TAXATION: COMMISSION SAYS BELGIAN SYSTEM FOR US FIRMS ILLEGAL.

The US legislation on FSCs was repealed in September 2000 following unfavourable rulings by the World Trade Organisation (WTO). An FSC is a foreign company, typically fully owned by a US exporting company that elects to be subject to FSC rules. This choice exempts the "foreign trade income" earned by such an FSC from US taxation. Under the US FSC legislation, an FSC must be organised or have an office in a foreign country having an agreement with the US for sharing tax information (which is the case with Belgium).

The foreign trade income of an FSC is exempt from US taxation only if certain economic processes, such as the sale or lease of exporting products or the supply of services concerned with such sale and lease transactions, take place outside of the US. In particular, an economic process is considered to take place outside the US if at least a portion of the FSC's direct costs is incurred outside the US, including advertising and sales promotions, processing customers' orders and arranging delivery, transporting the goods, invoicing customers and assuming credit risks.

Belgian tax system.

The Belgian tax system applies a fix method to determine the amount of taxable profits and this is not challenged by the European Commission. Belgian law holds that this method is suitable for taxing certain activities of foreign groups in Belgium, whereas the Commission claims the Belgian system cuts the rate of taxation an FSC should normally apply. The taxable profits of an FSC are determined by applying a fixed-8% mark-up to certain eligible costs incurred by the FSC. However, such eligible costs do not include...