Agreement on Far-Reaching Belgian Tax Reform
Belgian Corporate Income Tax rate to decrease from 33.99% to 25%. Other measures to guarantee budget neutrality.
On 26 July 2017, the Belgian government agreed on a far-reaching Belgian tax reform aimed at stimulating economic growth & attractiveness for foreign investment, job creation and overall fairness in taxation policy. The most important measures include a reduction of the corporate income tax rate, a minimum effective tax rate, a tax consolidation regime, an annual tax applicable to high-value securities’ accounts and an exemption of withholding tax for a first tranche of dividends distributed to private investors. Most of the measures are intended to enter into force in 2018 whereas the remaining part is anticipated for 2020.
You will find an overview of the measures that were announced on 26 July 2017 below. Please note that the details of the measures are still subject to change.
- Corporate income tax :
- Nominal tax rate reduction: The nominal CIT rate is gradually reduced from 33.99% to 29.58% in 2018 and to 25% in 2020. Under certain conditions, such as a minimum annual remuneration to be paid to its managers, SMEs benefit from a reduced rate of 20.4% on the first tranche of EUR 100,000 taxable income as per 2018 (further decreased to 20% by 2020).
- Minimum effective tax rate: The reform introduces a minimum taxable base equal to 30% of the taxable income exceeding a first tranche of EUR 1,000,000 (implying an effective tax rate of 7.5% on the taxable income exceeding EUR 1,000,000 as from 2020). Exceptions related to R&D investments would apply.
- Reform of notional interest deduction: Inspired by the EU Commission’s CCTB proposal, NID will no longer apply to the total equity but only to the increase of equity measured over a rolling 5 years period (incremental based approach referring to the past 5 years). Transitional rules will apply.
- Tax consolidation: By 2020, Belgium will introduce a CIT consolidation regime allowing the deduction of one Belgian group entity’s tax loss from another Belgian group entity’s taxable profits of a given fiscal year.
- Reform of the holding regime: The reform provides for the abolishment of the 0.412% minimum capital gains tax currently applicable to non-SMEs qualifying for the participation exemption. On the other hand, it extends the minimum participation threshold requirement of either 10% or EUR 2,500,000 acquisition value to the participation exemption for capital gains on shares, as was already the case for the participation exemption on dividends.
- Implementation of EU Anti-Tax Avoidance Directive: By 2020, Belgium will implement the limitation of tax deductibility of net borrowing costs to the higher of 30% of the EBITDA and an amount of EUR 3 million. Belgium will further adopt legislation introducing controlled foreign companies rules, a broader scope of exit tax and provisions against hybrid mismatches.
- Other measures: these include the temporary increase of the investment deduction for SMEs to 20% as from 2018, the extension of the wage withholding tax exemption for scientific research, the extinction of the investment reserve regime, the restriction of the use of losses attributed to foreign permanent establishments (by 2020) and the abolishment of accelerated and pro rata depreciation for tax purposes (by 2020).
2. Personal income tax
- Withholding tax on reimbursements of paid-up capital: when a company distributes its paid-up capital, this is currently free from any withholding tax or personal income tax. The Government has announced that for tax purposes, a proportional allocation of a capital reduction to the company’s taxable reserves would be introduced. To the extent taxable reserves are deemed to be distributed, dividend withholding tax is, in principle, due.
- Withholding tax exemption for dividends up to EUR 627: the Government has announced to introduce a withholding tax exemption on dividends received by private individuals up to a maximum amount of EUR 627 per year. At the current rate of withholding tax on dividends of 30%, the withholding tax exemption would amount to a maximum of EUR 188.10 per year.
- Reduction by half of the tax exemption on interest on savings accounts: Currently, the first tranche of interest income on savings account of EUR 1,880 per year is exempt from withholding tax (corresponding to a maximum exemption of EUR 564 per year). This amount is reduced by half to EUR 940 (or a maximum exemption of EUR 282) per year. As the dividend withholding tax exemption discussed above, this measure is meant to stimulate the investment of savings in the economy.
- Extension of the tax shelter for starting companies to growth companies: it was already possible to claim a personal income tax reduction of up to 45% of the funds invested into the equity of starting companies, on the condition (inter alia) to keep the shares during 4 years. Now, the tax shelter would be extended to growth companies, but it is unclear what exactly would be the definition of growth companies. Indirect investment in starting and growth companies would be stimulated by alleviating the regulatory requirements for private investment companies (private privak/pricaf privée) and lowering the investment threshold thereof to EUR 25,000 per investor.
- Taxation of capital gains on units of UCIs – abolishment of 25% debt receivables threshold: According to Article 19bis of the Belgium Income Tax Code (ITC), the interest component embedded in the capital gain realized by a Belgian individual investor upon the transfer against consideration, liquidation or redemption of its shares or units in qualifying undertakings for collective investment (UCI) is taxed as interest at 30%. One of the conditions for the application of the above tax treatment is that the UCI directly or indirectly invests at least 25% of its assets in qualifying debt receivables (such as bonds). The Government has now announced to abolish the 25% threshold altogether, meaning that all UCI investing in qualifying debt receivables will fall within the scope of Article 19bis ITC, irrespective of the above threshold.
- Pension savings: The government proposes a slight modification of the third pillar pension savings. The actual system, providing a 30% tax reduction for contributions of up to EUR 940, remains in place but the taxpayer will now have the possibility to opt for a new system, providing a 25 % tax reduction of up to EUR 1,200 per year. The new system offers a maximum tax reduction of EUR 300 while the actual system offers a maximum tax reduction of 282 EUR). The additional EUR 18 tax reduction requires an additional contribution or EUR 260, per year.
- Second pillar pension schemes for independents: building up a second pillar pension capital is currently generally less attractive for independents than for managers using a personal service company. In the future, the system for independents would be adapted to correspond to that of managers using a personal service company.
- Net income from secondary activities: the government confirmed that measures will be taken to enable employees who work at least 4/5 or pensioners to earn an additional untaxed amount of up to EUR 500 per month from their (secondary) activities.
- Employee profit participation: Premiums depending on the company’s profit offered to employees and not exceeding 30% of the total wage, would be subject to the normal 13.07% employee social security contribution, but would be exempt from employer social security contribution (currently around 30%) and would only be subject to 7% personal income tax.
- Deduction of car expenses for sole proprietorships: Currently, 25% of car-related business expenses are not deductible from the personal income tax base, irrespective of the CO2-emissions of the vehicle in question, while in the corporate income tax, the deductibility depends on the CO2-emissions and ranges from 50% to 120% (for the most eco-friendly cars). This rule would also be introduced in the personal income tax for sole proprietorships.
- Cayman tax: The look-through taxation for income received by trusts, foundations and other entities established in low-taxed jurisdictions will be further reinforced, to cover legal constructions that would otherwise slip through the net (a.o. multiple tier structures).
3. Other taxes
- Subscription tax on securities accounts: Belgian residents holding securities, such as shares, bonds and units of UCI of an aggregate amount exceeding EUR 500,000 on securities accounts, will be charged an annual subscription tax of 0.15% on the full amount. Securities held through pension savings schemes and life insurances would be exempt, however.
- Tax on stock exchange transactions (TSET): After having been increased multiple times in the past years, the rates of the TSET would be increased again. The 0.27% rate, generally applicable to transactions involving shares, would increase to 0.35% and the 0.09% rate, generally applicable to transactions involving bonds, would increase to 0.12%. Please note that the TSET was extended to transactions carried out abroad by Belgian residents as of 1 January 2017 (read more about it here).
4. Next steps
The measures announced will now be translated into draft legislation, which must be submitted to the Council of State. After the latter’s report has been issued, bills are submitted to the Federal Parliament, after which they are discussed and voted, adopted and published in the Belgian State Gazette. The measures that were referred to above as being applicable as of 2018, will likely enter into force as of 1 January 2018. However, it cannot be excluded that some measures may enter into force at an earlier date in the second half of 2017. Other measures are announced to enter into force as of 1 January 2020.
Please contact your trusted adviser at Loyens & Loeff in case you have any queries with respect to the above.