to act as an undisclosed agent for the Hong Kong company; suppliers and customers will contract directly with the Belgian company. However the profits of trading transactions will not be subject to Belgium taxation since the Belgian company will be acting only as an agent in the transaction. The Belgian company will only need to apply a tax percentage on the commission received.

To finish, the recent administrative bill shows that Hong Kong's General Tax Regime is actually not so much more advantageous than Belgium's. In fact, Hong Kong does not appear in the list of countries where the general tax regime is substantially favourable to Belgian businesses. As a result, Belgian companies receiving dividends from Hong Kong based companies can, in principle, benefit from a participation exemption.

Furthermore, the administrative bill also confirms that Belgian companies can apply for participation exemption, when receiving dividends from Hong Kong companies benefiting from a favourable tax treatment with respect to foreign income. This is due to the fact that these companies are not benefiting from a tax regime which deviates from Hong Kong's general tax regime.

Benoît Simpelaere, Partner
David Wasserman, Associate
Hoche Demolin Brulard Barthélémy - BELGIUM


(1) Although Hong Kong is a « special administrative region » of the Republic of China, this treaty is only between Belgium and Hong Kong, not between Belgium and the People's Republic of China. Nevertheless, Chinese companies that wish to benefit from the treaty can manage to have their headquarters in Hong Kong.