by Benoît Malvaux and Kurt Demeyere of NautaDutilh
After lengthy negotiations to form a government, a political compromise was finally reached. Prime Minister Di Rupo announced in his State of the Union address on 7 December 2011 that the federal budget deficit must be reduced by EUR 11.3 billion in 2012 in order to meet the criteria set by the Maastricht Treaty. In this regard, the Act of 28 December 2011 (the “2011 Act”) already introduced a number of measures. A second important piece of legislation is now being finalised (the “2012 Act”). This article provides an overview of the most important tax measures you can expect in the near future.
Until recently, the Belgian tax system was mainly focused on earned income, with no taxation of capital gains. The new government plans to bring about tax reform in four main areas, namely (i) individual investment income, (ii) fringe benefits, (iii) anti-avoidance measures, and (iv) corporate tax. Below we highlight the key measures in each area.
Reform of individual investment income taxation
The 2011 Act increased the withholding tax rate on both interest income and dividends, from 15% to 21%. An additional levy of 4% on substantial investment income has been introduced. This levy applies to qualifying investment income in excess of EUR 20,020 on an annual basis. The withholding tax rate on royalties remains 15%. The tax administration will set up a Central Contact Point to gather information about investment income. The implementation of this new legislation is still under discussion.
The existing exemption for interest income on savings accounts (up to EUR 1,830 annually per taxpayer) remains unchanged. Taxpayers are not obliged to report this amount on their tax returns, as it is not taken into account to calculate the abovementioned threshold of EUR 20,020.
Finally, despite calls to reform the capital gains tax, the system has not been substantially modified. Consequently, capital gains will be taxed at a rate of 33% only if they are speculative. Please note, however, that we expect both the tax authorities and the ruling commission to adopt a more stringent approach when it comes to assessing the speculative nature of capital gains.
Reform of fringe-benefit taxation
As the tax rate on earned (professional) income can reach up to 53.5%, granting fringe benefits (in lieu of remuneration) is a widespread practice in Belgium. The most common fringe benefits include company cars and housing, stock options and pension plans, all of which are targeted by the 2011 and 2012 Acts.
With respect to company cars, the benefit for tax purposes was previously determined based on CO² emissions and commuting distance (without taking into account the particularities of the car, such as an expensive options package). As of 2012, however, the benefit will be determined based on the value of the car and its environmental impact. It is not yet clear how the “value” of a car should be determined. Pursuant to the final text, it appears to be the guide price (for both new and used cars, with a 6% decrease in value per year for up to five years or 30% for the latter). The actual commuting distance or private kilometres driven does not affect the fringe benefit. These new rules lead to a substantial tax increase for expensive or polluting vehicles.
Company-provided housing and utilities are also popular management remuneration tools. In this regard, calculation of the benefit for tax purposes has been modified in three main respects: (i) the lump-sum value of the housing for tax purposes will be doubled if the cadastral income (i.e. imputed rental value) of the property exceeds EUR 745 per annum; (ii) the annual lump sum for heating is increased from EUR 1,640 to EUR 1,820 and for electricity from EUR 820 to EUR 910; and (iii) the aforementioned lump sums for heating and electricity will now be linked to the consumer price index.
The use of companies to hold real estate is widespread in Belgium (the manager holds bare title to the property, while the company is the beneficial owner or usufructuary). The finance minister has announced that the tax administration will conduct an in-depth audit to determine whether managers and companies correctly report these fringe benefits.
Since 1999, the grant of stock options to an individual has been taxable upon grant. On the other hand, capital gains realised upon exercise of the options are not taxable. The 2011 Act raised the standard tax base from 15% to 18% of the value of the underlying shares. Nevertheless, the grant of stock options remains a tax friendly form of remuneration, especially when stock prices are low.
It is still possible to book pension obligations deriving from qualifying managerial pension plans on the company’s balance sheet (in this way, the financial resources remain available to the company). Under the proposed legislation, however, companies will be obliged to outsource these types of pension plans and a 4.4% premium tax (with lower tax rates during a transition period) will fall due. Further, if an individual’s total pension benefits exceed the highest pension for public servants, there will be adverse tax consequences.
New general anti-avoidance provision
Under the current rules, the tax authorities can recharacterise a transaction or series of transactions if they can prove that the purpose of the transaction or transactions was to avoid tax and the taxpayer cannot demonstrate financial or economic reasons for the transaction(s).
The 2012 Act proposes the following changes:
(i) recharacterisation will no longer be necessary; once abuse has been established, the authorities can simply ignore or disregard the transaction;
(ii) there are two presumptions of tax abuse, i.e. abuse will be presumed when the taxpayer tries to fall within or outside the scope of the act, when claiming a tax benefit or exemption, respectively, contrary to its objective;
(iii) the taxpayer bears the burden of proof, i.e. the taxpayer must demonstrate valid objectives or reasons for the transaction(s), other than simply tax avoidance; and
(iv) if the taxpayer is not able to prove such other objectives, the administration can compute the tax as if the transaction had not taken place.
Corporate tax reform
Last but not least, the rules on the notional interest deduction (“NID”), the taxation of capital gains on shares and the debt-to-equity ratio used to disallow interest expenses will be modified.
The NID, created in 2005, allows companies to deduct a fictitious percentage of interest calculated on the basis of their adjusted equity (even if the company has no actual interest expenses). The percentage was based on the interest rate applicable to 10-year government bonds. Excess notional interest (i.e. notional interest which could not be deducted from taxable income as the company was loss-making) could be carried forward for seven years. This tool was very successful, but the government underestimated its cost in terms of lost tax revenue. Hence, effective 1 January 2012, the 2011 Act reduces the NID rate to 3% or 3.5% (for SMEs). Pursuant to legislative proposals, it will also no longer be possible to carry forward the NID in the future. However, companies will be able to continue to carry forward their existing NID, but only to offset taxable profit (up to 60%). This restriction will not apply to the first EUR 1,000,000 of taxable profit.
Capital gains on shares are tax exempt, to the extent the company is subject to tax at a normal rate. As from tax year 2013, however, the 2012 Act introduces a holding period of one year. If the shares are resold within this period, the capital gain will be taxed at a rate of 25%.
Belgium does not have stringent thin capitalisation rules. Indeed, only interest payments exceeding a 7-to-1 debt-to-equity ratio are not deductible, if the recipient of the interest is located in a tax haven. Publicly issued bonds and loans granted by financial institutions do not fall under this rule. After the publication of 2012 Act, however, two important changes will be introduced: (i) the ratio will be lowered to 5-to-1 and (ii) the thin capitalisation rules will apply, even if the recipient is not located in a tax haven. Consequently, all intra-group loans will be taken into account for the purpose of determining the debt-to-equity ratio. As Belgium is home to the headquarters of several multinational groups which engage in pooling activities, the proposed rule has been heavily criticised and is still under discussion. In any case, it will not be applied.