20/08/2013

Newsflash: Belgium introduces “Fairness Tax” – Briefing on its impact on real estate companies and project companies

As from tax year 2014 (i.e. financial years ending on 31 December 2013 or in 2014 but at the latest on 30 December 2014), Belgian companies and Belgian establishments of foreign companies become subject to what is referred to as a “fairness tax” on distribution of dividends.

The fairness tax is a separate assessment, at a rate of 5.15%, that targets distributed untaxed profits, i.e. profits that were not subject to corporate income tax as a result of notional interest deduction and/or carried-forward tax losses. As we will see, however, the scope is somewhat broader. The fairness tax is not deductible for corporate income tax purposes and is subject to the system of prepayments.

  • To the extent prepayments must be made during the taxable period to avoid tax increases while the fairness tax is only triggered by a dividend distribution decided solely by the general meeting of the shareholders after the end of the taxable period, one could dispute this obligation to make prepayments.

Real estate companies and companies active in project development (e.g. PPP) generally benefit from the notional interest deduction and/or present carried-forward tax losses (for depreciation on the asset and for financing costs). Accordingly these companies are potentially subject to this fairness tax. As we will see below, the same applies to Belgian holding companies, owning shares in Belgian or foreign real estate companies, as the capital gains arising on share disposals may become subject to this fairness tax.

In a nutshell the essentials of this new taxation are as follows.

Taxpayer and taxable event

Belgian companies and Belgian establishments of foreign companies are designated as taxpayer but only the distribution of a dividend (either by the Belgian company or by the foreign company) triggers the fairness tax. Please note that (i) the distribution of a liquidation bonus and of an acquisition surplus (in case of redemption of shares) does not constitute a taxable event, and (ii) SMEs are exempt from this tax.

The designation of Belgian establishments as taxpayers merits the following two remarks.

  • When the fairness tax is triggered by a dividend distribution made by a foreign company, the ‘deemed dividend’ of the Belgian establishment will be equal to “the part of the gross dividend distributed by the company that corresponds to the part of the accounting result of the establishment in the global accounting result of the company”. The way to determine this ‘deemed dividend’ may lead to contentious issues due to the poor drafting of the French and the Dutch versions of the legislation, which leave room for differing interpretations and, more importantly, due to the potential for accounting standards applicable to the foreign company and its Belgian establishment.
  • Whether a foreign company has a Belgian establishment  because of it owns Belgian real estate, is a matter of fact and is, therefore, a much debated issue. One should that a foreign company has a Belgian establishment if it qualifies as a real estate company and owns and lets Belgian real estate. To make such a determination, its articles of association and corporate object should be verified. It cannot, therefore, be deducted from the facts that a foreign company owns Belgian real estate and distributes dividends, that the fairness tax will automatically apply.

Taxable base 

The taxable base for the fairness tax is determined by the following sequences of steps.

Firstly, the positive difference between the dividends distributed for the taxable period and the taxable base, effectively subject to corporate income tax, is determined. The origin of the dividends distributed is not of importance, meaning that dividends deriving from exempt income (e.g. dividends received, capital gains on shares, rental income from foreign real estate exempt by tax treaty) are also taken into account to determine the taxable base.

Secondly, this amount is reduced by the part of the dividend deriving from previously (and at the latest during tax year 2014) taxed reserves, i.e. the profits that were not distributed but brought-forward. It is further specified that the LIFO-method will be applied to identify the historical origin of such dividend (i.e. the last built-up reserves are distributed first). A rather poorly drafted specific anti-abuse provision seems to prohibit, for the tax year 2014, the conversion of ordinary dividends (originating from the profits of the taxable period) into intermediary dividends (originating from profits brought-forward).

Thirdly, the balance after the second step is further limited by the application of a percentage representing the ratio between (i) the carried-forward tax losses and the notional interest deduction effectively deducted for the taxable period (the numerator) and (ii) the tax result of the taxable period, excluding the exempt write-offs, provisions and capital gains (the denominator).

This way of determining this taxable base calls for the following remarks.

  • Only untaxed profits deriving from the notional interest deduction and/or carried-forward tax losses are targeted, while untaxed profits deriving from the deductible expenses of the year and other tax deductions are not. This means that the taxpayer can continue to take full advantage of them, but no justification has been given for the limited scope.
  • Based on the legal provision, both the notional interest deduction of the year and the carried-forward notional interest deduction that were deducted should be taken into account, while, in the parliamentary works, only the notional interest deduction of the year is targeted.
  • The ‘tax result’ is only defined in the parliamentary works and refers to the tax result after the so-called ‘first operation’ (i.e. the sum of retained earnings variation, disallowed expenses and distributed dividends). This specification is not mentioned in the legal provision itself.
  • The profits realised through a foreign permanent establishment, or foreign real estate assets, are taken into account when determining the taxable base, which could be held to be contrary to the tax treaties entered into by Belgium.
  • To the extent exempt write-offs, provisions and capital gains are already excluded from the ‘tax result’, the intention of the legislator when mentioning these items remains unclear and might lead to the submission to the fairness tax of an exempt capital gain on shares.

Examples

Let us illustrate possible scenarios with a few examples. Please note that in these examples the percentage in step 3 has been rounded up 2 figures after the decimal.

Belgian real estate company

For the taxable period, this company reports an accounting profit of 6,000,000 EUR. It has 1,300,000 EUR disallowed expenses and can deduct 1,000,000 EUR notional interest deduction and 4,000,000 EUR carried-forward tax losses (former depreciation taken on the assets). We will also assume that all taxes due have been prepaid or duly provisioned, and that all profits of the year are distributed, i.e. 6,000,000 EUR.

Its corporate income tax is computed as follows:

Increase of taxed reserves (i.e. accounting result less the dividend distributed)

0

Disallowed expenses

1,300,000

Dividend distributed

6,000,000

Tax result after the first operation

7,300,000

Notional interest deduction
Carried-forward tax losses
Taxable base

2,300,000

Corporate income tax to pay

781,770

 

The fairness tax due by this company is computed as follows:

Step 1

6,000,000-2,300,000

3,700,000

Step 2

3,700,000-0

3,700,000

Step 3

5,000,000 / 7,300,000

68.49%

Taxable base

3,700,000 * 68.49%

2,534,130

Fairness tax due

2,534,130 * 5.15%

130,507.70

 

Belgian real estate company with real estate located in a treaty country

Let us take the same company, but assume it also owns real estate in France, which generates 1,600,000 EUR net rental income exempt by treaty.

For the taxable period, this company reports an accounting profit of 7,600,000 EUR. It has 1,300,000 EUR disallowed expenses and can deduct 1,000,000 EUR notional interest deduction and 4,000,000 EUR carried-forward tax losses (former depreciation taken on the assets). Same assumptions and thus this company distributes a dividend of 7,600,000 EUR.

Its corporate income tax is computed as follows and represents exactly the same burden:

Increase of taxed reserves (i.e. accounting result less the dividend distributed)

0

Disallowed expenses

1,300,000

Dividend distributed

7,600,000

Tax result after the first operation

8,900,000

Profits exempt by treaty
Notional interest deduction
Carried-forward tax losses
Taxable base

2,300,000

Corporate income tax to pay

781,770

 

The fairness tax due by this company is computed as follows:

Step 1

7,600,000-2,300,000

5,300,000

Step 2

5,300,000-0

5,300,000

Step 3

5,000,000 / 8,900,000

56.18%

Taxable base

5,300,000 * 56.18%

2,977,540

Fairness tax due

2,977,540 * 5.15%

153,343.31

 

Belgian holding company

Let us now assume that it is a Belgian holding company which owns shares in real estate companies. It also procures management services and financing, and therefore has operating profits. For the taxable period, this company reports an accounting profit of 10,000,000 EUR composed of operating profits for 1,500,000 EUR, dividends received for 2,500,000 EUR and a realised capital gain on shares following a disinvestment for 6,000,000 EUR. It has 250,000 EUR disallowed expenses and can deduct 150,000 EUR notional interest deduction and 1,200,000 EUR carried-forward tax losses (former operating and financing costs). It distributes a dividends of 9,000,000 EUR

Its corporate income tax is computed as follows:

Increase of taxed reserves (i.e. accounting result less the dividend distributed and the capital gain realised)
Disallowed expenses

250,000

Dividend distributed

9,000,000

Tax result after the first operation

4,250,000

Dividend received deduction (i.e. 95% of 2,500,000)
Notional interest deduction
Carried-forward tax losses
Taxable base

525,000

Corporate income tax to pay

178,447.50

Separate taxation of capital gain realised on shares (i.e. 0.412% of 6,000,000)

24,720

 

The fairness tax due by this company is computed as follows:

Step 1

9,000,000-525,000

8,475,000

Step 2

8,475,000-0

8,475,000

Step 3

1,350,000 / 4,250,000

31.76%

Taxable base

8,475,000 * 31.76%

2,691,660

Fairness tax due

2,691,660 * 5.15%

138,620.49

 

Entry-into-force

The fairness tax is applicable as from tax year 2014. In practice, and assuming a taxpayer’s financial year corresponds to a calendar year, it gives the following:

2012 and previous profits brought-forward: their distribution, which is subject to the aforementioned LIFO-method, does not trigger the fairness tax (or in other words, these profits are excluded from the taxable base when distributed);

2013 profits that are distributed: the payment of an advance dividend in 2013 and the distribution of the dividend in 2014 triggers the fairness tax;

2013 profits that are not distributed but brought-forward:

–       if they are distributed later in 2014 via an intermediary dividend, then this distribution should trigger the fairness tax as a result of the aforementioned specific anti-abuse provision;

–       if they are distributed later as from 2015, but subject to the aforementioned LIFO-method, then their distribution does not trigger the fairness tax (or in other words, these profits are excluded from the taxable base when distributed).

What to do ?

The compliance of this new taxation with European law, with Constitutional law and with the tax treaties entered into by Belgium is highly debated. One could thus consider the prospect of litigation.

Each taxpayer should, in any event, review its own situation and determine whether it is possible and worthwhile to monitor the dividend distributions. It could, for example, be worthwhile refraining from distributing dividends as long as the losses carried forward have not been fully used. With respect to the timing of dividend distributions, it should also be noted that the application of the LIFO-method on the retained earnings implies, for profit making companies, that if it is intended to distribute dividends in the near future, it could be advisable to distribute the existing retained earnings as soon as possible. Other ways of distributions or investment proceeds upstream could also be envisaged.

Contacts

If you have a question, or you want to discuss further one of the issues referred to above, do not hesitate to get in touch with your own contact person at Loyens & Loeff or with the contributors to this newsflash:

Christophe Laurent
Partner, Real Estate & Tax
+32 2 743 43 05
christophe.laurent@loyensloeff.com

Ariane Brohez
Senior Associate, Real Estate & Tax
+32 2 743 43 21
ariane.brohez@loyensloeff.com

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