The Act of 30 July 2013 has introduced a new, separate corporate income tax, called “fairness tax”. Fairness tax constitutes a separate, non-deductible levy for companies that distribute dividends during the taxable period and for which the tax base has been offset by means of the notional interest deduction and carry-forward losses. The rate of this tax is set at 5.15%. The fairness tax regime comes into force as from tax year 2014 (for financial years ending between 31 December 2013 and 30 December 2014). During the discussions leading to enactment of the bill, both the Belgian Legislative Advisory Council (Conseil d’Etat) and members of parliament opposed the new measure as possibly being contrary to the Belgian principles of equality and non-discrimination, the European Parent-Subsidiary Directive and other European tax-law principles, and international double taxation treaties.
Calculation of the tax base
Calculating the tax base is a three-step process.
Step 1: the tax base is calculated as the positive difference between:
the gross dividend distributed during the taxable period; and
the taxable income for that period that has actually been subject to corporate income tax at the (standard) 33.99% tax rate.
Step 2: the tax base thus calculated is reduced by that part of the distributed dividend originating from previously taxed reserves built up no later than during tax year 2014. For the purpose of this reduction, previously taxed reserves are taken into account after the last available reserves – using a “LIFO” (last in, first out) method.
Step 3: the outcome of this calculation is multiplied by a ratio whose:
- numerator includes the carried-forward losses and the notional interest deduction that have actually been used for the same taxable period; and whose
- denominator includes the result of the taxable period (which, for the purposes of fairness tax, is the taxable income existing before the application of deductions), excluding write-downs, provisions and tax-exempt capital gains.
After the recent introduction of the 0.412% capital gains tax, the fact that tax-exempt capital gains are excluded from the denominator is a (further) attempt to the attractiveness of the Belgian holding regime. Not including them increases the fairness tax base.
The final amount thus calculated is taxed separately at a 5.15% rate.
Practical example
For tax year 2014, a company has a taxable result of EUR 3,000 and EUR 1,500 previously taxed reserves built up no later than during tax year 2014. In reduction of its tax base, it applies several deductions: EUR 1,500 of notional interest deduction, EUR 1,300 of carried-forward losses, and EUR 200 of dividends-received deduction. After applying these deductions, the tax base for tax year 2014 is nil.
In addition, during the same taxable period, the company distributes a dividend of EUR 4,000.
Based on this information, the fairness tax is calculated as follows:
First step: difference between the gross dividend distributed and the final taxable result
4,000 (4,000 - 0)
Second step: less the part of the dividend that originates from previously taxed reserves built up no later than during tax year 2014 - here, 1,500
2,500 (4,000 - 1,500)
Third and final step: multiplied by the ratio determined as follows (see below):
(2,800 / 3,000) = 93.33%
Numerator: carried-forward losses and notional interest deduction used during this tax period
2,800 (1,300 + 1,500)
Denominator: taxable result of this tax period
3,000
Fairness tax base
2,333.25 (2,500 x 93.33%)
Fairness tax charge
120.16 (2,333.25 x 5.15%)
Fairness
tax is not applicable to small companies
Fairness tax is not
applicable to companies that qualify as “small companies” (“SMEs”) within the
meaning of section 15 of the Belgian Companies Code. Under that provision, a
company is deemed to be small if it does not exceed more than one of the
following thresholds:
- 50 employees (expressed in full-time equivalents);
- annual turnover of EUR 7,300,000;
- a balance sheet total
of EUR 3,650,000.
However, if the number of qualifying employees exceeds 100 full-time equivalents on an annual
average, the company is no longer deemed to be a small company. Furthermore, if it exceeds more than one criterion during a given accounting year, it will be deemed to be a “large” company for the next two accounting years at least.
Please note that these thresholds are calculated on a consolidated basis if the company is associated with one or more other companies, which is the case with many holding companies. It is important to mention that even small companies can fall within the scope of the tax. Thus, companies that would not themselves be affected by this tax, such as real estate special purpose vehicles (with no personnel, low annual turnover or a small balance sheet), will be affected by it
if the above criteria are exceeded on a consolidated basis.
The Belgian Income Tax Code sets criteria to determine whether other group companies should be taken into account to calculate the threshold.
Fairness tax is not applicable to small companies
Fairness tax is not applicable to companies that qualify as “small companies” (“SMEs”) within the meaning of section 15 of the Belgian Companies Code. Under that provision, a company is deemed to be small if it does not exceed more than one of the following thresholds:
- 50 employees (expressed in full-time equivalents);
- annual turnover of EUR 7,300,000;
- a balance sheet total of EUR 3,650,000.
However, if the number of qualifying employees exceeds 100 full-time equivalents on an annual average, the company is no longer deemed to be a small company. Furthermore, if it exceeds more than one criterion during a given accounting year, it will be deemed to be a “large” company for the next two accounting years at least.
Please note that these thresholds are calculated on a consolidated basis if the company is associated with one or more other companies, which is the case with many holding companies. It is important to mention that even small companies can fall within the scope of the tax. Thus, companies that would not themselves be affected by this tax, such as real estate special purpose vehicles (with no personnel, low annual turnover or a small balance sheet), will be affected by it if the above criteria are exceeded on a consolidated basis.
The Belgian Income Tax Code sets criteria to determine whether other group companies should be taken into account to calculate the threshold.
Fairness tax also applies to Belgian branches of foreign companies. For this purpose, the notion of “distributed dividend” has been adjusted to the situation of Belgian branches and is defined as the part of the gross dividend distributed by the foreign company that corresponds to the (positive) part of the accounting result of the Belgian branch in the global accounting result of the head office.
Will the tax be challenged?
Both the Conseil d’Etat and members of parliament opposed the new measure during the drafting of the bill and debates in Parliament as possibly being contrary to several basic principles of Belgian and international tax law, such as: the Belgian principle of equality and non-discrimination; the European Parent-Subsidiary Directive; and, more generally, principles of European tax law and international double taxation treaties. It cannot be ruled out that taxpayers may challenge application of the fairness tax to their particular tax situations.
