Belgium enters tax contest to woo foreign investors

By Anna McLauchlin

Date: 08/09/05

Belgium is intensifying its efforts to attract greater foreign investment with a marketing campaign for tax incentives that could be imitated by other EU states.

The move comes as part of a more general trend for tax competition, in which the new EU states have been to the fore.

Ironically it also coincides with a hearing in Luxembourg next week (13 September) as the European Court of Justice (ECJ) considers the legality of a previous Belgian scheme for attracting foreign companies.

That tax regime, for European co-ordination centres based in Belgium, is being phased out at the end of the year. Although the Commission ruled it amounted to illegal state aid, the court later suspended the effect of the decision while it considered the legality.

In recent years Belgium has been losing out on foreign investment to Luxembourg and Ireland, which have particularly low tax rates for businesses.

"When the standard of living is similar in other nearby countries, it does come down to setting the tax regimes side by side and seeing which is the more attractive," said one Brussels-based tax consultant.

"Belgium is the first country to fully address the fact that others have a much more attractive tax regime than it does."

Western European countries are now competing with new member states, which have often been applying a flat tax rate to attract companies. Cyprus, Estonia and Slovakia have all been enthusiasts for low tax rates.

According to the consultant, the Netherlands also recently issued a discussion paper touting a reduction in corporate income tax to 20%-26.9%.

Belgian Prime Minister Guy Verhofstadt said this week that he was planning a foreign trip to advertise his new scheme and argue that companies should set up operations in Belgium.

"It is essential that the maximum number of foreign investors are aware of this reform," he said on Tuesday (6 September). "That's why the government is launching a worldwide information campaign to promote the attractiveness of our country and this reform. After a tour in Asia...I will travel to Japan, Singapore and Hong Kong. Europe and the US will follow later."

From 2006 (tax assessment year 2007), companies based in Belgium will be allowed a tax reduction on their risk capital - known as a 'notional interest deduction' (NID).

The scheme replaces the 1982 tax regime for co-ordination centres in Belgium, which was ruled illegal by the European Commission in February 2003. The Belgian government, as well as the companies that benefited from the scheme, launched an appeal against that Commission decision at the ECJ, which will hold a hearing next week.

But a second aspect of Tuesday's hearing will be a challenge by the Commission to the Council of Ministers' unanimous decision retrospectively to grant Belgium a dispensation from the state aid rules.

NID does not offer the same incentives as the co-ordination centres. But used in conjunction with two other incentives - a ruling commission that will give foreign investors legal certainty on their tax treatment and a regime that provides tax relief on new profits that a company brings to the country - it is an alternative.

"There was a fear that the decision on co-ordination centres would see all headquarters simply draining out of Belgium," the consultant said. "But this new regime makes Belgium a significantly more appealing place to be, tax-wise."

Article reports on Belgium's intensifying efforts to attract greater foreign investment with a marketing campaign for tax incentives that could be imitated by other EU states. This move coincided with a hearing in Luxembourg, 13 September 2005, as the European Court of Justice (ECJ) considered the legality of a previous Belgian scheme for attracting foreign companies.