Best subsidiary location with substance for a Belgian company

[Marzio]

So I can efficiently build substance

You have to be careful about dealing with your country's tax office because "substance" doesn't mean "find the cheapest labour cost" and show that they work for you. You can show that but i bet the next question would be for them to ask what their contribution to the company is, what are they doing for you. If you are doing something related to programming, then having a micro-company in Romania makes a lot of sense because you can hire cheap programmers here and nobody will ever question this. If you don't have a reason to build substance other than lowering taxes in your country you are pretty much fucked because all the OECD laws are created specifically to avoid what you are trying to achieve.

 

[heaven]

You have to be careful about dealing with your country's tax office because "substance" doesn't mean "find the cheapest labour cost" and show that they work for you. You can show that but i bet the next question would be for them to ask what their contribution to the company is, what are they doing for you. If you are doing something related to programming, then having a micro-company in Romania makes a lot of sense because you can hire cheap programmers here and nobody will ever question this. If you don't have a reason to build substance other than lowering taxes in your country you are pretty much fucked because all the OECD laws are created specifically to avoid what you are trying to achieve.

Thank you for your concern. Saving taxes is my first goal, but cheap labour is a logic way for me to actually setup a structure other then tax. I'm not going to pay for employees that are not going to work for me They will provide customer support to our Belgian customers and other services will be added later on to increase our substance while having really cheap employees as well. Do you think this is the right way of approaching?

 

[JustAnotherNomad]

I think there is an additional risk because the CFC rules are quite new, so there are probably few precedents.

“An arrangement (or series thereof) is regarded as “non-genuine” (artificial) to the extent that the foreign company or foreign establishment would not own the assets, or would not have undertaken the risks, which generate all (or part of) its income, if it were not controlled by a company where the significant people functions (which are relevant to those assets or risks) are carried out and are instrumental in generating the CFC income. A non-genuine arrangement exists where assets are owned by a CFC but the strategic decisions are made by the Belgian taxpayer or its employees. Similarly, a non-genuine arrangement also exists where risks are borne by the CFC but the strategic decisions are made in Belgium.”

Belgian Corporate Tax Reform: Phase 2 measures

An outline of the Phase 2 tax measures in the Law of 25 December 2017 enacting the Corporate tax reform. These measures will be effective as of tax year 2020 (taxable periods starting on or after 1 January 2019). Any different effective dates are mentioned in the summary.

www2.deloitte.com

 

[JustAnotherNomad]

There really is a risk that they allow you to have the branch in Romania, but that you would still have to pay the difference to the Belgian tax. It’s really important that you find a good lawyer.

 

[heaven]

I think there is an additional risk because the CFC rules are quite new, so there are probably few precedents.

On the link you send under CFC it says:

Under CFC rules I also see: "A Belgian company is taxed on the “non-distributed profits” of a foreign company that is considered a CFC where such profits are arising from “non-genuine arrangements” which have been put in place for the essential purpose of obtaining a tax advantage."

Does that mean if I simply get the money back yearly by distributing dividends to Belgium. I won't have a problem?

 

[JustAnotherNomad]

That’s a really good question for a Belgian accountant... But I think what is meant is that you are simply taxed on the profits BEFORE they are distributed. Meaning you can’t reduce the taxable amount through dividend payments to the parent company, the exact opposite of what you’re hoping it means. ;-)

 

[Marzio]

I won't have a problem?

You will still have the problem because the point isn't about non-distributed profits, is about profits arising from "non-genuine arrangements" so if they believe that your substance structure is artificial you'll end up paying taxes on both distributed and non distributed profits.

 

[Marzio]

And even if you'll go to an accountant i'm still not sure how this would work out for you because lets say that the accountant will say "sure you can have a romanian company for your customer support". What will happen later if the Belgian tax administration will say "we don't think that you romanian company is genuine", who do you think that will pay taxes? The accountant can simply say "excuse me sir, i was wrong".

 

[JustAnotherNomad]

The accountant will also have to inform the authorities if your intent was to save taxes. In theory at least.

 

[heaven]

"we don't think that you romanian company is genuine"

But why would it not be genuine if I have a director and 3 employees doing real actual stuff there for example? It's normal to work in every companies best interest you own. So charging my Belgian company at a little above market rate seems like a normal procedure.

 

[heaven]

BEFORE they are distributed. Meaning you can’t reduce the taxable amount through dividend payments to the parent company, the exact opposite of what you’re hoping it means. ;-)

Pretty sure you are right. However it would also be a logical way for Belgium to get the money back into the country instead of compounding it offshore.

 

[JustAnotherNomad]

Yes, I think you should be fine if you can show that there is a valid business case, that restrictions for transfer pricing are met etc.
But I’m not a lawyer.

 

[Marzio]

if I have a director and 3 employees doing real actual stuff there for example?

It could work out, it's just my bias to think that's easier to move your tax residency.

 

[bru1234]

if you got a director, three employees, it shows substance. Now the last thing is... WHERE are the decisions of that company made?
If the answer is Belgium, houqton we got a problem!
If you can say without hesitation your director takes that decisions to handle the company, you are legitimate to have a company abroad and will not have any problem with that.
Knowing of course it is better if you can show you get some profits of it (dividends) and pays the 30% taxes on it.

 

[heaven]

Yes, I think you should be fine if you can show that there is a valid business case, that restrictions for transfer pricing are met etc.
But I’m not a lawyer.

Ok, then I know I'm going into the right direction.

It could work out, it's just my bias to think that's easier to move your tax residency.

It definitely is but in my case it's impossible. Maybe in a few years.

if you got a director, three employees, it shows substance. Now the last thing is... WHERE are the decisions of that company made?
If the answer is Belgium, houqton we got a problem!
If you can say without hesitation your director takes that decisions to handle the company, you are legitimate to have a company abroad and will not have any problem with that.
Knowing of course it is better if you can show you get some profits of it (dividends) and pays the 30% taxes on it.

It will probably be me in the beginning but I'll just make the director a proxy for my decisions. Meetings can be had on Video conference (Zoom or something more privacy oriented) and through instant messaging (Wickr, Signal, ...).

 

[CaptK]

Can you appoint nominee director to be physical person in Romanian Micro Company?

Yes but they are then in charge of the bank account.

 

[heaven]

Yes but they are then in charge of the bank account.

Wouldn't this be easily solved with putting a max on their spend/withdrawal, so they need my signature if they want to go over a certain amount.

 

[CaptK]

Maybe a joint signature but then you have taken the arms length approach out of the equation. Control of a bank accout is CFC.

Then your over billing of yourself is called into question because you are paying yourself if you have any control of the bank account.

 

[heaven]

Maybe a joint signature but then you have taken the arms length approach out of the equation. Control of a bank accout is CFC.

Then your over billing of yourself is called into question because you are paying yourself if you have any control of the bank account.

It would seem weird if I want to invest in a country to setup a customer support and marketing base and I hire a director and employees that I need to trust them with all the money on the bank account. The director is there to help and guide the employees. Not to have free access to 6 or 7 digit figures. The business doesn't need that much spending. 99% will be amounts lower transaction €1000 per transaction, I'll just put the max spend on €5.000 a month.

 

[heaven]

Does someone know of some other place with low/no tax with access to cheap labour? I think Romania is still No. 1 atm. But I'm open to suggestions!