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The Belgian Corporate Income Tax – lower tax rates, but less deductions
 
In the early hours of Wednesday 26 July, after several days of negotiations, the ministers of the federal government reached an agreement on the budget for the coming year and on a series of structural tax reforms.

Further details have now been revealed that show that the reduction of the corporate income tax rate will be financed principally by a tightening of the tax base.

The following is a summary of the measures as they have been announced. These will have to be formalized in a bill of law that will not be reviewed by the Council of State before being submitted to Parliament in September or October.

1. THE CORPORATE INCOME TAX REFORM

The most prominent measure is the corporate income tax reform with a substantial reduction of the tax rate.

The basic corporate income tax rate is 33 percent, with an additional crisis contribution of 3 percent on top of the tax giving a tax rate of 33.99 percent. However, few companies pay the full corporate income tax rate due to a number of exemptions and deductions, incentives or ‘niche’ regimes.

Profits from overseas branches in treaty countries are tax exempt. There is a 95 per cent dividend received deduction and an exemption, in principle, for capital gains on qualifying shareholdings. The Patent Income Deduction has been abolished but is grandfathered for a period of five years, until 30 June 2021, and it has been replaced by the Deduction for Innovation Income. There is the (in)famous notional interest deduction. Moreover, losses can be carried forward indefinitely and without any limitation. And finally, Belgian companies can take an investment deduction for investments in qualifying depreciable, tangible or intangible, assets that are newly acquired or realized.

Nevertheless, as a result of BEPS and various EU initiatives, many of those deductions and special tax regimes have lost their attractiveness. A reduction of the rate was unavoidable as the tax rate was much higher than the rate in neighboring countries.

A major overhaul of the corporate tax regime, with a tax rate slashed to 20%, had been put forward by Finance Minister Johan Van Overtveldt, who had launched a comprehensive plan to get to “20 percent by 2020”. (1)

In brief, he wanted to reduce the corporate tax rate from 33.99 per cent to 20 per cent in 2019. To offset that lower rate, Belgian companies would have to waive a number of favorable tax measures, like the notional interest deduction, the carry forward of losses (at least partially so that companies would pay at least 12% tax, that is 20% tax on 60% of their tax losses), the introduction of the interest deduction in line with the Anti-Tax Avoidance Directive (2), and a raise of the standard withholding tax rate from 27 to 30 percent.

At the same time, he proposed to drop the “Fairness Tax” and the 0.4 percent capital gains tax on shareholdings, to raise the dividend received deduction from 95 per cent to 100 per cent, and to lower the capital gains tax rate from 25 to 20 percent.

Despite appeals from the business world, the government has not been able to find an agreement on this issue, until now.

1.1. The tax rate

The corporate income tax rate will be reduced to 29 percent in 2018 and 2019 (with a lower additional crisis contribution of 2 percent). In 2020, the company income tax rate will be just 25 percent and the additional crisis tax will be dropped.

The reduction in the corporate income tax rate will be financed with a number of measures limiting the special deductions and tax regimes mentioned above, see 1.2.

Small companies:

Small companies with annual taxable profits which do not exceed €322,500 (subject to certain additional conditions) pay a reduced corporate income tax rate that varies between 24.98 and 33.99 percent. As from 2018 the rate will drop to 20 percent on the first €100.000 in profits for small companies as defined in the Companies Code. These are companies that have no more than 50 employees on average, annual sales not exceeding €7.3 million, and a balance sheet total not exceeding €3.65 million (article 15 of the Companies Code).

Moreover, in order to discourage the use of personal services companies to avoid the personal income tax, the condition that a director of the company must receive a remuneration of a certain level would be reinforced; the minimum level would be pulled up from €36,000 per year to €45,000.

Moreover, in order to discourage the use of personal services companies to avoid the personal income tax, the condition that a director of the company must receive a remuneration of a certain level would be reinforced; the minimum level would be pulled up from €36,000 per year to €45,000.

Small and middle-sized companies will also benefit from a temporary increase of the investment deduction from 8% to 20%.


1.2. Compensatory measures

Notional interest deduction:

In the first place, the risk capital deduction (better known as the “notional interest deduction”) will be capped. The notional interest is a percentage of the company’s equity that a Belgian company or permanent establishment may deduct from its taxable profits. The percentage of the deduction is linked to the interest rate paid by the Belgian Treasury on ten-year linear bonds; due to the low interest rates, that deduction was already minimal.

In the future, it will not be calculated on the total qualifying equity of the company anymore, but on the increase of the company’s equity over the past five years, and not the total qualifying equity of the company anymore.

Minimum company income tax:

A minimum tax base will be introduced for companies that have profits in excess of €1,000,000. The full deduction of certain incentives (e.g. the loss carried forward, the notional interest deduction and the carry forward of the dividend received deduction) will be limited to €1,000,000. Over that threshold, the deduction will be capped at 70 percent. In practice this means that any company that has profits over €1,000,000 will pay an effective tax of 7.5 percent when the corporate income tax rate is 25 percent in 2020.


Capital gains tax:

As a principle, capital gains realized by a company on a shareholding have always been tax exempt. That allowed companies to invest excess liquidity and realize tax exempt capital gains. That rule was modified in 2012 and capital gains on shareholdings that did not qualify for the dividend received deduction (i.e. under the threshold of 10 per cent of the share capital or with a value of EUR 2,5 million or less) were taxed if the company sold the shareholding within the first year of acquisition at a fixed rate of 25 per cent. This tax will be extended to all capital gains on shareholdings, bringing the capital gains tax exemption on shareholdings into line with the conditions for the dividends received deduction.


It is also the government’s intention to abolish the 0.4 percent tax (0.412 percent including the additional crisis contribution) on capital gains realized on shareholdings by medium-sized and large companies. This was a special tax introduced by the Program Act of 27 December 2012, for all tax-exempt capital gains realized by medium-size and large companies with effect from tax year 2014.

Recapture of the losses of overseas permanent establishments:

As mentioned above, profits from overseas branches in treaty countries are tax exempt but losses made in an overseas permanent establishment could be set off against Belgian profits. In the future such losses will only be allowed as a set off against the Belgian profits if the overseas loss cannot be carried forward or carried back and set off against future or past profits of the permanent establishment.

Belgium has the intention to follow the OECD recommendations to give a more economic definition of a permanent establishment.


ATAD

The government is also confident that the implementation of the EU Anti-Tax Avoidance Directive will bring more income, with the introduction of CFC rules, EBITDA interest limitation, exit taxation and hybrid mismatch rules.

Other measures:

The government is also counting a limitation of other deductions, a change in the depreciation rules, the increase of fines and compliance to finance the tax reform.


1.3. Tax Consolidation

Belgian corporate income tax law does not provide for a system of consolidation of the profits and losses of separate legal entities for tax purposes, or any other form of group relief. The concept of VAT-unity was introduced in Belgian law some time ago, but that did not extend to corporate income tax.

The absence of a system of tax consolidation allowing one company to set off the losses of another company in the group against its profits added complicated acquisitions or mergers of companies.

Moreover, specific tax measures target certain attempts to realise group relief in the form of a tax consolidation. E.g. where a profit-generating activity is transferred to a loss-making affiliated iincompany (e.g. through a tax-neutral exchange for shares), the tax authorities might refuse the loss-making company the right to carry forward and offset its losses against the profits from the transferred activity.

The government has now announced that it would introduce a system of tax consolidation with effect from 2020. No details are available yet; the government is examining various options.

1.4. Withholding tax on share capital distributions

As a principle, the distribution of share capital following a decision of the shareholders to reduce the share capital are not liable to withholding tax, unless the company had incorporated taxed reserves into its share capital. The company had the choice to distribute either paid up share capital share capital or share capital that originated in taxed reserves. Withholding tax was only due on the latter.

In the future, when a company decides to pay out share capital, this will be deemed to originate proportionally in paid up share capital and taxed reserves. The portion that originates in paid up share capital will remain untaxed.

1.5. Financing growth companies

For private PRICAFs, the prudential rules, the rules relating to the management activity and temporary investments will be made more attractive. Moreover, the minimum investment threshold will be decreased from €100,000 to € 25,000.

The tax shelter for start-up companies is to be extended to growth companies under the same conditions.

1.6. Profit participation

The government proposes to introduce an optional but simple profit participation scheme whereby employees could receive a premium that is not more than 30 percent of the salary cost.

2. INDIVIDUAL TAXATION


For individuals, the tax measures will mostly affect the taxation of savings.

Annual tax on securities accounts:

First of all, an annual tax of 0.15 percent will be due on securities and trading accounts that have a value in excess of €500,000 per tax payer (€1,000,000 for married couples and registered partners).

This tax would hit securities accounts that hold listed stocks, bonds and funds. Pension savings accounts and unitized life assurance policies linked to one or more investment funds are to be excluded.


Exemptions for investment income redistributed:

Interest on savings accounts is currently exempted for the first €1,880 (per tax payer). That exemption will be extended to other forms of investment, such as dividends to channel savings to investments in the real economy via the stock market.

To achieve this, the exemption for interest on savings accounts is halved to €940, and a new exemption is introduced of withholding tax is granted for the first €627 (two thirds of €940) for dividends from stocks. That exemption will be granted in the form of a tax reimbursement through the tax return.

Pension savings:

The tax deduction for pension saving will be maintained at €940 per tax payer. However, he will be able to opt for a higher deduction of €1,200, in an effort to encourage taxpayers to save for a complementary pension but with a tax reduction of 25 percent instead of 30 percent, so that the actual benefit goes from €282 to €300. The taxpayer would be able to choose between both regimes. It is to be noted that in either case the taxation is deferred until the taxpayer is 60 and the tax then is only 8 percent.

Tax on stock exchange transactions:

At the beginning of this year, the stock exchange tax was extended to transactions via foreign platforms that had escaped taxation until then. Investors will presumably be asked to report the stock exchange transactions in a special tax return since Belgium cannot oblige foreign banks and intermediaries to pay the tax.

Moreover, the cap of the stock exchange tax had been raised from €800 to €1,600 for stocks, €1,300 for bonds and €4,000 for investment funds. The tax rates had been maintained, but now they will go up from 0.27 percent to 0.35 percent for the purchase or sale of stocks, warrants and options, and from 0.09 percent to 0.12 percent on the purchase or sale of bonds on the secondary market and units of UCITS.


Cayman Tax:

The government is also expecting to draw more income from closing loopholes in the Cayman tax. This is the moniker for the look-through tax for income received by trusts, foundations and other entities in tax havens set up by Belgian residents. It had been noted that certain legal arrangements were not caught by the Cayman tax.

3. OPTIONAL VAT REGIME FOR RENTAL AGREEMENTS


In principle, rental agreements relating to real property are VAT exempt with the notable exceptions of financial leasing of real property, car parks, storage facilities or equipment that is or is deemed immovable.


This means that landlords and investors in real property were at a disadvantage compared to real property investors in other EU Member States. They were not able to recover the VAT they pay for the construction or acquisition of new properties, for renovation work or for operating and maintenance. They had to rely on complicated constructions to try and find a way to charge VAT on the rental income.

For many years, the Government refused to introduce a VAT regime for real property for fear of the impact on the budget. The Government is now proposing to introduce an optional regime so that investors could charge VAT and recover the input VAT. This may be introduced as early as 2018.


28 July 2017
Marc Quaghebeur
Partner, De Broeck Van Laere & Partners

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(1) For a full description of the corporate tax reform he had put together we refer to our contribution of 3 October 2016, Marc Quaghebeur, ’20 Percent for 2020’: A Scenario for Belgium’s Corporate Tax Reform, Tax Notes International, 3 October 2016, 77.

(2) Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, OJ L 193, 19.7.2016, p. 1–14.




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