The Belgian coordination center legislation, providing major tax incentives for international groups which centralize coordination activities in Belgium, has proven a success. The legislation permits multinational groups to carry out a large variety of financial and management services on a virtually tax-free basis. About 300 international companies have applied for and obtained permission to set up coordination centers. Included among this number are a cross-section of the largest U.S. based multinationals as well as a growing number of U.K., German, Dutch, Scandinavian and Belgian groups.

The principal attraction of the coordination center legislation is that it allows, besides support services to group members, a broad range of sophisticated intra-group financing operations to be carried out in a virtually tax-free environment. These latter operations include leasing, reinvoicing, factoring, netting and cash pooling as well as more traditional group lending activities. Not surprisingly, some coordination centers have been set up with a large capital amounting to fifty or even a hundred million dollars.


Multinationals have found a great variety of uses for Belgian coordination centers. In fact, no two centers are likely to engage in exactly the same combination of activities. The legislation permits each multinational, in agreement with the government, to construct a "tailor-made" coordination center in function of its present and future needs.

This great flexibility in application of the legislation stems from the broad range of activities which are permitted for Belgian coordination centers. All such activities have one thing in common, however. They must be "intra muros", or in other words, performed solely for the benefit of group members.

For example, a Belgian coordination center may centralize accounting activities for affiliated companies. It may charge such affiliates for its services, and even recover a profit margin on a "cost-plus" formula. However, the center may not perform accounting services for other, non-affiliated companies which are not members of the group. Performing services for unrelated parties would violate the "intra muros" requirement.

The activities which can be carried out by coordination centers can be separated into two principal categories.

2.1 Support Services Rendered Directly To Group Members

The first category comprises a variety of support services provided directly to other group members. Such centralized services make unnecessary the duplication of the same activities in a variety of different locations. This increases efficiency and can result in important cost savings.

Services in this category are normally charged directly by the coordination center to the affiliated companies which receive them. Generally such charges are based on the costs incurred by the center in carrying out the services, often with a small profit margin calculated according to a "cost-plus" formula. The activities which fall into this category are the following:

2.1.1 Advertising and sales promotion

Coordination centers may centralize and coordinate advertising campaigns for group members, centralize the purchase or development of sales-related documentation, organize seminars for sales personnel of group members and develop marketing and sales techniques. The coordination center should not, however, participate actively in the solicitation or conclusion of sale contracts with unrelated customers.

2.1.2 Collection and dissemination of information

This category covers a broad range of activities, including carrying out market surveys, investigating customers' credit, collecting information regarding availability of products from outside suppliers, coordination of the global study of an industrial project (engineering), study of strategic orientations of the group, etc.

2.1.3 Insurance and reinsurance

A coordination center may centralize, in the name and on behalf of members of the group, the insurance or reinsurance of risks borne by affiliated companies, including i.a. the coordination of negotiations with insurers in order to obtain more favorable conditions and the prefinancing of damages. A center may also carry out risk management and study the environmental issues of the group.

2.1.4 Scientific research

Scientific research, as well as product development and quality control activities, in the fields of activities of the members of the group, may be carried out within the framework of a coordination center.

2.1.5 Government relations

Relations with national as well as international government institutions may be handled by a coordination center. This activity is of particular interest to multinational groups which wish to develop monitoring and liaison activities with the institutions of the European Communities located in Brussels.

2.1.6 Accounting, administrative and electronic data processing activities

A broad range of back-up services for affiliated companies can be carried out centrally at a coordination center. A center may, for instance, prepare and send invoices to customers, receive and confirm customer orders, organize the shipment of raw materials and finished products and maintain inventory controls over product flows.

2.1.7 Storage of raw materials and spare parts

A coordination center is allowed to store, handle, manage and transfer at cost price raw materials and spare parts (excluding finished products). The center should, however, always act on behalf of group members.

2.1.8 All preparatory and auxiliary activities

This is a "catch-all" heading, covering a broad range of activities which are remote from the profit-generating industrial and commercial objectives of the group. Such activities include regional headquarters functions of supervision and control, centralizing of in-house legal services, tax management and the like.

Included under this heading is the activity of centralized purchasing of raw materials and components from third parties. Such purchasing must be carried out by the center in the name and for the account of affiliated members of the group.

2.2 Financial Services Provided Indirectly Through Inter-Company Transactions

The second major category of activities carried out in Belgian coordination centers consists of intercompany transactions whose objective is to centralize financial management and the hedging of foreign exchange risks.

A common feature of these activities is that they are not rendered directly by the coordination center and invoiced as management services to the affiliated companies of the group. Instead these services are carried out in the form of inter-company transactions, such as leasing and factoring. The coordination center covers its costs with revenues from the transactions themselves. Such revenues take a variety of forms (interest, lease payments, etc.) depending on the nature of the particular transaction.

This category of activities represents the most original feature of the Belgian legislation, and has been the focus of the greatest interest from multinationals. The Belgian legislation enables multinational companies to carry out a variety of centralized financing operations in a favorable tax climate and take advantage of Belgium's wide network of double taxation treaties.

The following are the principal techniques made possible by the Belgian legislation for centralized financial and hedging activities.

2.2.1 Reinvoicing

A coordination center may reinvoice to affiliated companies products and services invoiced to the center by other members of the group. Such reinvoicing is an effective technique used to manage foreign exchange risks for group members.

An example for this technique is as follows:

Global, Inc. has established a plant for manufacturing component parts in Germany and an assembly plant in the U.K. The German plant invoices the components in Deutsche marks on 90 day credit terms.

If the components are invoiced directly to the U.K. affiliate, the U.K. company will bear a foreign exchange exposure between the time it books the account payable and the date of settlement. If the U.K. company also purchases goods and services from affiliates in other countries, it may have similar exposures in a dozen currencies or more.

Likewise, the other affiliated companies of the Global group, each purchasing goods and services from group members, may bear the risk of currency fluctuations. The various affiliates may not have adequate financial expertise or banking facilities to deal effectively with the risks involved.

These currency risks can be concentrated in a coordination center through the technique of reinvoicing. In the example above, rather than billing the U.K. affiliate directly, the German company would invoice the Global coordination center for the components. Since the invoice would be denominated in Deutsche marks, the German company would bear no currency risk.

The Global coordination center would then reinvoice its U.K. affiliate for the same products, but in pounds sterling. The U.K. company would thereby be insulated from any risks of fluctuation in the sterling-mark exchange rate prior to the settlement date. The entire exchange risk is concentrated in the hands of the coordination center, along with all similar risks on the multitude of intercompany transactions among group members. A small staff of foreign exchange experts within the center can oversee the entire group's foreign exchange activities.

2.2.2 Factoring

The factoring of receivables is another technique for shielding group members against foreign exchange risks. A German manufacturing company may have outstanding receivables denominated in a variety of currencies. Instead of bearing the risk of exchange fluctuations until payment, the German company may factor its receivables to a coordination center. Since the German company receives immediate payment in its own currency, it is effectively relieved of the exchange risk. The coordination center, which bears the risk, can manage this risk as well as all other similar exposures as part of a centralized program of foreign exchange hedging.

Whereas reinvoicing can be carried out only with respect to intercompany sales, such a limitation does not apply to factoring. Claims against both related companies and non-related customers may be acquired by a coordination center. In application of the "intra muros" principle, however, the center may acquire such receivables only from members of the group.

Factoring also represents a powerful technique for centralized management of group liquidity. A coordination center may effect rapid injections of cash in group members by purchasing a portion of their accounts receivable.

2.2.3 Leasing

Leasing is another common technique for centralizing group financing. A Belgian coordination center may lease movable property (machinery, tools, etc.) as well as immovable property (land and buildings) to group members on more favorable terms than may be available to each affiliate standing alone. Coordination centers may even carry out sale and lease-back transactions, subject to compliance with strict guidelines.

2.2.4 Financing

A coordination center may loan funds to affiliated companies on a short or long-term basis. The loaned funds may be (i) from capital of the coordination center itself or (ii) borrowed from banks and other financial institutions, or from affiliated companies. Coordination centers may also raise money from outside the group by issuing bonds.

A coordination center may also receive investment income and earn interest on deposits with banks or other financial institutions. However, a coordination center may not keep or make deposits with third parties (i.e. parties not being a member of the group to which the center belongs) if the deposited funds were provided as capital contributions to the center by group members (i) which have borrowed to finance their contributions to the center and (ii) which, directly or indirectly, deduct the interest on the loans from Belgian taxable income. This restriction does not apply if the center uses at least 75% of the capital contributions for activities other than deposits within 12 months after the date of the contributions, and thereafter for at least 6 months per year.

The content of this article is intended to provide general information on the subject matter. It is not a substitute for specialist advice.

De Bandt, van Hecke & Lagae - Brussels (32-2)501.94.75