In our tax alert of 1 August 2017, we informed you that the Belgian government had announced substantial tax reforms to make Belgium more attractive for investors and summarised the main corporate tax reforms of what has come to be known as the "Summer Agreement". You will recall that the Summer Agreement provides for a gradual decrease in the corporate tax rate from 33.99% to 25% (and even 20% for SMEs) by 2020 (see our previous tax alert for more information). At the same time, the Summer Agreement includes a number of compensatory measures to keep the tax reform budget neutral.
The Belgian government approved the draft text on 25 October 2017 and the Finance Minister Johan Van Overtveldt issued a note containing a more detailed overview of the proposed measures (Hervorming vennootschapsbelasting - oktober 2017 (NL) / Réforme de l'impôt des sociétés - octobre 2017 (FR) / Corporation tax reform - October 2017 (ENG)). Below we focus on four important aspects of the corporate tax reform.
It should be noted that the proposed legislation is still not publicly available and that the Summer Agreement must still pass various legislative hurdles before it can be transposed into Belgian law. Hence, the following information is preliminary only and subject to change.
1. A Capital Decrease may Trigger Taxation
As a general rule, the paid-in capital of a Belgian company can be distributed to its shareholders in a tax-neutral way, provided certain conditions are met. Paid-in capital is defined in Article 184 of the Income Tax Code and can include share premiums and subscriptions for profit-sharing certificates. Tax-neutral repayment of capital implies that shareholders receive back only their original investment. If shareholders receive more than their original investment, the excess is generally considered a dividend, subject to withholding tax (in principle at a rate of 30%).
The legislature recently amended the definition of paid-in capital to exclude (to a certain extent) capital that is created as a result of a contribution in kind of shares. Further to this change in the law, a contribution in kind of shares, even if it leads to an increase in capital for company law purposes, will (in certain situations) only partially be considered paid-in capital for tax purposes. The remainder will be considered a reserve which, upon distribution, will be categorised and potentially taxed as a dividend.
This difference between the concept of a capital decrease for company law and tax law purposes is further amplified by the Summer Agreement, which provides that a company with taxed reserves (regardless of whether they have been incorporated into capital) or untaxed reserves (incorporated into capital) will be deemed to have distributed a pro rata portion of those reserves (hence potentially triggering withholding tax) further to a capital decrease. Consequently, a capital decrease may no longer be tax neutral and may trigger withholding tax or even corporate tax (to the extent untaxed reserves are deemed distributed). Since the capital indicated on the company's balance sheet will not necessarily correspond to the paid-in capital for tax purposes, taxpayers will need to keep track of the paid-in capital separately (for instance by using form 328D, which was to a certain extent already the case, e.g. for reserves incorporated into capital).
Moreover, according to the Summer Agreement, the same rules will apply to foreign companies. Hence, if a foreign company reduces its capital, the Belgian parent company will need to assess the extent to which the capital repayment should be considered a dividend (potentially qualifying for the dividends-received deduction).
According to the explanatory note by Finance Minister Johan Van Overtveldt, the new rules will apply to capital decreases approved after 1 January 2018.
The Summer Agreement confirms that both the liquidation reserve (i.e. the possibility for SMEs to pay a 10% tax in order to form a reserve which can be distributed tax free upon liquidation of the company) and the transitional measure for liquidation surpluses (based on Article 537 ITC) will not be affected by the new measure.
2. The Participation Exemption and Capital Gains on Shares
In order to make Belgium a more attractive location for the establishment of holding companies, tax rates will be reduced (see supra), the Belgian participation exemption (or dividends-received deduction) will be increased from 95% to 100% as from 2018, and the separate tax of 0.412% on capital gains on shares realized by large companies will be abolished.
The exemption for capital gains on shares will however be aligned with the conditions for the dividends-received deduction. This means, for instance, that capital gains on shares will only be exempt if a participation threshold of 10% (or an acquisition value of EUR 2.5 million) is met (in addition to the "subject to tax", holding period and certain anti-abuse requirements). According to the text of October 2017, this measure is intended to prevent "normal investments" from being made through a company. In addition, other measures will be introduced to prevent a rush by self-employed persons to organize their activities in the form of a company due to the lower corporate tax rate (see our previous tax alert).
3. Minimum Tax Base
Under the current rules, tax losses carried forward can still be offset against future profits without any limitation in time or amount. While the new rules will not provide for a limitation in time, the amount that can be offset will be reduced.
This results in the following calculation of the tax base:
New sequence
Limitation
Non-taxable items
Dividends-received deduction
DRD carried forward will be included in the basket (see below).
Tax consolidation deduction
Newly implemented deduction in relation to tax consolidation
Transitional regime for the patent income deduction
Until 30 June 2021
Deduction for innovation income
Investment deduction
Result
Notional interest deduction (on an incremental basis)
These deductions taken together are limited to EUR 1,000,000 + 70% of the result after the investment deduction. The remainder can be carried forward.
DRD carried forward
Deduction for innovation income carried forward
Tax losses carried forward (unlimited)
Notional interest deduction carried forward (unlimited)
Notional interest deduction carried forward (7 years)
1. A Capital Decrease may Trigger Taxation
As a general rule, the paid-in capital of a Belgian company can be distributed to its shareholders in a tax-neutral way, provided certain conditions are met. Paid-in capital is defined in Article 184 of the Income Tax Code and can include share premiums and subscriptions for profit-sharing certificates. Tax-neutral repayment of capital implies that shareholders receive back only their original investment. If shareholders receive more than their original investment, the excess is generally considered a dividend, subject to withholding tax (in principle at a rate of 30%).
The legislature recently amended the definition of paid-in capital to exclude (to a certain extent) capital that is created as a result of a contribution in kind of shares. Further to this change in the law, a contribution in kind of shares, even if it leads to an increase in capital for company law purposes, will (in certain situations) only partially be considered paid-in capital for tax purposes. The remainder will be considered a reserve which, upon distribution, will be categorised and potentially taxed as a dividend.
This difference between the concept of a capital decrease for company law and tax law purposes is further amplified by the Summer Agreement, which provides that a company with taxed reserves (regardless of whether they have been incorporated into capital) or untaxed reserves (incorporated into capital) will be deemed to have distributed a pro rata portion of those reserves (hence potentially triggering withholding tax) further to a capital decrease. Consequently, a capital decrease may no longer be tax neutral and may trigger withholding tax or even corporate tax (to the extent untaxed reserves are deemed distributed). Since the capital indicated on the company's balance sheet will not necessarily correspond to the paid-in capital for tax purposes, taxpayers will need to keep track of the paid-in capital separately (for instance by using form 328D, which was to a certain extent already the case, e.g. for reserves incorporated into capital).
Moreover, according to the Summer Agreement, the same rules will apply to foreign companies. Hence, if a foreign company reduces its capital, the Belgian parent company will need to assess the extent to which the capital repayment should be considered a dividend (potentially qualifying for the dividends-received deduction).
According to the explanatory note by Finance Minister Johan Van Overtveldt, the new rules will apply to capital decreases approved after 1 January 2018.
The Summer Agreement confirms that both the liquidation reserve (i.e. the possibility for SMEs to pay a 10% tax in order to form a reserve which can be distributed tax free upon liquidation of the company) and the transitional measure for liquidation surpluses (based on Article 537 ITC) will not be affected by the new measure.
2. The Participation Exemption and Capital Gains on Shares
In order to make Belgium a more attractive location for the establishment of holding companies, tax rates will be reduced (see supra), the Belgian participation exemption (or dividends-received deduction) will be increased from 95% to 100% as from 2018, and the separate tax of 0.412% on capital gains on shares realized by large companies will be abolished.
The exemption for capital gains on shares will however be aligned with the conditions for the dividends-received deduction. This means, for instance, that capital gains on shares will only be exempt if a participation threshold of 10% (or an acquisition value of EUR 2.5 million) is met (in addition to the "subject to tax", holding period and certain anti-abuse requirements). According to the text of October 2017, this measure is intended to prevent "normal investments" from being made through a company. In addition, other measures will be introduced to prevent a rush by self-employed persons to organize their activities in the form of a company due to the lower corporate tax rate (see our previous tax alert).
3. Minimum Tax Base
Under the current rules, tax losses carried forward can still be offset against future profits without any limitation in time or amount. While the new rules will not provide for a limitation in time, the amount that can be offset will be reduced.
This results in the following calculation of the tax base:
New sequence
Limitation
Non-taxable items
Dividends-received deduction
DRD carried forward will be included in the basket (see below).
Tax consolidation deduction
Newly implemented deduction in relation to tax consolidation
Transitional regime for the patent income deduction
Until 30 June 2021
Deduction for innovation income
Investment deduction
Result
Notional interest deduction (on an incremental basis)
These deductions taken together are limited to EUR 1,000,000 + 70% of the result after the investment deduction. The remainder can be carried forward.
DRD carried forward
Deduction for innovation income carried forward
Tax losses carried forward (unlimited)
Notional interest deduction carried forward (unlimited)
Notional interest deduction carried forward (7 years)
4. Corporate Tax Consolidation
Belgium is one of the last European countries without corporate tax consolidation rules.
As of 1 January 2020, however, corporate tax consolidation will be progressively introduced into Belgian law. It is important to note that consolidation will not impact the financial accounts and will take the form of a "group contribution". Under the proposed measure, consolidation will be achieved by allowing a profitable group company to make a tax-deductible payment to a loss-making company.
Consolidation appears to be subject to a number of limitations:
- the intra-group transfer is capped at the tax losses realised during the tax year;
- tax consolidation is only allowed between Belgian companies, either between a parent and a direct subsidiary or between subsidiaries of the same parent company, and will not be possible between other group relations;
- at least 90% of the capital must be held by the parent;
- the group company must have existed for at least five years;
- companies subject to exceptional tax treatment do not qualify (e.g. REITs).
- Although the new tax consolidation rules certainly represent an improvement, it is unfortunate that their scope is so restricted.
5. Miscellaneous
The above measures are not exhaustive. The Summer Agreement also introduces the following changes:
- a reform of the rules governing the private privak;
- in the event of a tax-neutral reorganization, limitation of the dividends-received deduction in the same way as carried-forward tax losses;
- calculation of the notional interest deduction on an incremental basis;
- abolishment of the investment reserve;
- extension of the payroll tax exemption for R&D;
- implementation of ATAD2 (hybrid mismatches, limitation on interest deductibility to 30% of EBITDA, introduction of CFC rules, exit taxation);
- further alignment of the Belgian concept of "permanent establishment" to BEPS Action Point 7;
- introduction of a 0.15% tax on securities accounts containing certain assets with a value of more than EUR 500,000;
- etc.
