Developments in Belgian tax
November 2018 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2018 Issue
Following the so-called summer agreement reached by Belgium’s coalition government on 26 July 2017, two major laws were enacted overhauling Belgium’s Corporate Income Tax (CIT) law. By far the most exhaustive one was the law of 25 December 2017, which was supplemented by the law of 30 July 2018 (the CIT reform laws).
The best news for corporate taxpayers in Belgium was the relatively steep reduction of the headline CIT rate to 25 percent in 2020 (29.58 percent in 2018 and 2019), down from 33.99 percent. A further reduction to 20 percent was enacted for small and medium-sized enterprises (SMEs) on the first tranche of €100,000 of net taxable income. More good news for holding companies and so-called mixed companies – i.e., companies combining operational and holding activities – seeing the dividends-received deduction for qualifying dividends go to 100 percent, up from 95 percent, putting Belgium on equal footing with the Netherlands and Luxembourg. It is interesting to note that interest on acquisition loans for shareholdings and participations remains tax deductible, although the general interest limitation rule may impact the amount of effectively deductible interest.
Further good news is the introduction of a ‘light’ tax consolidation regime effective 1 January 2019. Regrettably, the Belgian legislator did not opt for a full-fledged tax consolidation system whereby only the head of the group would file a consolidated tax return including all income and expense items of the members of the group. Conversely, Belgium opted for a group contribution regime very much akin to the one existing in Sweden. Under this regime, Belgian companies or permanent establishments of foreign companies are allowed to make a contribution of (part of) their net taxable income to one or more 90 percent or more directly related Belgian entities, so as to allow the latter to offset the group contribution against its/their net operating losses (NOLs).
Subject to the conclusion of a group contribution agreement, the profitable group entity is allowed to deduct the group contribution from its net taxable income, thus reducing the aggregate tax burden of the group. One peculiar aspect of this group contribution regime is that the contributor must pay to the recipient an amount equal to the amount of tax that the former would owe absent the group contribution. Unlike the group contribution itself, the payment in lieu of the tax saved is a non-deductible item, since the tax that would have been due absent the group contribution would also constitute a non-deductible item. In order to qualify for the group contribution regime, the participating entities must have been directly related (for at least 90 percent) for an uninterrupted period of at least five years prior to the year in which use is made of the group contribution regime. ‘Directly related’ means that a parent company and its (less than 90 percent) subsidiary are within scope, but so are two or more sister companies provided they are (less than 90 percent) directly owned by a common parent company.
The CIT reform laws also transposed the interest limitation rule contained in the EU’s Anti-Tax Avoidance Directive (ATAD) into national law. From 2020 onwards, Belgian corporate taxpayers will have to aggregate all interest and similar expenses and deduct these from all interest and similar income. Any net financing surplus (i.e., excess of interest paid or owed over interest earned) will be deductible without limitation up to €3m. Any excess net financing surplus beyond the €3m threshold will only be deductible insofar as it does not exceed 70 percent of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA).
An interesting feature is that any unused portion of the net financing surplus can be transferred to other Belgian group entities which are not fully utilising their interest limitation capacity. As is allowed under ATAD, loans entered into prior to 17 June 2016 are out of scope of this interest limitation rule, provided none of their essential features are amended on or after this date. Several types of financial businesses – including leasing and factoring businesses – are not subject to the new interest limitation rule. Practitioners should be aware that the ‘old’ 5:1 debt-equity rule remains in existence and should be complied with in parallel with the new interest limitation rule.
By the same token, ATAD compliant controlled foreign company (CFC) and anti-hybrid rules were introduced by the CIT reform laws and the scope of the already existing exit tax has been widened.
Because the 2017 tax reform had to be neutral for Belgium’s budget, several other measures were taken to compensate for the expected drop of revenue caused by the aforementioned – and a few other – taxpayer-friendly measures. First and foremost, at least for international practitioners, is probably the total overhaul of the Belgian notional interest deduction regime (NID). For taxable periods through 2017, the NID was computed on the taxpayer’s total adjusted equity (at a rate reflecting the government’s borrowing rate on 10-year notes).
From 2018 onwards, the NID will be computed on the taxpayer’s incremental equity only, i.e., the increase of the taxpayer’s adjusted equity at the end of the taxable period compared to the adjusted equity at the end of the preceding taxable period. For the taxable period itself and for each of the four subsequent taxable periods, one fifth of this increment will serve as the basis for computation of the NID. Given the low NID percentages of late (e.g., 0.746 percent for 2018 for non-SME taxpayers), it should be clear that the NID has lost much if not all of its attractiveness for corporate taxpayers putting or keeping high amounts of equity on the balance sheet of their Belgian entities.
Yet another revenue raiser is the introduction of a so-called minimum tax. By putting a number of tax incentives and tax attributes in a basket and disallowing the effective use of 30 percent of this basket, a minimum tax of up to 30 x 25 percent = 7.5 percent has been created. The first tranche of €1m of the basket is fully granted (no 30 percent disallowance), aiming to shield primarily SMEs from the negative effect of the minimum tax.
One other significant revenue raiser – especially relevant for international practitioners – is the strengthening of the conditions to be met for benefiting from the full exemption of capital gains on shares. Since 1 January 2018, Belgian corporate taxpayers disposing of a participation or shareholding in another Belgian or foreign corporation must comply with the same ‘minimum participation’ test as the one that has been in the statute for many years in connection with the dividends-received deduction.
In other words, as of 2018, corporate taxpayers disposing of a shareholding or participation at a gain will have to corroborate that this shareholding or participation either represented at least 10 percent of the share capital of the underlying corporation, or had a purchase price or value of at least €2.5m. It suffices to meet either one of these thresholds. This minimum participation must have been maintained for an uninterrupted period of at least one year immediately prior to the disposal of it.
The latest of the CIT reform laws also repeals the so-called fairness tax, a minimum tax of 5.15 percent applicable under certain specific conditions that was introduced in 2013 by the previous Belgian coalition government. Following a ruling from the European Court of Justice (ECJ) of 17 May 2017 and a final ruling from the Belgian Constitutional Court of 1 March 2018, the current Belgian government decided to scrap the fairness tax entirely.
However, as was indicated by the Constitutional Court, the fairness tax is not abolished in terms of the past, meaning that taxpayers which had been assessed by the fairness tax in any of the taxable periods 2014 through 2017, will not automatically be discharged. Depending on the position they have taken in the past, they may be able, though, to obtain a discharge for those earlier years.
Werner Heyvaert is a partner at De Langhe Attorneys. He can be contacted on +32 (2) 880 3535 or by email: email@example.com.
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