Belgian Parliament adopts tax measures from 2013-2014 budget including the Fairness Tax
On 18 July 2013, the tax measures previously announced by the Belgian government after the latest 2013 budget control were adopted by Parliament. (please click here for the adopted bill). The bill will now have to be ratified and then published in the Belgian Official Gazette in order to take effect.
The tax measures in this bill have already been reported in our Tax Alert of 3 July 2013 (please click here for the full text of that Tax Alert), and therefore this Tax Alert only focuses on changes that have been made to the original plans and on additional information that has become available since.
The Fairness Tax is an additional tax of 5.15% (5% + 3% crisis surcharge) to be levied in case a company distributes dividends while it has deducted notional interest deduction and/or loss carry-forwards from its corporate tax base. “Small companies”, as defined in Article 15 of the Belgian Company code, are exempt from the Fairness Tax.
The Fairness Tax is levied on the “untaxed” part of distributed profits multiplied by a fraction. The calculation can be summarized as follows:
FT = 5.15% x “untaxed” part of the distributed profits x [(Notional interest deduction + loss carry-forwards applied)/“gross” taxable basis]
The “untaxed” part of the distributed profits is equal to the amount of the dividends distributed,
- less the (final) taxable result that has effectively been subject to 34% corporate income tax; and
- less the portion of the dividends that stems from reserves that were previously taxed. However, only reserves taxed up to tax year 2014 (FYs ending on 30 December 2014 at the latest) are excluded. Profit that is retained after tax year 2014 (FYs ending on 31 December 2014 or later) and that is distributed as dividend in subsequent years, will not be excluded from the basis of the Fairness Tax.
The fraction includes:
- a numerator that is the sum of the notional interest deduction and the loss carry-forwards effectively used to offset taxable income; and
- a denominator that corresponds to the “gross” taxable basis, i.e., the taxable basis after the “first operation” in the Belgian corporate tax return. This refers to an intermediary step in the calculation of the Belgian corporate income tax liability after the exclusion of some tax-exempt income such as exempt capital gains on shares but before the deduction of other tax benefits such as the dividends received deduction, the patent income deduction, the notional interest deduction, loss carry-forwards and the investment deduction.
Non-resident companies with a permanent establishment (PE) in Belgium are also subject to the Fairness Tax according to the formula above. The distributed dividend is, however, defined as the portion of the gross dividend distributed by the non-resident company that corresponds to the part of the accounting result of the Belgian PE in the overall accounting result of the non-resident company. Important to note is that the Fairness Tax will not apply to liquidation distributions.
Points of attention
When taking a closer look at the calculation method of the Fairness tax, it appears that the Fairness Tax may have some unintended or unexpected consequences. The compatibility with EU law and double tax treaties may also be questioned. A number of points of attention are highlighted below:
- Certain types of tax-exempt income (transfer pricing corrections, capital gains on shares etc.) may amplify the effect of the Fairness Tax as these items are part of the distributable profit, but they are not taken into account in the denominator of the fraction. In a brief reply dated 18 July 2013 to a parliamentary question on this subject, the Finance Minister confirmed that such tax exempt income is indeed not to be included in the denominator of the fraction.
As a result, capital gains on shares that are redistributed as dividends may be both subject to the separate assessment of 0.412% on capital gains on shares and the Fairness Tax.
- Certain types of income benefit from tax deductions that are processed after the “first operation” (such as the dividends received deduction, the patent income deduction, the investment deduction). In case such income is distributed as dividend, it is in principle included in the taxable basis of the Fairness Tax. The effect on the Fairness Tax is somewhat mitigated as this income is also included in the denominator of the fraction. Nevertheless, in relation to dividends received, the Fairness Tax could lead to a taxation which may not be in line with the European Parent-Subsidiary Directive. A similar situation arises in relation to profit attributable to PEs outside Belgium in a jurisdiction with which Belgium has concluded a double tax treaty. It is questionable whether Belgium would be in a position to levy the Fairness Tax on profit attributable to PEs outside Belgium under the applicable double tax treaty.
- The application of the Fairness Tax to non-resident companies with a PE in Belgium also appears problematic:
- Profit retained after tax year 2014 does not benefit from an exclusion from the basis of the Fairness Tax. Even when such retained profit has effectively been subject to 34% corporate income tax, a distribution in later years may trigger the Fairness Tax and may therefore lead to double taxation. Minor changes in the dividend policy, the composition of the corporate tax basis and the utilization of notional interest deduction and loss carry-forwards, may have a significant impact on the Fairness Tax.
- First, in order to determine the equivalent amount of “dividends distributed” for a Belgian PE, the Fairness Tax requires that the “accounting result of the PE be compared to the overall accounting result of the non-resident company. It is unclear whether this should be assessed under Belgian GAAP. Applying Belgian GAAP to the worldwide activities of non-resident companies, possibly including PEs in other countries, may prove impracticable.
- Second, the calculation of the Fairness Tax does not take into account the fact that a foreign entity may also have loss-making PEs in other countries. It is unclear how such losses should be dealt with for the purpose of the calculation of the Fairness Tax.
- Finally, the Fairness Tax can apply to a Belgian PE even though it has not actually transferred its earnings outside of Belgium to the head office of the non-resident company. Even if the earnings of a Belgian PE are re-invested in its Belgian operations as retained earnings, a dividend distribution by the non-resident company could trigger a Fairness Tax liability in Belgium, regardless of the source of the distributed profits. Again, the compatibility with the EU freedoms and the double tax treaties may be questioned.
No changes to the dividends received deduction
The government initially planned to tighten the minimum participation requirement for the dividends received deduction. However, this was finally not included in the bill adopted by Parliament.
The Fairness Tax legislation has turned out to be a rather complicated matter and EY will continue to brief you on updates and developments. The actual impact of the Fairness Tax requires a case by case analysis, and it might require for companies to, for example, revise their capital structure and/or dividend policy. We recommend however to assess the potential impact of the Fairness Tax as soon as possible and are happy to assist you in this matter.