On 26 July 2017, the Belgian government announced that an agreement on new budget measures had been reached. This agreement includes the long-awaited corporate income tax reform which is to be introduced in the coming months. The announced changes will also, among other things, have an impact on the tax regime for savings income. The draft bill which formalises these measures has not yet been disclosed and further details/amendments should be given upon its release.
The following paragraphs will highlight some of the most important changes for both corporate and individual taxpayers.
With respect to the upcoming corporate income tax reform, the contemplated changes will be implemented in stages, the first stage from 2018 and the second stage from 2020. This reform will include both beneficial and compensating measures.
A. Progressive reduction of corporate income tax rates
Companies are currently subject to a standard corporate income tax rate of 33.99%, i.e. 33%, plus a complementary crisis contribution (or “tax surcharge”) of 3%.
Small and medium-sized companies (“SMEs”) can benefit from progressive corporate income tax rates ranging between 25% and 35.5%, provided that certain conditions are met.
As from 2018, the standard corporate income tax rate will be reduced from 33.99% to 29,435%. This rate will subsequently be reduced to 25% in 2020.
Furthermore, SMEs will benefit from a 20% rate on realised profit up to EUR 100,000.
It is still uncertain whether or not the so-called “fairness tax” (a 5,15% tax to be levied when a dividend distribution is performed by a company and such distributed profits have not been effectively taxed at the ordinary corporate income tax rate) will be addressed in the framework of this reform further to the ruling of the European Court of Justice of 17 May 2017 which has confirmed its partial illegality. This decision has been commented in our previous newsletter of 2 June 2017 (see “Fairness Tax – illegality partially confirmed”). In this decision, the European Court of Justice had confirmed that the fairness tax was in breach with the Parent-Subsidiary Directive, in so far as that tax, in a situation where profits received by a parent company from its subsidiary are distributed by the parent company after the year in which they were received, has the consequence of subjecting those profits to taxation exceeding the 5% ceiling provided for by the Directive.
B. Compensating measures
With immediate effect (as from 2018)
- Limitation of the notional interest deduction
The notional interest deduction (“NID”) is a Belgian tax deduction introduced by the Law of 22 June 2005 whereby Belgian or foreign companies subject to Belgian corporate income tax or Belgian non-resident corporate income tax are entitled to deduct a certain percentage (“NID rate”) of their eligible adjusted net equity from their taxable income.
Since tax year 2013, excess NID can no longer be carried forward and stock of carried forward NID generated prior to tax year 2013 may only be carried forward for seven years. Furthermore, NID can only be used to offset taxable profits up to EUR 1m, plus 60% of any excess taxable profit.
The qualifying net equity on which the NID rate will apply will be equal to the adjusted net equity which has accrued over the previous five taxable periods (so-called “incremental equity”).
In other words, the NID regime will effectively allow for a deduction, provided that the eligible adjusted net equity has given rise to a surplus (upon which the NID rate will apply), in comparison with the average adjusted net equity of the previous five taxable periods.
For example, and from our understanding*, a company with an average adjusted net equity of EUR 5m over the previous five taxable periods increases its average net equity with EUR 100,000 over the current taxable period. Such surplus of EUR 100,000 will be regarded as the NID base on which the NID rate (e.g. 0.5%) will apply, i.e. amounting to a deduction of EUR 500 for the given taxable period.
- Minimum taxable basis
Belgian corporate income tax does not provide for a restriction on the setting-off of tax deductions carried forward against taxable profit. This, however, does not apply to carry forward NID which is subject to a 60% limit on the remaining taxable profit that exceeds EUR 1m.
The use of tax deductions carried forward will be restricted to an amount of EUR 1m, plus 70% of the taxable profit. This restriction will only apply to the following tax deductions:
- losses carried forward;
- dividend-received deduction carried forward (which corresponds to the participation exemption in the Parent-Subsidiary Directive);
- innovation-income deduction carried forward (which corresponds to the new deduction regime adopted further to BEPS 5);
- the NID carried forward.
For example, a company with a taxable profit of EUR 3m will in any case have a minimum taxable base of EUR 600,000, considering the potential use of tax deductions carried forward for a maximum of EUR 1m, as well as 70% of the excess taxable profit of EUR 2m, i.e. EUR 1,400,000.
Furthermore, the setting-off of tax increases against tax deductions (of the current year of tax deductions carried forward) will also be put to an end so that any tax increase imposed will constitute a minimum taxable basis.
- New regime for capital gains on shares
Capital gains on shares which are realised by companies are fully exempt, provided that the company issuing the shares is fully taxable and to the extent that such underlying shares have been held for at least one year by the company. This full exemption still triggers the payment of a 0.412% tax (i.e. 0.4% plus a 3% tax surcharge) for companies which do not qualify as SMEs.
If the above-mentioned conditions are not met, realised capital gains are subject to taxation at a rate of 25.75% (i.e. 25% plus a 3% tax surcharge).
The exemption on capital gains will only apply for companies holding at least 10% of the share capital of the issuing company or with an acquisition value of at least EUR 2.5m.
In addition, the current 0.412% rate of taxation applicable to non-qualifying SMEs will be repealed. As a result, all companies will benefit from a 0% taxation on their realised capital gains, provided that the underlying shares have been issued by a fully taxable company.
- Withholding tax on capital decrease
Capital decreases which correspond to the reimbursement of the paid-up capital are tax-free transactions. Any payment which exceeds the paid-up capital is, however, regarded as a dividend payment, subject to a withholding tax of 30%.
A company holding taxed reserves will no longer be able to decrease its capital just by reimbursement of the paid-up capital, i.e. it will not be exempt from taxation. Indeed, any capital decrease undertaken by a company with taxed reserves will be regarded as a partial dividend distribution on which withholding tax will be due. Such withholding tax will be pro rata to the share of taxed reserves deemed to be distributed in the paid-up capital increased by the taxed reserves.
The remaining portion of the paid-up capital will remain exempt from taxation.
With differed application (as from 2020)
- Tax consolidation
Entities are treated separately for tax purposes.
An optional system of tax consolidation will be introduced by the federal government as from 2020. Under the new system, a Belgian group of companies will be treated as a single entity for tax purposes so that it will be able to provide a single tax return on behalf of the whole entity through the computation of the losses and profits realised by the group.
- Conversion of tax-free reserves
Tax-free reserves are specific reserves not subject to tax until their distribution or the sale of the assets to which it relate. These reserves are notably constituted of revaluation surplus or exceptional amortization charges on tangible or intangible assets.
Tax-free reserves arising in tax years closing before 1 January 2017 will be convertible into taxed reserves upon payment of a 15% withholding tax. Such rate will decrease to 10% provided that certain conditions are met (such conditions have not yet been disclosed). Specific categories of tax-free reserves will however be disregarded from the scope of this measure.
- Accelerated amortization charges
Assets can be depreciated on a straight-line basis over its expected useful life or according to the accelerated method. Both type of amortization charges are tax deductible under certain conditions.
Accelerated amortization charges will no longer be tax deductible for assets acquired as of 1 January 2020.
- Recapture of foreign Permanent establishment losses
Losses attributable to a foreign permanent establishment of a Belgian company can be set off against Belgian profits provided that such losses have not already been set off against the permanent establishment profits in the foreign country over the same taxable period. If the Belgian company fails to demonstrate that the losses incurred by such permanent establishment have not been set off against its taxable profit in its country of location, the deemed-deducted losses must be reintegrated into the taxable profit in Belgium.
Losses of foreign permanents establishments will only be deductible in Belgium provided that such losses are characterized as definitive. In other words, losses of foreign permanent establishments will only be deductible against Belgian profit provided that it is demonstrated that the company has exhausted all the possibilities to deduct such losses from its foreign profits during the taxable period as well as in the course of previous taxable periods.
- Progressive implementation of the Anti-Avoidance Directives
The Anti-Avoidance Directives (the so-called “ATAD I” and “ATAD II”) have been introduced by the European Commission as part of the Corporate Tax Reform Package. These Directives contain legally binding anti-abuse measures aimed at combatting aggressive tax planning.
As from 2020, the ATAD I measures will enter into force in Belgium.
These will include an interest limitation rule according to which the deduction of lending costs will be capped at a maximum of 30% of the company’s EBITDA in the tax period in which they are incurred. Belgian companies which are part of a group must calculate their EBITDA on a consolidated basis. A minimum amount of EUR 3m of tax deductible interest for a taxable period will nonetheless be applied for each entity or within the group of Belgian companies.
The tax interest deduction which has not been deducted can be carried forward without any limitation.
The implementation of ATAD measures will also include the introduction of a CFC legislation into Belgian law, along with the already applicable choice between immediate and deferred payment of exit taxation (over a five years period).
Individual taxpayers will also face major changes with respect to both income tax and capital taxation.
Individual taxpayers are generally subject to a 30% withholding tax on their dividend income.
A new tax-exempt quota of dividend income will be implemented. As a result, dividend income on shares will only be subject to withholding tax (30%) for income which exceeds EUR 627. This measure will allow a tax saving of a maximum of EUR 188.10 (30% of EUR 627).
Interest income which derives from a regulated savings account is currently subject to a 15% withholding tax for income exceeding the first threshold of EUR 1,880.
The 15% withholding tax will apply on income which exceeds the threshold of EUR 940, instead of the current threshold of EUR 1,880.
- Securities accounts
There is no particular taxation regime for securities accounts.
A withholding tax of 0.15% will apply on deposits of securities accounts valued at EUR 500,000 or more. The new tax will only apply to shares, securities and funds. Pension savings or life insurance products are, however, to be excluded from the scope of this tax.
At this stage, there are no details as to whether any exemption will be provided for certain securities, e.g. for securities held by executives in the framework of a family-owned business or securities held by the founders or managers of a company, or whether the amount of tax due further to this new regime will be capped at a maximum amount.
- Pension savings
Payments of up to EUR 940 made in the framework of tax-benefit pension savings allows for an annual 30% deduction on the payment made.
As from 2018, alongside the existing 30% tax deduction for payments of up to EUR 940 per year, individual taxpayers will alternatively be able to opt for a 25% tax deduction on payments of up to EUR 1,220 per year.
Measures applicable to all taxpayers (corporate and individual)
- Stock exchange transaction tax
The stock exchange transaction tax mainly applies to the purchase and sale of certain securities and the redemption of its own shares by investment companies as well as to relevant conversions of participation rights within the same section of an investment company.
It has been announced that two of the three applicable stock exchange transaction tax rates will increase when the new tax measures are implemented. The purchase and sale of shares issued by mutual funds or investment companies will, however, not be affected by the increase in the rates. The rates will therefore increase as follows:
|Categories of Security
||Current Tax Rate
||New Tax Rate
Belgian or foreign state securities
Securities of subdivisions of the Belgian State or foreign states
Bonds issued by Belgian or foreign corporations or other legal entities or certificates representing bonds
(not including shares in investment funds)
Capitalisation shares of investment companies
Other categories of securities
(not including shares in investment funds)
These changes should enter into force on 1 January 2018.
These modifications will not have any impact on the applicable caps, currently set at, respectively, EUR 1,300 (for 0.09%), EUR 1,600 (for 0.27%) and EUR 4,000 (for 1.32%).
- General tax increase on late advance payments
The payment of income tax due can under certain conditions be processed via quarterly advance payments. Such advance payments allow for a tax credit of up to 1.5% of the advance payment made, depending on which quarter such payment has taken place in.
Late or no advance payments generally trigger the payment of a tax increase. However, since the enactment of the Program Law of 3 August 2016, such tax increase is no longer applicable when the increase is lower than 0.5% of the underlying computed tax or lower than EUR 50.
As from 2018, this exemption will be repealed so that the tax increase will in any event be enforced. Furthermore, the standard tax increase rate applicable for late advance payments will increase from 1% to 3%.
- Scope of disallowed expenses widened
Fines and penalties are not deductible. However, there are a few exceptions, including administrative proportional fines for VAT infringements as well as tax increases related to deductible taxes.
The secret commissions tax applicable to unproperly reported salaries, commission fees and advantages in kind is also tax deductible. Costs related to electric cars are deductible at 120%.
The deductibility of car-related expenses is determined by the CO2 emission of the car and ranges between 50% and 100% (except for electric cars).
As from 2018, the tax deductibility of car-related expenses for fuel cars will be capped at 40% when the CO2 emission exceeds 200g/km and the deductibility of costs related to certain hybrid cars will be aligned with fuel cars costs.
Furthermore, the tax deductibility of expenses will be capped at 100% of the costs incurred. As a result, costs related to electric cars or bikes will no longer benefit from a 120% tax deduction rate.
As from 2020, fines and penalties will be fully excluded, as will the secret commissions tax.
- New optional VAT regime for rental activities
Property leasing is, as a matter of principle, not subject to VAT unless otherwise provided by Belgian VAT law (e.g. warehousing activities are subject to 21% VAT).
As from 2018, a new optional system of VAT will be put in place for real property leases. Under this system, the professional leasing of real property will optionally be subject to VAT, provided that certain conditions are met.
This new regime will allow a wider scope of deduction of the input VAT paid for the acquisition of real properties (e.g. the immediate deduction of the input VAT paid for the construction of new building which is subsequently subject to professional lease). This regime will only be available for new contracts established as from 1 January 2018.