Belgian tax authorities release Circular letter on Fairness Tax
The Belgian tax authorities released a Circular letter to clarify the application of the Fairness Tax. For our previous alert on this measure, please click here for the full text .
Please click for the full text of the Circular letter:
After a brief recap on the background of the Fairness Tax and its calculation, this alert will report on the key items addressed in the Circular letter.
The Fairness Tax is a separate corporate tax assessment of 5,15% on distributed profits which have not been effectively taxed as a result of the notional interest deduction (NID) or the deduction of tax losses carried forward (TLCF). The Fairness Tax was introduced in July 2013 in order to provide for a certain level of taxation for companies which end up not paying taxes because of NID and/or TLCF. It applies as of assessment year 2014 (FYs ending on or after 31 December 2013). The Fairness Tax applies to Belgian resident companies as well as Belgian permanent establishments of non-resident companies.
Calculation for Belgian companies
Fairness Tax = Untaxed distributed profit x Proportionality factor x 5,15%
The “untaxed distributed profit” refers to the dividends distributed by the company in excess of its corporate tax base subject to 33,99%. Taxed reserves constituted at the latest during assessment year 2014 are in principle grandfathered, subject to a special transitory rule and a LIFO-rule. On the basis of a “proportionality factor”, the Fairness Tax is limited to the part of the distributed profit which was not effectively taxed as a result of the deduction of NID or TLCF.
The Circular letter clarifies the special transitory rule for assessment year 2014 (FYs ending as from 31 December 2013 until 30 December 2014 at the latest). The Circular letter confirms that, for the calculation of the Fairness Tax in assessment year 2014, grandfathering only applies to reserves constituted and taxed at the latest during assessment year 2013 (FYs ending as from 31 December 2012 until 30 December 2013 at the latest). Consequently, distributions of current-year profit realized in assessment year 2014 would not qualify for grandfathering.
In relation to the transitory rule for assessment year 2014, the Circular letter also confirms that grandfathering applies when an intermediary dividend is distributed by the general shareholders’ meeting from reserves constituted and taxed at the latest in assessment year 2013.
According to the Circular letter, grandfathering also applies to interim dividends decided by the board of directors provided that the interim dividend stems from reserves constituted and taxed at the latest in assessment year 2013. But grandfathering does not apply if current-year profit of assessment year 2014 is distributed during the same year by way of an interim dividend.
Although not specifically mentioned in the Circular letter, grandfathering should logically also apply to intermediary dividends and interim dividends distributed in connection with assessment year 2015 (FYs ending as from 31 December 2014 until 30 December 2015 at the latest) distributed from reserves constituted and taxed at the latest in assessment year 2014. Indeed, as the transitory rule does not apply to the calculation of the Fairness Tax for assessment year 2015, grandfathering is available for distributions of reserves constituted in assessment year 2014.
It was unclear whether the LIFO-rule would also apply to current-year profit. Under such interpretation, dividends would be deemed to stem first from non-grandfathered current-year profit. The Circular letter does not confirm this interpretation, but rather indicates that the LIFO-rule only applies to the extent that dividends stem from reserves constituted in prior years. This is specifically mentioned in relation to assessment year 2014, but this should logically also apply to subsequent years.
Fairness Tax on capital gains on shares mitigated
In order to limit the application of the Fairness Tax on the part of the distributed profit which was not effectively taxed as a result of the deduction of NID or TLCF, the proportionality factor is defined as a fraction:
- The numerator includes the NID and/or TLCF effectively deducted during the year;
- The denominator includes the so-called “tax base after the first operation” in the corporate tax return, an intermediary step in the calculation of the Belgian corporate tax base.
Based on the preparatory works, it appeared that capital gains on shares subject to tax at the rate of 0,412% would be excluded from the denominator. This would considerably amplify the effect of the Fairness Tax.
But according to the Circular letter, capital gains on shares subject to corporate tax at the rate of 0,412% should be included in the denominator together with other separately taxed items. This mitigates the effect of the Fairness Tax in case of distribution of such capital gains.
Many questions highlighted in the previous alert remain unresolved. In particular, the Circular letter does not provide guidance on how the Fairness Tax should be calculated for Belgian permanent establishments of non-resident companies. Furthermore, apart from capital gains on shares (see above), the amplifying effect of tax exemptions and deductions is not addressed.
Finally, the fundamental issue of the possible incompatibility of the Fairness Tax with the Belgian constitution, EU law or double tax treaties remains. Meanwhile, a request to annul the Fairness Tax is pending before the Belgian Constitutional Court.
While the Circular letter provides useful clarifications on important practical aspects, it does not provide comprehensive guidance. Many questions remain unresolved. Companies are recommended to reassess the potential impact of the Fairness Tax on their tax liability and financial reporting taking into account the new Circular letter. This may require companies to revise their dividend policy.
Do not hesitate to get in touch with the contact persons listed here or with your regular contact at EY Tax Consultants for more information or assistance in this matter.