In its governmental agreement, the new Belgian government pledged to assume a pioneering role in the fight against abusive tax practices. As one of the first concrete steps, Belgium has integrated the “EU list of non-cooperative jurisdictions for tax purposes” (the “EU blacklist”) into Belgian law and now imposes several defensive tax measures on Belgian taxpayers that interact with EU blacklisted jurisdictions (Law of 20 December 2020, published 30 December 2020). The enthusiasm with which this is done however raises a number of questions as it may result in a disproportionate impact for bona fide taxpayers.
What is the EU list of non-cooperative jurisdictions for tax purposes?
The list includes non-EU countries and territories that do not comply with certain “tax good governance standards” relating to transparency, fair taxation and implementation of the minimum standards agreed at OECD level as part of the Base Erosion and Profit Shifting (BEPS) project.
The objective of the EU blacklist is to encourage listed countries to exchange tax information with EU Member States and put an end to certain abusive tax practices.
The EU blacklist is therefore not focused on the nominal or effective tax rate applicable in third countries. A third country that does not impose corporate income tax will not be blacklisted for that reason alone. However, jurisdictions that do not sufficiently cooperate internationally on tax matters, maintain harmful preferential tax regimes or facilitate the use of offshore structures without economic substance, may be put on the EU blacklist.
Which jurisdictions are currently on the EU blacklist?
The EU Finance Ministers adopted the EU blacklist for the first time on 5 December 2017. Since then, the list has been regularly updated and is now revised twice a year.
The current EU blacklist was adopted by the EU Finance Ministers on 6 October 2020 and includes the following jurisdictions: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and Seychelles.
Next to the blacklist there is also a so-called “grey list” of jurisdictions that do not sufficiently meet the relevant standards but that have committed to do so within a certain deadline. The current grey list includes: Australia, Botswana, Eswatini, Jordan, Maldives, Morocco, Namibia, Saint Lucia, Thailand, Turkey.
Depending on the outcome of further monitoring, new jurisdictions may be listed, listed jurisdictions may move from the grey list to the blacklist or vice versa or may no longer appear on any list. The next update of the EU blacklist (and grey list) is scheduled for February 2021.
What is the consequence of a blacklisting?
There is no general sanction in respect of countries that are blacklisted, but some specific EU rules provide for potential sanctions linked to a blacklisting. For instance, certain EU funding to third countries is not available if moneys are channeled through entities in blacklisted countries. Also, the new EU reporting obligation for intermediaries with respect to cross-border arrangements (“DAC 6”) applies automatically if deductible payments are made to associated enterprises in EU blacklisted jurisdictions.
Absent general sanctions, EU Finance Ministers have recommended EU Member States to take coordinated measures to tackle aggressive tax planning through blacklisted jurisdictions.
Already in 2017, Member States were advised to apply at least one of the following administrative tax measures with a view to achieving increased audit and control risk for blacklisted jurisdictions and their abusive arrangements:
- reinforced monitoring of certain transactions;
- increased audit risks for taxpayers benefiting from the regimes at stake;
- increased audit risks for taxpayers using structures or arrangements involving these jurisdictions.
In addition, in December 2019 the EU Finance Ministers approved a Report of the Code of Conduct Group on Business Taxation (the “Guidance”) in which EU Member States are recommended to take at least one of the following legislative tax measures:
- non-deductibility of costs and payments (interest, royalties, etc.) to entities or persons in blacklisted jurisdictions;
- applying more severe CFC rules to CFCs in blacklisted jurisdictions (CFC rules provide that the income from a “controlled foreign company” is included in the tax base of the controlling taxpayer);
- applying withholding tax or applying a higher rate of withholding tax on payments such as interest, royalties and service fees, if the recipient is in a blacklisted jurisdiction;
- limiting or denying the participation exemption on dividends received from subsidiaries in blacklisted jurisdictions.
Why is Belgium taking measures now?
Under the Guidance, Member States are asked to apply at least one of the abovementioned legislative measures by 1 January 2021.
This is a mere recommendation and not a binding rule (it is for instance not included in an EU Directive). However, in its governmental agreement of 30 September 2020, the new Belgian government agreed to take a constructive approach towards any EU tax harmonization project (and also to provide broad support for a more ambitious role for the Code of Conduct Group).
Does Belgium already use blacklists under national law?
The Belgian Income Tax Code (“ITC”) already uses several “blacklists” for the purpose of either increased reporting requirements or denial of access to certain tax benefits provided by the ITC. For further reference below, the following “Belgian” lists are for instance used for corporate tax purposes:
- a list of States or territories considered by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes as a jurisdiction that is not effectively and substantially implementing the OECD standard for exchange of information on request (list of “Non-Cooperative Jurisdictions”);
- a list of States or territories (outside the EEA) that either do not impose corporate income tax or impose corporate income tax at a nominal tax rate below 10% or impose corporate income tax on offshore income at an effective tax rate below 15% (list of “Low-Tax Jurisdictions”). This list is fixed by royal decree (cfr. Article 179 of the royal decree implementing the ITC);
- a list of States (outside the EU) in which the general rules on taxation are significantly more favorable than in Belgium (the “DBI/RDT Blacklist”). This list is fixed by royal decree and includes countries in which the nominal tax rate or the effective corporate tax rate is below 15% (cfr. Article 73/4quater of the royal decree implementing the ITC).
Which defensive measures has Belgium adopted towards EU blacklisted jurisdictions?
A definition of “EU-list of non-cooperative jurisdictions” is included in Article 2, §1, 19° ITC. The definition refers to the EU blacklist as adopted by the Council of the EU and of which any update is published in the Official Journal of the EU.
The following defensive measures are introduced:
Corporate taxpayers will be required to report annually on payments made directly or indirectly to persons or branches established in EU blacklisted jurisdictions, or on bank accounts managed by or held with such persons or branches (amended Article 307, §1/2 ITC, applicable to payments as of 1 January 2021). Such reporting obligation already applies with respect to Non-Cooperative Jurisdictions and Low-Tax Jurisdictions (which jurisdictions are partially overlapping with the EU blacklisted jurisdictions). The reporting obligation does not apply if the total amount of concerned payments in the tax year is less than €100,000.
The aggregated list of jurisdictions referred to in Article 307, §1/2 ITC can be found here.
Non-deductibility of payments
Payments that are subject to the aforementioned reporting obligation are automatically non-deductible if the taxpayer fails to report them (noting that this automatic non-deductibility may be set aside with respect to jurisdictions that have a qualifying double tax treaty with Belgium or an international agreement on exchange of information). Even if the payments are reported, they will not be deductible if the taxpayer fails to prove that they are made in the context of real and genuine transactions with persons that are not artificial arrangements (Article 198, §1, 10° ITC). This non-deductibility as of now also applies to the EU backlisted jurisdictions.
From a consistency (and also simplification) perspective we wonder why the Belgian legislator has merely added the EU blacklist to the two sets of blacklists already mentioned in Article 307, §1/2 ITC, rather than replacing the list of Non-Cooperative Jurisdictions by the EU blacklist. Both lists substantially assess the same criteria with the difference that the EU blacklist seems stricter, at least in principle. Indeed, in order for a jurisdiction to be considered compliant on tax transparency under the EU blacklist criteria, it should possess at least a “Largely Compliant” rating by the Global Forum with respect to the OECD Exchange of Information on Request standard, whereas the Belgian list of “Non-Cooperative Jurisdictions” only includes jurisdictions which are considered “Non-Compliant” concerning this standard. Jurisdictions that are rated by the Global Forum as “Partially Compliant” may therefore be included on the EU blacklist (unless relevant commitments are made) but are not considered as “Non-Cooperative Jurisdictions”.
It should however be noted that the Belgian tax administration recently stated that “Partially Compliant” jurisdictions are also considered as “Non-Cooperative Jurisdictions” for the purpose of Article 307, §1/2 ITC (see Circular 2020/C/112, nr. 7). This administrative position is consistent with how the term “non-cooperative jurisdiction” is generally employed in the context of the EU blacklist and the Global Forum but contradicts the stated intention of the legislator and previous administrative positions. This confusion about the precise meaning of the Belgian list of Non-Cooperative Jurisdictions would have been a reason in itself to refer only to the EU blacklist, which will only have effect if it is published in the Official Journal.
Under this highly questionable administrative position, the Belgian list of “Non-Cooperative Jurisdictions” would currently include quite a number of jurisdictions not included on the EU blacklist (namely the “Partially Compliant” jurisdictions Botswana, Dominica, Ghana, Kazakhstan, Liberia, Malta, Sint Maarten and Turkey). This is caused by the fact that the Belgian list of Non-Cooperative Jurisdictions blindly takes over the “Partially Compliant” rating of the Global Forum, whereas the EU blacklist derives from a further assessment and considers developments and commitments made by the relevant jurisdictions. Also, the “Non-Compliant” rated jurisdiction Guatemala does not (yet) appear on the EU blacklist.
Stricter CFC rule
Furthermore, the Belgian CFC rule is made more severe if the CFC is located in an EU blacklisted jurisdiction (applicable to any tax year closed as of 31 December 2020). Under the Belgian CFC rule, non-distributed profits of a CFC arising from “non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage” are taxed in the hands of the Belgian taxpayer to the extent such profits are attributable to the significant people functions carried out by the Belgian controlling taxpayer. For this purpose, a foreign company qualifies as “controlled foreign company” or “CFC” if (i) the Belgian taxpayer holds (directly or indirectly) the majority of voting rights, capital or profit entitlement of that company (“Participation Condition”) and (ii) the foreign company is subject to an income tax which is lower than 50% of the corporate tax that would have been due had the foreign company been established in Belgium (“Taxation Condition”).
The Guidance suggested Member States that introduce a defensive measure in its CFC rule to lower the ownership threshold or increase the required effective tax rate. The Belgian legislator decided to simply not apply the Participation Condition and the Taxation Condition if the foreign company is located in an EU blacklisted jurisdiction.
This obviously does not mean that the CFC rule can be applied absent control of the Belgian taxpayer over the CFC. Indeed, CFC income can, in essence, only be re-attributed to the Belgian taxpayer if the foreign company owns assets or bears risks which it would not have owned or borne had it not been controlled by the Belgian taxpayer who exercises the significant people functions linked to those assets and risks.
Since the EU blacklist is as such not focused on the nominal or effective tax rate applicable in third countries (see above) it can be expected that not applying the Taxation Condition to CFCs in EU blacklisted jurisdictions will result in (even) more situations of double taxation resulting from the CFC rule.
Stricter participation exemption
Finally, the Belgian participation exemption (also referred to as the “DBI/RDT” system) will no longer apply to dividends received by a Belgian corporate taxpayer from EU blacklisted countries. Previously, the participation exemption was already denied to dividends received from jurisdictions that do not impose a corporate tax or that are listed on the DBI/RDT blacklist (see above). However, the DBI/RDT Blacklist only creates a presumption in that taxpayers may still benefit from the participation exemption if they (or the tax administration) demonstrate that both the nominal and effective tax rate are not below 15%.
This possibility to provide counter-evidence is not provided in case of dividends received from EU blacklisted jurisdictions. Even if it may not be evident to consider this a violation of EU law, as EU-based taxpayers that take participations in non-EU-based companies are not directly protected under the EU freedom of establishment, that does not render it less questionable.
The participation exemption intends to avoid economic double taxation of distributed profits (firstly in the hands of the distributing company, secondly in the hands of the corporate shareholder). There does not seem to be any good reason to deny the participation exemption to taxpayers that prove that a reasonable level of corporate taxation (e.g. 15%) applies in the hands of the distributing company. Also, in addition to the DBI/RDT Blacklist there already exist other anti-avoidance rules that deny the participation exemption in case dividends are related to artificial arrangements without substance (Article 203, §1, 7° ITC); but here as well the taxpayer has the possibility to prove that the structuring is not artificial or essentially tax-driven so that the participation exemption can be applied.
During the parliamentary process, it was noted by the Belgian government that the taxpayer and tax administration are not able to assess the tax regime of jurisdictions against the criteria used for the EU blacklist and that for this reason taxpayers cannot be given the possibility to provide counter-evidence. That conclusion is of course wrong. The Guidance itself asks Member States to implement the EU blacklist in a proportionate way. It suggests that Member States apply defensive measures in a targeted manner, specifically addressing the reason why a jurisdiction is listed. The Guidance also emphasizes that the application of any defensive measures is without prejudice to provisions of national law that allow the taxpayer to provide counter-evidence.
The fact that the taxpayer cannot provide counter-evidence (of the level of taxation, or of the absence of artificial arrangements without substance) in the context of the participation exemption is therefore clearly disproportionate.
It is finally noted that the Law of 20 December 2020 also introduces a reversal of the burden of proof as to whether structures in EU blacklisted jurisdictions come within the scope of the so-called “Cayman tax” (a tax transparency regime for certain legal structures controlled by Belgian individuals and legal entities).
The fact that the EU blacklist is given teeth by linking it to the application or denial of certain domestic tax rules may be justified and was expected.
It is noted that while the EU Guidance requests Member States to introduce at least one of the suggested defensive measures towards EU blacklisted jurisdictions, Belgium has introduced all of them except an (increased) withholding tax. The Belgian legislator has indeed taken a maximalist approach that is questionable on certain points.
The fact that taxpayers cannot provide counter-evidence in the context of the participation exemption is in our view disproportionate. Here, Belgium is much stricter than what is suggested by the EU Guidance, at the cost of bona fide taxpayers doing business in or through EU blacklisted jurisdictions.
Also, the EU blacklist is used outside the scope of the defensive measures suggested by the EU Guidance. In particular, certain tax recovery measures introduced to support corporate taxpayers that suffered heavily during the COVID-19 pandemic will be denied to taxpayers that have a “link” with the jurisdictions listed in Article 307, §1/2 ITC, which now also includes the EU blacklist (see, for instance, our memo on COVID-19 tax support measures discussing some of these measures). The required “link” is defined by reference to the making of payments to, or the holding of a direct participation in, a company established in a blacklisted jurisdiction. Here, the ITC thus denies an important tax benefit that is entirely unrelated to the “link” which the Belgian taxpayer has with the blacklisted jurisdiction. For taxpayers affected by these limitations, the result may be severe especially since the holding of a participation in a company in such blacklisted jurisdiction is automatically penalized, without the possibility to provide counter-proof.
Of course, there is a logic in denying COVID-19 tax support measures to companies that engage in abusive tax practices in blacklisted jurisdictions. This was also suggested by the European Commission in its Recommendation of 14 July 2020 on making State financial support to undertakings in the Union conditional on the absence of links to non-cooperative jurisdictions. However, not all taxpayers that do business with e.g. Panamanian companies engage in abusive tax practices. As the European Commission points out in its recommendation, Member States should disregard the link to EU blacklisted jurisdictions in the absence of abusive tax practices. As a minimum, the taxpayer should be able to provide counter-evidence (of the level of taxation, of the absence of artificial arrangements without substance, …).
Finally, as indicated above, we wonder whether it would not have made sense to replace the Belgian list of “Non-Cooperative Jurisdictions” with the EU blacklist, rather than simply adding the EU blacklist to the already existing lists.
The fact that the EU blacklist is given teeth by linking it to the application or denial of certain domestic tax rules may be justified, but the enthusiasm with which this is done raises a number of questions.