Budget 2012: new bill with tax measures submitted to Parliament

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The government Di Rupo I submitted a bill of law, which contains a fourth series of the tax measures that were announced in its formation note.
The following is a summary overview of these tax measures.

Corporate tax measures

Excess notional interest deduction (NID)
The bill abolishes the carry-forward of excess NID relating to tax years 2013 and following.
Prior excess NID will remain deductible within the normal period of 7 tax years with some limitations:

  • The imputation of this excess NID becomes the last operation of the tax calculation (after the deduction of tax losses and before the application of the tax rate).
  • The excess NID may be fully imputed to the first million EUR in taxable basis remaining after all previous operations and for 60% of residual taxable base on top of that first million EUR.
  • Excess NID that could not be imputed due to the 60% limitation does not expire at the end of the 7-year period but may be imputed even after that. As a result, excess NID will not be lost due to the 60% limitation.

Click here to see one of the examples given in the Explanatory Memorandum

This measure would apply as from tax year 2013. Changes to the duration of accounting year made as from 28 November 2011 are not taken into account for the application of these measures.

Capital gains on shares
The bill confirms the tax-neutral character of restructurings for the assessment of the holding period requirement in article 192, §1 ITC 1992.
This would apply as from tax year 2013 and to capital gains realized and transactions performed as from 28 November 2011 in the course of tax year 2012 provided the accounting period is closed on 6 April 2012 at the earliest.

Investment deduction
In principle, the transfer of the use of qualifying fixed assets to another taxpayer leads to the exclusion for investment deduction purposes.
An exception to this exclusion already applies when the asset is transferred to an individual who uses the asset professionally in Belgium in order to obtain taxable profits.
However, according to article 75, 3° ITC 92, the investment deduction is denied when an SME transfers the use of qualifying fixed assets to another SME. In 2008, the Constitutional Court considered the denial of the investment deduction to a qualifying SME in such a case unconstitutional. The legislator will now extend the exception to the exclusion by allowing the investment deduction in case of the transfer of the right of use to a qualifying SME which will use the asset professionally in Belgium in order to obtain taxable profits
This measure would apply as from tax year 2013, but only to fixed assets acquired or produced as from 1 January 2012.

Non-deductibility of solidarity levy borne by the debtor
As is already the case for the withholding tax, the bill provides for the non-deductibility of the 4% solidarity levy on movable income when this levy is borne by the debtor of the income.
This would apply to payments as from 1 January 2012.

Withholding tax on interest from regulated savings accounts
When the legislator provided that the withholding tax rate on the interest on regulated savings accounts would remain at 15% for the amount exceeding EUR 1,830 (for tax year 2013), he lost sight of the fact that that bracket of EUR 1,830 is only tax exempt for individuals. For taxpayers subject to corporate tax and legal entities tax, the changes with regard to the withholding taxes resulted in an increase of the withholding tax rate from 15% to 21% for the first EUR 1,830, whereas the excess interest would remain taxable at 15%.
This is now amended: for these taxpayers, also the first EUR 1,830 will remain subject to the 15% withholding tax rate.
This would apply as from 1 January 2012.

Personal income tax measuresConversion of tax deductions into tax credits – Limitation of the tax credit rate
The tax relief associated with a number of private expenses which currently takes the form of a deduction from  taxable income (and therefore results in tax savings calculated at the taxpayer’s top tax rate) will be converted into tax credits (i.e. a reduction of  the amount of tax due, calculated at a specified rate).
This will be the case for the tax deductions for:

  • Child care expenses
  • Qualifying gifts
  • Employment costs for a housekeeper
  • Maintenance and renovation expenses for protected Monuments & Landscapes

An exception is made for mortgage loan payments (and life insurance premiums linked to such a mortgage loan) for the taxpayer’s sole and own dwelling “aftrek enige eigen woning/deduction pour habitation propre et unique”) and for alimony payments, which remain available as a tax deduction.

For alimony payments, the bill also explicitly confirms following current practices of the tax authorities:

  • Alimony payments jointly due by both partners,  will be deducted  proportionally (pro rata parteof their incomes) from  both partners’ income
  • Alimony payments that are due on the basis of foreign legal provisions that are comparable to the obligations in the Belgian Civil  or Judicial Code  are taxable in the hands of the beneficiary and deductible by the debtor under the same conditions as alimony payments made further to an obligation embedded in Belgian Civil or Judicial Code.

The tax credits amount to:

  • 45% of the amounts paid  for child care expenses and qualifying gifts (with certain limits);
  • 30% of the payments (with certain limits) for the other expenses  mentioned above that have been converted from a tax deduction into a tax credit (employment cost for a housekeeper, maintenance and renovation expenses for protected monuments and landscapes);
  • 30% of the payments (with certain limits) for the existing tax credits which are currently calculated at the taxpayer’s adjusted average tax rate between 30% and 40% (e.g. the tax credit  for employee contributions to a company pension plan, capital reimbursement for a mortgage loan other than a loan qualifying for the tax deduction for sole and own dwelling, individual life insurance premiums, individual pension savings plan premiums , expenses for PWA/ALE-vouchers, energy savings investments etc.).

 These modifications will apply as from tax year 2013.

No additional municipality taxes on movable income
In order to align the Belgian Income Tax Code with recent case law  of the Court of Justice of the European Union, the Law of 14 April 2011 held that movable income – interests and dividends - arising from EU Member States other than Belgium is not subject to the additional communal (and provincial) tax when reported through the tax return.
As a result, when a taxpayer opted to report Belgian-source movable income in his tax return, this was still subject to additional communal tax. This is no longer the case as from tax year 2013, and interest income and dividend income - regardless their source - are excluded from the additional communal (and provincial) taxes.

Tax on interest from funds investing in debt claims
The bill provides for a modification of article 19bis ITC 92 relating to the tax on income from capitalization funds that are invested for more than 40% in debt claims.
The debt investment threshold for the income from these funds to qualify for this tax will be lowered from 40% to 25%.
For cases in which the percentage of the investments in debt claims is not known, the bill introduces a presumption that the fund is invested in debt claims for 100%. This results in the increase of the taxable basis for this tax in case the fund is not capable to identify the part of the income related to qualifying debt claims.
Currently, the tax does not apply to income from non-passported funds that are established in the European Union, whereas it does apply to similar funds established outside the European Union. As a result, it also applies to funds established in a Member State of the European Economic Area (Iceland, Norway or Lichtenstein). Following criticism of the EU Commission, also the income from funds in these countries will not be subject to this tax.
These modifications will apply as from the date of publication of the law.

Other
Some other relevant personal income tax measures in the bill provide the following (entry into application in tax year 2013 unless indicated otherwise):

  • Fees paid by mobile telephone operator companies for the use of private property for the installation of transmission or receiving devices will be taxed as miscellaneous income at 15% (applicable as from 1 January 2012);
  • Gifts paid to universities and scientific institutions will no longer be primarily deducted  from prizes, subsidies, pensions, etc. received, which are taxed as miscellaneous income in accordance with article 90, 2° ITC 92;
  • The refundable tax credit for children (for low income earners) will be calculated at a flat rate of 25% (with a maximum of EUR 250 per child). This refundable tax credit is no longer available for international civil servants or spouses of international civil servants who are taxed as single taxpayers;
  • The tax credit for expenses to protect the taxpayer’s home against fire and burglary will no longer be allocated between both partners on the basis of their ownership in the property, but rather on the basis of their respective income. The tax credit will also be calculated at a rate of 30% and no longer at the rate of 50%.

 Income tax for non-residents

Permanent establishment - general
The wording in Dutch used for permanent establishment (“vaste inrichting”) is the same for the domestic law concept as for the tax treaty concept which may cause confusion. In order to make the distinction more clear, the domestic law concept will be replaced by “vaste bedrijfsinrichting”. In French, the domestic law concept is changed from “installation fixe” into “installation fixe d’affaires”.
Some double tax treaties deem a permanent establishment to exist when services are rendered in a country during a certain period of time, when there is no permanent establishment according to the domestic rules. In such a case, income from these services would not effectively be taxed when these are rendered in Belgium. According to the bill, the taxpayer will be deemed to have a permanent establishment in Belgium in accordance with domestic law whenever there is a permanent establishment according to the applicable double tax treaty.
This would apply as from tax year 2013.
The legislator also provides that when a foreign enterprise renders services in a project or in related projects for more than 30 days during any period of 12 months, these activities constitute a permanent establishment in Belgium. This would apply as from 1 January 2012.

Permanent establishment – construction sector
In domestic law, companies are considered having a permanent establishment in Belgium in case of construction operations when these take an uninterrupted period of more than 30 days.
In order to combat the avoidance of the classification as a permanent establishment by sectioning longer term construction assignments over different group companies into periods of 30 days or less, the bill provides that the periods are taken together to determine whether the minimum duration requirement is met when connected or associated enterprises (in the company law sense) perform similar activities in Belgium. An escape clause allows the taxpayers to prove the existence of other motives than the avoidance of the characterization as a permanent establishment.
This measure would apply as from 1 January 2012.

Taxation of income for which taxing power is allocated to Belgium
In principle, double tax treaties do not impose taxes but only allocate taxing power. When Belgium has taxing power based on the double tax treaty but Belgian domestic law does not effectively impose a tax on the income because of an insufficient link with the Belgian territory, Belgium is not entitled to tax.
As some Belgian treaties (based on the UN Model Treaty) include provisions allocating taxing power to the source state even when the link of the income with the source state is not very strong, Belgian domestic non-resident income tax provisions are not sufficiently aligned with those treaties for Belgium, as the source state, to effectively tax that income.
In order to avoid this situation, a catch-all provision is added to article 228 ITC 92. This provision allows Belgium to tax (depending on the case, in accordance with the personal income tax rules, the corporate income tax rules or the legal entities tax rules) income not listed in the first and second paragraph of that article  when Belgium has been granted the taxing power by the treaty.
Some of the examples given in the explanatory memorandum are:

  • Royalties for the rendering of technical assistance paid to a resident of Argentina, Brazil, India, Morocco, Rwanda, and Tunisia;
  • Management fees paid to a resident of Ghana;
  • Commissions paid to a resident of Romania for services rendered as an intermediary;
  • Profits of a permanent establishment in Belgium after exercise of the option to be considered having a permanent establishment in Belgium when having rendered services in Belgium (in the framework of the treaties with Romania and Rwanda);
  • Salary payments for which the double tax treaty allocates taxing power to Belgium but which do not qualify under the domestic 183 days rule.

This measure would apply as from 1 January 2012.

 Salary
The bill holds that salary paid to a non-resident by a Belgian person, legal entity, establishment or by the Belgian State or a political subdivision, is taxable, regardless of whether it is borne directly or indirectly by the debtor of the salary. This was already implied but indirect payments are now included explicitly.
The explanatory memorandum gives the following examples (among other):

  • Salary payments to an employee working for a Belgian branch made by the foreign headquarter, which are recharged to the branch;
  • Salary payments to an employee working for a Belgian company made by a foreign group company, which are invoiced to the Belgian company;
  • Salary payments to an employee working for a Belgian company made by a group company serving as temping agency, which are invoiced to the Belgian company.

Salary payments are also deemed to be borne by the permanent establishment when they are tax deductible at the level of the permanent establishment, even when they have not actually been deducted.
This clarification would apply as from tax year 2013.

 Other
These are the most important other measures:

  • Non-residents without an abode in Belgium may deduct alimony payments to non-residents in Belgium when they earn at least 75% of their professional income in Belgium. The bill clarifies that whether or not this criterion is met must be assessed over the entire taxable period. This would apply as from tax year 2013.
  • Currently, the income tax code allows non-residents with an abode in Belgium (or alike in accordance with the 75%-rule) to not only benefit from the tax reduction for mortgage capital repayments when they have full ownership of the property, but also when they only have usufruct or a long lease right. For resident taxpayers, this tax reduction only applies when they have full ownership. The bill provides that the tax reduction will also only apply for abovementioned non-residents in case of full ownership. This measure would apply as from tax year 2013.

 Conclusion

The measures announced in the first note of the government "Di Rupo I" have now been embedded in acutal legislation or draft legislation.
The government is currently working on the budget 2013, which will without doubt trigger further tax law changes. EY Tax Consultants will keep you updated when detailed information becomes available on new tax measures.