Do’s and don’ts of the group contribution scheme, or tax consolidation

The so-called Summer Agreement of 2017 on corporate tax reform introduced the group contribution scheme. Belgian legislation hereby gained a tax consolidation system, albeit in limited form.

Author: Mady Francken, Senior Advisor BDO Tax

Profit transfers

The group contribution scheme centres on the idea of a profitable company within a corporate group transferring all or some of its profits to an affiliated company that suffered losses in the same assessment year. The transferred profit is referred to as the ‘group contribution’. The profitable (thus, transferring) company may deduct this group contribution from its taxable result, while the loss-making (receiving) company adds it to its taxable result. The outcome? The profitable company owes less corporate income tax, while the loss-making company transfers no, or fewer, losses to the next financial year.

Note: the group contribution scheme only allows for compensation of tax losses from the taxable period covered by the group contribution agreement (see text box).

“The group contribution does not yield any savings for the profit-making company.”

Compensation

In return for the group contribution, the profit-making company must pay the loss-making company compensation. Merely booking the debt without an actual payment is insufficient. This compensation must be equal to the amount that the profit-making company saves on taxes thanks to the group contribution. In other words, the group contribution does not yield any savings for the profit-making company. The group contribution’s main advantage is to the group as a whole. After all, the amount saved is retained within the group, with the loss-making company receiving the compensation instead of the amount being lost to taxes.

Limited consolidation

Unlike full tax consolidation, affiliated companies cannot submit a single tax return and be taxed as one company. The group contribution scheme only serves to allow companies to redistribute the taxable base within their group. The companies remain separate companies for tax purposes – that is, they submit their own tax returns and are taxed separately.

Who’s in and who’s out?

Only affiliated companies are eligible for group contribution. These companies or establishments must be regarded as either parent and subsidiary companies or sister companies for a continuous 5-year period, with a participation requirement of at least 90%.

The group contribution scheme applies to both domestic and foreign companies and also to Belgian establishments of foreign companies located in the European Economic Area (EEA). However, the legislator has introduced several important restrictions and exceptions:

  • The group contribution scheme can only be applied between affiliated companies with sufficient participation. ‘Sufficient participation’ is understood to mean:

    1. A parent-subsidiary relationship with at least 90% of the subsidiary’s shares held directly by the parent.
    2. Sister companies whose shared parent company is based in the EEA, with at least 90% of both subsidiaries’ shares held directly by this parent. If a natural person owns multiple companies in their entirety, these are not regarded as affiliated sister companies.

  • To be regarded as ‘affiliated’ companies, it is essential that the required participation between the companies exists for a continuous period of at least 5 years. This 5-year period commences on 1 January of the fourth calendar year prior to the calendar year referenced by the assessment year. For example, a group contribution for financial year 2020 (assessment year 2021) requires an uninterrupted 90% participation from 1 January 2017 to 31 December 2021.

  • Companies that make available to their company directors real estate or other rights in rem relating to such properties are expressly excluded.

  • A domestic company may use its profits to offset an affiliated foreign company’s ‘terminal losses’ if:

    1. The foreign company is based in the EEA and is not subject to a tax system that deviates from common tax law.
    2. The foreign company has definitively ceased its activities, and no affiliated company has taken over the activities within 3 years of this cessation.
    3. A group contribution agreement has been concluded with the foreign company. The amount of the group contribution covered by this agreement may not exceed the foreign company’s trading losses for the taxable period in which it definitively ceased activities, determined in accordance with Belgian tax legislation. If these losses are deducted by the foreign company or by another person, in whole or in part, the losses are limited to the non-deducted portion.

“The group contribution scheme will take effect as from the 2020 assessment year.”

Effective date

The group contribution scheme applies as from the 2020 assessment year and must be associated with a financial year commencing on 1 January 2019 at the earliest. In other words, companies that keep their accounts per calendar year can offset their profits and losses as from 1 January 2019.

Tax returns

In order to receive the deduction for the group contribution, the profitable company must append the group contribution agreement (Form 275 CTIG) to its corporate tax return. If the companies wish to apply the group contribution for several consecutive assessment years, they must conclude a new agreement meeting the above-mentioned conditions for each assessment year. Whether or not the companies concerned employ parallel financial years is not relevant. It is only required that the group contribution agreement relate to the same assessment year. The law does not specify precisely when the contract must be concluded. Logically, this must always have occurred before either of the companies submits its corporate tax return.

Mandatory! Group contribution agreement

The group contribution scheme requires the companies concerned to conclude a group contribution agreement. This agreement must satisfy the following conditions:

  • The agreement must specify the amount of the group contribution. In principle, the parties are free to set this amount as they wish. If more profits are transferred than the loss-making company has losses, however, the excess forms the latter’s minimum taxable base. In other words, this company cannot deduct or offset deductible items against the portion of the group contribution that exceeds its losses. If a group contribution agreement is concluded regarding the terminal losses of a foreign company based in the EEA, the amount of the group contribution may under no circumstances exceed the terminal losses suffered by this foreign company.
  • The agreement must state the obligations taken up by both parties. The loss-making company undertakes to include the group contribution in its result for the taxable period. The profit-making company undertakes to pay the loss-making company compensation (actual payment) equal to the tax it saves by applying the group contribution.

The law states explicitly that an agreement is only eligible for the group contribution scheme if the legal conditions are met and actually executed by the parties.

“Only affiliated companies (in Belgium and abroad) are eligible for the group contribution scheme.”

Do you have any questions about the application of the group contribution scheme? Are you looking for help with the analysis of your situation? If so, please do not hesitate to contact the specialists from our Tax team: tax@bdo.be.