Budget 2012: government agreement on a bill of program law with second batch of tax measures
The government agreed on a bill of program law containing a second batch of tax measures that were announced in the governmental agreement. The main measures deal with:
- The taxation of capital gains on shares (corporate tax income);
- Thin capitalization;
- The general anti-abuse measure;
- The benefit in kind for company cars;
- The reporting requirement regarding movable income.
Capital gains on shares(corporate tax income)
The tax exemption on capital gains will be subject to the condition that the shares are held for at least 1 year in full ownership. If this holding requirement is not fulfilled, the capital gains become taxable at a special tax rate of 25 %. The capital losses on shares remain non-deductible (except in cases of liquidations to the extent of the actually paid-in share capital). An exception is made for financial institutions and traders belonging to the financial sector for the shares in their trade portfolio. Capital gains on those shares are taxable, even in case of their realization after 1 year. Conversely, capital losses on those shares will be tax deductible. Special rules apply for transfers between the portfolios of these institutions. On the other hand, brokerage houses that are not part of the financial sector may be subject to double taxation.
This measure applies to capital gains and capital losses:
- realized or recorded in the accounts in tax year 2013;
- and realized or recorded in the accounts as from 28 November 2011, but pertaining to tax year 2012 insofar the accounting period ends no earlier than the date of publication of the law.
The new thin cap rule provides for a 5 to 1 debt/equity ratio (instead of 7 to 1 under the current regime) for intra-group loans and loans from persons that are not subject to income taxation or are subject to a tax on interest that is substantially more beneficial than in Belgium. The thin cap rule will not apply to loans from credit institutions, from leasing companies and factoring companies insofar these loans relate to those specific activities and to loans from companies primarily active in the field of public-private cooperation. No changes are made to the general deductibility limitation of the Articles 54 and 55 of the Income Tax Code 1992. As a result, it should be noted that (direct or indirect) interest payments to companies that are not subject to income taxation or are subject to a tax on that income that is substantially more beneficial than in Belgium remain in principle non-deductible unless the taxpayer proves that these payments relate to real and sincere transactions that they are at arm’s length.
Intra-group loans - concept of group
The scope of the new thin cap rules is extended to intra-group loans, irrespective of the tax treatment of the interest at the level of the beneficiary. The concept of group comprises all companies that are connected in the company law sense. Companies are connected with one another when the one has control over the other or when they are part of a consortium.
Control is defined as the legal or factual power to have a decisive influence on the appointment of the majority of the members of the Board of Directors or on the policy of the company (Art. 5 Companies Code). There is an irrefutable presumption of the existence of legal control when:
- Someone has the majority of the voting rights based on his shareholdership or based on an agreement with other shareholders;
- Someone has the right to appoint the majority of the directors;
- Someone has control based on the articles of association or an agreement with the company;
- There is joint control.
Factual control comprises other situations of control than the abovementioned situations. There is a refutable presumption of factual control when the shareholder concerned exercised a majority of the voting rights at the two last General Shareholders Meetings.
A consortium groups all companies under a central management. There is an irrefutable presumption of central management when:
- the central management is provided for in a contract or in the articles of association; or
- the management bodies are manned with the same people for a majority of their members.
There is a refutable presumption of central management when the majority of the shares of the different companies is held by the same people.
Debt and equity
The debt component includes all loans, with the exclusion of bonds, other publicly issued borrowing instruments and loans granted by financial institutions. In this context, the concept of “beneficial owner” is key and allows to disregard certain structures in cases of guaranteed loans and indirect loans. The thin cap provisions apply when the debt level exceeds five times the fiscal equity, i.e. the sum of the taxed reserves at the end of the accounting period and the paid-in capital at the beginning of the accounting period. The reference to the accounting concept of equity in the preliminary version of the draft bill did not make it to the final version. This measure applies as from the date of publication in the Belgian Official Gazette.
General anti-abuse measure
The general anti-abuse measure is rewritten in order to allow a more economic approach for reclassification purposes. In the current version, case law requires that the new classification given by the tax authorities has the same or similar legal consequences as the classification given by the taxpayer. As a result of this restrictive approach, the general anti-abuse provision was not a very effective tool for the tax authorities to combat tax avoidance. In the new version, it is no longer required that the classification given by the tax authorities has the same or similar legal consequences. The tax authorities will be able to reclassify when tax avoidance is the main objective for the classification of the taxpayer and the tax authorities feel that another classification is more suitable for a just taxation. It is absolutely not clear which boundaries must be respected by the tax authorities in this matter. For example, a question would be whether the tax authorities are able to reclassify a transaction or transactions when the main objective is tax-planning outside Belgium.
The taxpayer can avoid the reclassification by proving that other than tax reasons constitute the main objective for his classification. It is at this time unclear how much more important these other reasons must be or whether one other (non-tax) reason suffices.
If the approach of the tax authorities would turn out to be too economic, the level of legal certainty will decrease and litigation, in turn, will surely increase. The compatibility of the new provision with the constitutional legality principle is already a big question mark. The question whether or not an objective is the main objective is a subjective one, thus likely this measure will result in considerable controversy and inconsistent decisions at the level of the lower courts. It should be noted that the legislator considers the application of this rule a last resort, for the cases in which the normal application of the interpretation rules, the technical provisions of the Income Tax Code 1992, the specific anti-abuse measures and the simulation theory do not provide for a solution. It will also be relevant which positions the Belgian Ruling Commission will take towards new and existing structures. Also, it is not entirely sure whether existing structures are grandfathered.
The same anti-abuse provision is introduced in the Code of Registration Duties. It also applies for inheritance tax purposes, as a result of the reference to the rules on registration duties in Art. 106, second indent of the Code of Inheritance Duties.
The anti-abuse provision for registration duties purposes is set to apply to legal acts performed as from 1 January 2012 contrary to the new anti-abuse provision in the Income Tax Code 1992 where no date of entry into application nor a grandfathering clause have been provided in the draft texts at this time.
Benefit in kind for company cars
Some changes are made to the rules dealing with the benefit in kind regarding company cars, as enacted in the law of 28 December 2011. For second hand cars, the benefit in kind in the first year will be determined on the basis of their car list price (including VAT and options) in case of a sale to a private individual . This is the result of a reaction on certain schemes that concerned sale and repurchase transactions on existing fleets. Thereafter, the basis for determining the benefit will decrease with 6% per year. The benefit can decrease to a level of 70% of the original car list value at the most. For new cars, the basis of the benefit in kind remains the invoiced amount (including VAT and options). Also for new cars, the basis for determining the benefit will decrease with 6% per year (to a level of 70% of the original car list value at the most). These modifications apply to benefits granted as from tax year 2013. However, for payroll tax purposes, the new rules only need to be taken into account as from 1 May 2012.
A modification is made to the rules regarding the withholding tax and the solidarity levy, as adopted in the law of 28 December 2011. The information regarding the payment will not be communicated to the National Bank, as originally planned, but to a separate service of the Governmental Department of Finance, which is independent from the tax authorities. This measure applies as from tax year 2013. There is still a lot of uncertainty in these laws and considerable repairs will need to be done. In today’s legislation, a lot of the movable income needs to be declared in the personal income tax return. For example, dividends taxed at a rate of 25% and interest on savings accounts in excess of EUR 1,830 always need to be declared, thus resulting in a quasi-full disclosure of the movable assets to the tax authorities. Also, in a considerable number of situations, the 4% solidarity levy cannot be withheld at source, since the issuer of the securities (be it government bonds, corporate bonds, shares) does not know the identity of the beneficiaries. The intermediate banks knows this identity but are not the withholding tax agent and, thus, not competent to apply the solidarity levy. Consequently, in these cases, the beneficiary cannot ask the issuer to withhold this 4%-levy, thus it becomes quasi-impossible to remain anonymous for the tax authorities.
- In the framework of the rules regarding the banking secrecy, the legislator delegates the power to regulate the modalities of the functioning of the competent department, the reporting requirement of the financial institutions and the access of the competent tax official to the information to the government.
- Taxpayers will have to report each year the account number of their foreign bank accounts to the competent department of the National Bank.
Measures still to be enacted
This draft bill still does not include all of the tax measures that have been announced but have not yet enacted. The following announced measures still have to be put into legislation:
- The conversion of certain tax deductions into tax reductions (deduction for only own dwelling, deduction for child care expenses, gifts);
- The modifications to the deductibility of second and third pillar pension contributions (80%-rule, tax reduction for personal pension contributions);
- The externalization of individual pension promises (there is considerable lobbying since a transition over only three years would penalize small and medium-sized companies and their directors, as the externalization requirement would cause a too considerable cash-flow);
- The increase of the benefit in kind for free housing and for the free use of electricity and heating (by way of a royal decree);
- The NID carry-forward (amongst others the combination of the 7 year limitation in the case of considerable carried forward losses, considering the reversal of the operations in the tax return may be relevant for financial institutions and deferred tax assets).
As far as the NID is concerned, it should be noted that the European Commission has recently sent a reasoned opinion to the Belgian government. According to the European Commission, the exclusion of foreign branches and foreign real estate located in other EU and EEA countries from the NID basis constitutes an infringement of the EU freedom of establishment and the EU free movement of capital. The Belgian government will have a period of two months to answer the European Commission. If it fails to do so or if the answer is not considered satisfactory, the European Commission may decide to submit the matter to the European Court of Justice. In such a case, it is expected that the Court of Justice will rule in favor of the European Commission.
Several measures still need to be enacted in the (near) future. The new legislative initiatives need to be taken sooner, rather than later. Ernst & Young welcomes the clarifications regarding the company car taxation. Additional clarifications (e.g. on the tax treatment of movable income) are still necessary, however. Also, it may be feared that the new general anti-abuse provision may cause unnecessary additional legal uncertainty and an increase of litigation in tax matters. Ernst & Young will organize a new Webcast as well as a follow up seminar to be announced soon, to cover the above summarized important changes.