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Executive summary

On 14 December 2023, the Belgian parliament approved the draft bill to introduce into Belgian law the Pillar Two minimum effective tax rate of 15% for multinational enterprises and large-scale domestic groups with consolidated annual revenues exceeding €750m.

The Memorandum of Understanding confirms that the new legislation is aligned with the Organisation for Economic Co-operation and Development (OECD) Pillar Two model rules and implements the European Union Pillar Two Directive (EU Directive 2022/2523). Interaction with and consequences of (updated) Agreed Administrative Guidance should be closely monitored.

Effective for Fiscal Years starting on or after 31 December 2023, a Qualified Domestic Minimum Top-up Tax (QDMTT) and an Income Inclusion Rule (IIR) is introduced. An Undertaxed Profits Rule (UTPR) will apply for Fiscal Years starting on or after 31 December 2024. The bill also includes a Transitional Country-by-Country Reporting Safe Harbor as well as a transitional UTPR Safe Harbor for MNE Groups in the initial phase of their international activities.

Furthermore, the bill includes noteworthy amendments to certain existing provisions, in particular an amendment to the research and development (R&D) tax credit regime to meet the definition of a "Qualified Refundable Tax Credit."

New compliance and filing requirements are included, as well as a system of advance tax payments to collect the Top-up Tax under the QDMTT and IIR. The bill includes in the interaction between the (current) system of advance tax payments for the corporate income tax liability and the advance tax payment system for the QDMTT.

Background

On 20 December 2021, the OECD released the Pillar Two Model Rules as approved by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) — (See EY Global Tax Alert, OECD releases Model Rules on Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021). The Model Rules define the scope and key mechanics for the Pillar Two system of global minimum tax rules, which includes the IIR and the UTPR, referred to collectively as the Global anti-Base Erosion (GloBE) rules.

The Pillar Two Model Rules aim to establish a minimum tax rate for large multinational enterprises (MNEs) on the income generated in the countries where they operate. These rules are presented as a model that jurisdictions can use to develop their own domestic legislation.

In addition, in 2022, the OECD published the Commentary to the Pillar Two Model Rules (See EY Global Tax Alert, OECD releases Commentary and illustrative examples on Pillar Two Model Rules, dated 21 March 2022), along with guidance on safe harbors and penalty relief under the GloBE rules (See EY Global Tax Alert, OECD/G20 Inclusive Framework releases document on safe harbors and penalty relief under Pillar Two GloBE rules, dated 21 December 2022). Since then, the OECD has also released Agreed Administrative Guidance (published on 2 February 2023 and 17 July 2023) that provides additional information concerning the interpretation and operation of the GloBE Rules (See EY Global Tax Alerts, OECD/G20 Inclusive Framework releases Administrative Guidance under Pillar Two GloBE Rules: Detailed Review, dated 9 February 2023, and OECD/G20 Inclusive Framework releases additional Administrative Guidance on Pillar Two GloBE Rules: Detailed review, dated 21 July 2023).

On 15 December 2022, the Council of the European Union (i.e., the EU Member States) unanimously adopted the directive ensuring a global minimum level of taxation for MNE groups and large-scale domestic groups in the EU (the Directive) — (See EY Global Tax Alert, EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules, dated 15 December 2022). The Directive intends to ensure the GloBE rules are implemented in a coordinated manner throughout the EU, as adjusted to comply with EU law and taking into account the specifics of the EU Single Market.

EU Member States have until 31 December 2023 to transpose the Directive into national legislation with the rules to be applicable for Fiscal Years starting on or after 31 December 2023, with the exception of the UTPR, which is to be applicable for Fiscal Years starting on or after 31 December 2024.

Detailed discussion

General overview

On 14 December 2023, the Belgian Parliament approved the draft bill to introduce the Pillar Two rules into Belgian law. The legislation can therefore be considered substantively enacted as from 14 December 2023. The rules are generally aligned with the EU Directive and, thus, also the OECD Model Rules. The newly approved Pillar Two rules are implemented in a separate Pillar Two Act, rather than being incorporated into the existing Income Tax Code.

The rules apply to all MNE groups and large-scale domestic groups with annual consolidated revenues exceeding €750m in at least two of the last four Fiscal Years.

Effective for Fiscal Years starting on or after 31 December 2023, a QDMTT and IIR is introduced. An UTPR will apply for Fiscal Years starting on or after 31 December 2024.

QDMTT

The QDMTT is computed in line with the OECD Model Rules (including the substance-based income exclusion) and includes a de minimis exclusion. The Transitional CbCR Safe Harbor is also extended to the QDMTT. The QDMTT is to be determined based on the accounting standard used for preparing and filing the consolidated financials of the Ultimate Parent Entity accounts.

The Memorandum of Understanding confirms that the model for the QDMTT return will not include additional datapoints beyond those required for computing the Top-up Tax liability under the IIR/UTPR.

UTPR

Under Belgian domestic tax law, the UTPR will be levied by means of an additional levy instead of a deduction limitation.

Administrative Guidance

The Memorandum of Understanding confirms that the OECD Agreed Administrative Guidance serves as a source for interpretation.

Transitional CbCR Safe Harbor

The bill includes the Transitional CbCR Safe Harbor, i.e., a temporary measure that allows an MNE to avoid undertaking detailed GloBE rule computations if it can demonstrate, based on its Qualified Country-by-Country (CbC) report, that for a jurisdiction it has met one of the following tests: i) revenue and income below the de minimis threshold; ii) an effective tax rate that equals or exceeds an agreed rate; or iii) no excess profits after excluding routine profits.

If one of these tests is met, the Top-up Tax in a jurisdiction for a Fiscal Year will be deemed to be zero.

Other safe harbors

The bill includes the transitional UTPR Safe Harbor, hereby reducing the total UTPR Top-up Tax to zero for MNE Groups that are in the initial phase of their international activities.

Other significant rules

R&D tax credit regime

The bill includes noteworthy amendments to certain existing provisions. In particular, amendments to the R&D tax credit regime (i) shorten the repayment period of the R&D tax credit from five to four years to meet the definition of a "Qualified Refundable Tax Credit" and (ii) introduce an option to either offset or transfer the R&D tax credit (instead of an automatic offsetting mechanism) to prevent neutralizing or mitigating the benefit of the R&D tax credit through interaction with foreign tax systems (e.g., US global intangible low-taxed income (GILTI) for a Belgian controlled foreign corporation (CFC)).

Limitation rule for use of certain tax attributes

The Belgian limitation rule for the use of certain tax attributes is expected to change (again) following the introduction of the Pillar Two legislation, subject to an announcement by the Minister of Finance in the Belgian Official Gazette (See EY Belgium Tax Alert, New corporate tax measures as from 1 January 2023, dated 11 January 2023). More specifically, under the current limitation rule, 60% of the taxable profit exceeding €1m constitutes a minimal taxable basis. The 60% threshold will be reduced to 30% again as of tax year 2025 (financial years starting on or after 1 January 2024).

Administration and compliance

New compliance and filing requirements, as well as a system of advance tax payments are introduced. Moreover, some other relevant considerations should be noted.

QDMTT and IIR/UTPR return

Separate returns (one for the QDMTT and another one for the IIR/UTPR) will have to be prepared and submitted, as follows:

• To reduce the administrative burden, only one Belgian Constituent Entity is required to submit the respective returns on behalf of the MNE (although requiring a new and separate company registration number with respect to the QDMTT return).
• The QDMTT return is due within 11 months following the Fiscal Year-end; this allows time to compute the QDMTT before the deadline of the IIR/UTPR return.
• The IIR/UTPR return is due within 15 months following the Fiscal Year-end. However, for the first year the deadline is extended to 18 months following the Fiscal Year-end.
• Noncompliance may result in administrative sanctions (i.e., tax increase or administrative penalties varying between €2,500 and €250,000) and/or criminal sanctions. The Memorandum of Understanding states that a certain degree of tolerance will be applied for errors that have been made during the first years.
• The model of the respective returns are yet to be published by means of a Royal Decree.

Advance tax payments

Similar to the corporate income tax liability, a system of (voluntarily) advance quarterly tax payments is introduced, allowing for collection of the Top-up Tax under the QDMTT and IIR in the same year in which the low-taxed profits are realized:

• A surcharge will be applied when insufficient advance quarterly tax payments are made, although for the first year of implementation, the advance tax payments made in any quarter are weighted equally.
• An interaction between the system of advance tax payments for the corporate income tax liability and the system of advance tax payments for the Top-up Tax liability under the QDMTT is foreseen, i.e., the purpose is not to penalize taxpayers that from an overall (i.e., for corporate income tax and QDMTT) perspective made sufficient advance tax payments. A similar interaction is not foreseen with respect to the IIR.

Other

• Top-up Taxes levied are considered as nondeductible for corporate income tax purposes.
• The Top-up Tax under the QDMTT, respectively UTPR, will be collected in the hands of the Belgian Constituent Entity that has the largest net qualifying income (if there is more than one). However, the group may elect another Belgian Constituent Entity to pay, in first instance, the Top-up Tax. Subsequent cross-charges of any Top-up Tax paid to the other Belgian Constituent Entities are tax neutral.
• Joint and several liability is imposed for the payment of the QDMTT and the UTPR on all Belgian Constituent Entities.
• The QDMTT and IIR/UTPR returns of Belgian Constituent Entities will be considered "complex returns," resulting in an extended 10-year investigation and assessment period.
• Considering the international and specific nature of the Pillar Two Rules, no advance decision requests or rulings regarding the application of the Pillar Two legislation may be submitted to the Belgian Service for Advance Decisions. However, questions may be addressed on an informal basis to a dedicated central service within the Belgian tax administration to ensure a consistent interpretation of the rules. This central service will also provide future additional guidelines and further clarifications on possible issues regarding the application of the Pillar Two rules.

Implications and next steps

It will be important for businesses to assess and map the potential impact of the Pillar Two Global Minimum Tax on their tax positions, potential disclosures in their financial statements, the availability of the required datapoints in their systems as well as their overall compliance processes.

As a next step, the bill will be published in the Belgian Official Gazette. Certain elements will be addressed by means of a Royal Decree (e.g., model of QDMTT and IIR, respectively, UTPR return, modalities of UTPR levy, etc.).

The interaction with and consequences of (updated) Agreed Administrative Guidance on the current legislation should be monitored. In particular, the question arises whether (updated) Agreed Administrative Guidance can be considered merely as explanatory or interpretational in nature or as constituting new rights and obligations, requiring a (reparation) law or whether such new guidance will be reflected in administrative circular letters.

It remains to be seen if (and when) certain existing tax provisions, such as the Belgian dividend received deduction regime, the CFC rules or even the current applicable group contribution regime, etc. will be amended as a result of Pillar Two.

Businesses should also continue to monitor developments in other countries that are relevant to their footprint.

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For additional information with respect to this Alert, please contact the following:

EY Tax Consultants BV (Belgium)

• Peter Moreau | peter.moreau@be.ey.com
• Arne Smeets | arne.smeets@be.ey.com
• Bart Desmet | bart.desmet@be.ey.com
• Max Van Den Bergh | max.van.den.bergh@be.ey.com

Ernst & Young LLP, Belgian Tax Desk, New York

• Jochen Heynickx | jochen.heynickx1@ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor