Permanent establishment in Belgium

Foreign companies should always be aware of the permanent establishment risk when engaging in cross-border activities. The term „permanent establishment“ refers to a company’s participation in the economy of another state on a sufficiently permanent basis for the state in which the permanent establishment is located to be able to tax its income. The term „permanent establishment“ is also important in determining which state has the right to tax the wages and salaries of employees working across borders (see also Income tax in Belgium).

The term „permanent establishment“ is defined in Article 5 of the OECD Model Tax Convention. Belgium and many other countries have adopted this provision in their double taxation agreements. The most important types of permanent establishments are described below.

A. Material permanent establishment

A physical permanent establishment exists if your company has a physical place of business in Belgium (as owner, tenant or otherwise). This permanent establishment can take the following forms, for example head office, branch, place of business, factory, workshop, etc.

B. Staffed permanent establishment

A permanent establishment in another country may also exist if the company has a permanent representative in that country. In order for a permanent establishment to exist, three conditions must be met. Firstly, the individual concerned must not be considered an independent representative. Secondly, this person must be authorised to conclude contracts on behalf of the foreign company. Thirdly, they must habitually exercise this authority.

C. Construction or assembly work

Finally, the location where construction or assembly work is carried out is also considered a permanent establishment if the duration of the work exceeds 12 months. Construction work is a broad term that encompasses all technical work, including planning and supervision. It is also deemed to be construction work if the work is fully subcontracted (and carried out by a subcontractor). Examples of construction work include the construction or erection of a structure (e.g. the construction of buildings, roads, sewers, bridges), assembly and installation work (e.g. the laying of pipes, the installation of machinery in a factory, the laying of cables in a building), repair and renovation work (e.g. painting a building, replacing a roof, replacing window frames) and civil engineering work (e.g. the laying of pipes and cables, excavation and dredging work).

There is a general exception for activities of a preparatory or supporting nature. These activities mean that there is no permanent establishment even though the conditions are met. The decisive factor is whether the activities of the permanent establishment constitute a substantial and significant part of the activities of the enterprise. As this is a factual assessment, the interpretation may vary from company to company depending on the nature of the activities carried out.

Corporate income tax in Belgium

In the event that a foreign company establishes a permanent establishment in Belgium, the profits generated by such an establishment (i.e. Belgian turnover minus Belgian costs) are subject to taxation under the Belgian corporate tax system. This is in accordance with the applicable double taxation treaty. The general rate of corporation tax is 25%. In addition, there are numerous incentives in Belgium that further reduce the tax rate. It should be noted that there is no separate trade tax in Belgium. All companies, regardless of their sector, pay the same corporation tax. Corporation tax returns must be filed at the end of the calendar year.

Belgian permanent establishment

The national definition of a „permanent establishment“ differs in most cases from the definition in the double taxation agreements. However, the DTA always takes precedence over national law, so that the DTA determines which country is authorised to levy taxes.
However, there are often situations in which there is a permanent establishment in Belgium under Belgian law, but no permanent establishment under the DTA. As the DTA takes precedence, Belgium may not tax the income of the „Belgian permanent establishment“. However, Belgian law stipulates that you must fulfil a number of administrative obligations in this case, such as filing a so-called “zero tax return“ for non-resident tax.

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