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The new tax measures of the Swedish Coalition
 
On 11 October 2014, the new federal government led by Prime Minister Charles Michel was sworn in by King Filip.  The new government wants to be a government of recovery, balancing the budget with €8 billion in cuts and €2 billion in new taxes.

Elections

The new government has been put forward by a center-right coalition between the conservative parties Open VLD and MR, the Flemish Christian democrat party CD&V and the Flemish Nationalist Party N-VA.  As the Walloon conservative party is in a minority position in Wallonia, it was initially dubbed a “kamikaze coalition”. This name was, however, soon replaced by the moniker “Swedish coalition” in a reference to the Swedish flag (with blue referring to the liberal parties, yellow to N-VA, and the cross to CD&V).

The new government wants to bring recovery by 2018 for three quarters by imposing savings on expenditure, and for a quarter by creating new forms of income (or taxes). 

Company income tax

The government wants to offer businesses a Fiscal Pact to limit the uncertainties in the economic and fiscal environment, and to support the growth of enterprises, in particular SMEs, by encouraging more productive investments.

The government wants to extend the transitory regime that was introduced a year ago when the withholding tax on the liquidation surplus was raised from 10 to 25 percent, the same rate as for ordinary dividends. The liquidation surplus is everything paid out to the shareholders upon liquidation in excess of the company's share capital.  Until 30 September, companies were able to distribute taxed reserves at the reduced rate of 10 percent, provided that the net dividend was immediately reincorporated into the company's paid-up capital (for prior coverage see Doc 2013-17551).  The government wants to perpetuate this transitory regime by allowing SMEs to freeze (part of their) taxed reserves until the liquidation of the company and pay 10 percent withholding tax; these reserves can then be distributed tax free upon liquidation. However, if dividends are distributed out of these frozen reserves before liquidation, an additional tax of 15 percent will be due (5 percent after the first five years).

Company cars are a common (and tax efficient) part of a remuneration package in Belgium. To encourage employers to invest in green cars for their employees, the government will examine whether the minimum value for tax purposes of the fringe benefit cannot be reduced under €1,250.

Employers should see their contributions on salaries decrease from about 33 percent to 27 or even 25 percent.

Inter-municipal corporations that are currently liable to the legal entities tax (for non-profit organisations) will be liable to corporate income tax as of 1 January 2015. That decision offers a solution to the decision of the Constitutional Court of 17 July 2014 (case 2014-114).

Notional interest deduction

The Government's budget agreement does not mention the risk capital deduction (commonly known as the notional interest deduction), allowing a Belgian company to set off a percentage of its equity against its taxable profits.
However, the government plans to limit the risk capital deduction for financial institutions and insurance companies by excluding the share capital they have to maintain to strengthen their capital requirements.

The percentage of the risk capital deduction is linked to the interest rate paid by the Belgian Treasury on 10-year linear bonds during the months of July, August and September of the penultimate year preceding the tax year. For 2015 (tax year 2016) the rate is based on the figures of July, August and September 2014.  Yesterday, it was reported that the rate of the notional interest deduction for tax year 2016 will be 1.562% against 2.63 percent in tax year 2014, but since the rate cannot vary more than 1% from one tax year to the next, the rate will be 1.63 percent. This is likely to give the Treasury an additional €300 million in company income tax over the next two years. 

Secret commissions tax and disallowed expenses

When a (corporate or individual) taxpayer makes certain payments for e.g. salaries, fees or commission fees without properly reporting them in a salary slip or a commission fee note, the tax authorities may impose a tax of 300 percent (309 percent including the “additional crisis tax”) of the amount of the payment. The tax is set at a level that theoretically outweighs the loss for the Treasury in income tax and social security contributions.  However, this tax is seen as punitive and its application has varied widely over the years (for prior coverage see Doc 2013-17551).

The secret commissions tax will no longer be punitive ; the absence of reporting is to be sanctioned with administrative fines.  The tax will be linked to the non-disclosure or the non-timely disclosure of the identity of the beneficiary preventing the effective taxation of the beneficiary.  The secret commissions tax will become a tax of last resort when the beneficiary cannot be taxed anymore. The secret commissions tax would be set at a rate of 100 percent for individual payers and 50 percent for companies (respectively 103 and 51.5 percent taking account of the “additional crisis tax”).  The tax itself would not be disallowed as a business expense.

More in general, the rules relating to disallowed expenses are to be simplified resulting in three categories of disallowed expenses: penalties and taxes, advantages granted for which the beneficiary cannot be identified and gifts.

Personal income tax

One of the avowed aims of the coalition is to bring about a “tax shift” from tax on labour to tax on wealth and consumption, including indirect taxes and environmental taxes and the tax transparency tax (see below). Workers will see a tax reduction of about €250 in 2018, in the form of an increase of the lump-sum allowance for business expenses for employees.

In the meantime, the automatic indexation of salaries will be frozen. In principle, all salaries in Belgium are increased by two percent whenever the consumer price index goes up by two percent. This indexation will be skipped once in 2015 and continued whenever the index increases by another two percent. There will be certain corrections for the lowest wages, and allowances.

The tax regime of pension savings will be modified allowing the government to tax these during the build-up in the next five years. Approved pension savings plans allow individuals to save up to €950 in a securities account or an insurance wrapper and get a tax credit capped at 40% of the saving. The pension saving capital is taxed at the age of 60 at a fixed rate of 10 percent. That rate will be decreased to 8 percent, but 1 percent would be collected every year in the coming five years so that the tax would be a mere 3 percent at the age of 60.

For a period of four years, the automatic indexation will be suspended for so-called “fiscal deductions” and tax credits, such as the exemption of interest on saving deposits and the tax reductions for so-called “replacement income” (retirement pensions, and unemployment benefit, invalidity allowances), long-term saving and pension saving, with the exception of the marriage quotient

The government has also hinted that it intends to give access to second pillar pensions to those self-employed who, unlike self-employed who work through their personal services company, cannot pay into a pension plan, like a group insurance. In practice this means they would be allowed to pay part of their income into a defined contributions plan.

VAT and excise duties

The VAT will be harmonized - read extended - to include certain exempt services, such as plastic surgery and treatments as well as for internet sales.  The latter is actually the consequence of the new VAT localization rules for telecommunication, broadcasting and electronic services supplied to EU consumers.

At the same time, the 6 percent VAT rate for the renovation of private housing will be limited to houses that are over ten years of age instead of five years.

The threshold for compulsory VAT registration that has just been increased to €15,000 may be increased to €25,000. Furthermore, the system of penalties and interest for late payment would be amended.

Excise duties on coffee, wine, spirits and energy (excluding on beer) will be adapted every year to the index of the consumer prices. Excise duties on tobacco and (non-business) diesel will be increased.

Other taxes

Court registry fees will be simplified but are likely to be increased by 50 percent.

The budgetary agreement confirms that the government wants to cooperate with the introduction of a Financial Transaction Tax, but wants this financial transaction tax to focus on speculative transactions in shares and derivatives, with the exclusion of intragroup transactions, transactions by pension funds and insurance companies, and transactions in securities issued by the State. This may lead to the abolition of the tax on stock exchange transactions. However, in the short term, the tax on stock exchange transactions will be increase and the cap on the tax may be abolished.

Transparency Tax

Although it was expected that a tax would be introduced on wealth or on gains on investments or that the withholding tax on dividends or interest would be raised. The only new tax on wealth is a transparency tax on legal arrangements such as trusts and foundations, dubbed "look-through tax” or "Cayman tax". Tax will be due on the income of a low-taxed entity or trust by the Belgian resident shareholder or beneficiary even if the income is not distributed to the individual.

The previous government had introduced a reporting obligation for the settlor of a legal arrangement, for his heirs or beneficiaries (for prior coverage see document 2014-7891). Moreover, a first text had been drafted to introduce fiscal transparency for income tax purposes for the founders of foreign legal arrangements and trusts. The bill had, however, not been submitted to Parliament.

Based on that first text, the transparency tax would be levied as follows. A Belgian resident founder/settlor or backer would be deemed to be the owner of the assets, rights, and funds owned by the foreign legal arrangement that he has set up or financed, and he would be deemed to be the owner of the income derived from those assets, rights, and funds as well. His heirs of the founder would be assimilated to the founder or backer; they would be deemed to be the owners in proportion to their participation in the legal arrangement or in proportion to their share in the inheritance.

If the legal arrangement is set up in the form of a legal entity that is subject to an effective tax rate of 10 percent or more, the Belgian resident would not be subject to tax on its income but he would still have to disclose the legal entity.

The new rules would also introduce the notion of a beneficiary -- specifically, the individual or corporate body that, at any time or in any way, receives any benefit granted by the legal arrangement. The founder could also be the beneficiary.  For income tax purposes, the beneficiary would be taxed on any amounts or advantages that are derived from assets, rights, or funds that are in the possession of a legal arrangement and that he receives (outside his professional activity). The tax on the beneficiary would be charged at the rate of 25 percent, except in two situations: if the founder has been taxed in Belgium on the income from the trust assets, or if the legal arrangement distributes the rights and funds that were transferred into the legal arrangement.

Non Residents Income Tax

In 2013 a "catch-all" provision has been introduced allowing the Belgian tax authorities to tax certain income of non-residents that was not effectively taxed.  If a Belgian resident taxpayer or a Belgian establishment of a foreign taxpayer has incurred an expense that constitutes taxable income in accordance with the income tax code, and there is a double tax treaty that allows Belgium to tax that income, then the catch-all provision allows Belgium to tax this income. If no double tax treaty is in place between Belgium and the State of residence of the non-resident, then Belgium can tax if the beneficiary of the income cannot prove that the income is effectively taxed there.

The tax is levied in the form of a withholding tax due by the Belgian debtor at a rate of 16.5% (actually 33% of the payment minus a standard deduction of 50%) ; the non-resident taxpayer is, however, allowed to file a return if this is more beneficial. The tax is aimed at royalties in e.g. the double tax treaties with Argentina, Brazil and India, and at payments for technical assistance which were not taxable if there was no permanent establishment.

In a note to the relevant taxpayers in the Belgian State Gazette of 23 July 2014 introduced a “de minimis” rule of €38,000 per beneficiary per year, and per debtor or intermediary. For payments under €38,000, the debtor or the intermediary does not have to withhold tax; however, if the total of his payments exceed €38,000, only those payments that pass the threshold must be reported and withholding tax deducted.

The government confirms that the scope of the catch-all provision will be restricted to those cases that were aimed at initially to eliminate side effects that may have a bad influence on the market.

Tax-cification and modernization

Former Finance Minister Koen Geens had launched the idea of “tax-cification” as a contraction of the words tax and pacification, a dialogue for the improvement of the relationship between the tax administration and the taxpayer, and a mutual relationship of trust between the tax administration and the tax advisers and accountants. The government wishes to continue working on this to improve the previsibility of the tax liability. The reform of the secret commissions tax and the rules on disallowed expenses, the reform of the federal tax code and the simplification of the tax systems are all part of this process of tax-cificiation.

The application of the general anti-abuse provision will be evaluated in order to give the taxpayer more legal certainty. Moreover, the role and the independence of the Ruling Committee is confirmed and the committee will be authorized to decide whether the tax administration will apply the general antiabuse provision or that a tax avoidance scheme is not abusive. That was a bone of contention between tax payers and the tax administration that wanted to limit the role of the Ruling Committee to deciding whether a tax avoidance scheme that may be abusive is justified by the non-fiscal motives of the taxpayer (for prior coverage see Doc 2012-17585).

The communication between the tax administration and the taxpayer will be more and more digitalized, replacing registered mail by emails. Tax audits will be modernized focusing on a further collaboration with other administrations (social inspections, general fraud, etc) and foreign tax administrations.

Brussels, 15 October 2014

Marc Quaghebeur,
partner, De Broeck Van Laere & Partners, Brussels



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