Belgium is of particular interest when establishing non-profit associations (such as trade associations), not only for its central location close to EU institutions, but also for its tax rules.
In Belgium, non-profit associations are normally not subject to corporate income tax, but rather to the legal entities tax, which predominantly relates to financial investment income (e.g. interest and dividends), real estate investment income (e.g. lease income), and some miscellaneous forms of income (e.g. capital gains on substantial shareholdings, capital gains on real estate disposals, unreported income payments). Except for public authorities (state, regions, municipalities, etc.) and inter-municipal associations, non-profit associations may obviously not be involved in profit-making activities or operations. Not respecting such a requirement, will trigger the corporate income tax to apply.
The distinction between profit making activities and non-profit activities is determined in function of whether these activities generate gains for the legal entity. The Belgian tax authorities consider that this is the case when the legal entity conducts industrial, commercial or agricultural activities which generate income that would be considered as professional income subject to personal income tax if this activity was conducted by a natural person.
A limited list of intrinsically profit making activities can nevertheless be conducted by non-profit associations without these being considered as profit making activities triggering corporate income tax. This is the case for:
- insolated or exceptional transactions;
- investment of funds; and
- transactions which only ancillary imply industrial, commercial or agricultural operations or that do not require the implementation of industrial or commercial methods.
The interpretation and the implementation of this latter exception are controversial and sometimes generates discussions or litigations with the tax authorities.
Value added tax
A non-profit association supplying goods or services to third parties (which can be its members) is considered a VAT taxpayer. Depending on the activity conducted by the association, the VAT status will be fully taxable, partially exempt of fully exempt.
Fully taxable VAT taxpayers can deduct in principle 100% of their input VAT, while fully exempt taxpayers cannot deduct any input VAT and partially exempt taxpayers can only deduct only a percentage thereof reflecting the portion of taxable activities compared to all its activities.
The main discussions and litigations with the tax administration are usually related to:
- the method used by partial VAT taxpayers in order to determine the percentage of exempt and taxable activities; and
- the VAT treatment of membership fees (especially for lobbying associations), i.e. do these cover supplies (of goods/services) to the members or can these be considered merely as payments without counterpart from the association.
It is therefore critical to analyse these two items upfront in order to secure the situation and avoid future discussions with the VAT authorities and, in borderline cases, to discuss with the VAT office (informal ruling) and/or to apply for a formal advance tax ruling with the Belgian Ruling Commission.