Fairness Tax

Introduction

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On 1 August 2013, the Law of 30 July 2013 containing miscellaneous provisions was published in the Belgian Official Gazette. This law provides for several tax measures, including the Fairness Tax (FaTa).

What is the FaTA, when does it enter into force and whom does it apply to?

  • The FaTa is a separate corporate tax assessment of 5,15% to be levied on the occasion of a dividend distribution when (part of the) distributed profits have not been effectively taxed at the ordinary Belgian corporate income tax rate.
  • The FaTa is applicable to all Belgian companies that do not qualify as a ‘small company’ under the Belgian company code and to permanent establishments of non-resident companies.
  • The FaTa is applicable as of tax year 2014 (FYs ending as of 31/12/2013).
  • The fairness tax is potentially triggered when dividends are declared and the taxable basis is reduced by the application of the notional interest deduction ('NID') or tax losses carried forward ('TLCFs'). The use of other tax deductions, such as dividend participation exemption, exemptoin of capital gain on shares, patent income deductions, investment deductions does not trigger the application of this fairness tax. Nevertheless, the FaTa liability may be increased when distributing profits from such types of exempt income while at the same time other taxable income is offset by NID or TLCFs against .

 

How is the FaTa calculated?

The FaTa taxable basis consists of the ‘untaxed’ part of distributed profits multiplied by a proportionality factor, and can be summarized by the following formula:

FaTa = 5,15procent X ‘untaxed’ part of the distributed profits X ((notional interest deducted + (loss carry-forwards applied divided by ‘gross’ taxable basis))

 >> Click here to calculate the fairness tax <<

 

How are the ‘untaxed’ part of distributed profits and the proportionality factor determined?

  • The ‘untaxed’ part of the distributed profits is equal to the amount of the dividends distributed:
    • minus the (final) taxable result that has effectively been subject to 33,99% corporate income tax; and,
    • minus the amount of retained earnings that are included in the dividends distributed. However, only earnings that have been retained up to FY 20131 qualify for this deduction (‘grandfathered reserves’). Profits that are retained as of FY 2014 onwards and are distributed as dividends in a subsequent year, will not be excluded from the ‘untaxed’ part of the distributed profits.
  • The proportionality factor consists of:
    • a numerator that is the sum of the notional interest effectively deducted and the loss carry-forwards used to offset taxable income in the course of the same tax year;
    • a denominator that equals the ‘gross’ taxable basis. The ‘gross’ taxable basis is an intermediary step in the calculation of the Belgian corporate income tax liability, from which some tax-exempt income has already been excluded but from which other tax benefits have not yet been deducted (as explained below).
  • Non-resident companies with a permanent establishment (‘PE’) in Belgium are also subject to the FaTa according to the formula above. The amount of dividends distributed, however, is defined separately for PE’s. For purposes of the FaTa calculation, the actual amount of dividends distributed by a non-resident company with a Belgian PE is reduced pro rata the part of the Belgian-sourced accounting results in the accounting results of the entire non-resident company.

 

What impact does the FaTa have on existing reserves and earnings retained in the current accounting year (FY 2013)1?

  • Taxed reserves that have been accumulated in FY2012 or before, i.e. grandfathered reserves, are excluded from the FaTa calculation when they are distributed.
  • On the basis of the current wording of the FaTa, it is unclear whether dividend distributions in the course of FY2013 or on the occasion of the closing FY2013 annual accounts can benefit from the grandfathering provision even though there are good arguments to defend that the grandfathering can be invoked. There seems to be a growing consensus, however, that interim dividends in the course of FY2013, i.e. anticipatory distribution of FY2013 profits and thus not sourced from reserves existing prior to FY2013, will be subject to the FaTa. It is expected that questions relating to the transitory measures will be further clarified by an administrative circular.
  • As an anti-abuse rule, the origin of the earnings that are distributed in a given tax year is to be determined on the basis of the LIFO (last in, first out) method. An illustration is provided in the Points of Attentions section.

 

How are the ‘untaxed’ part of distributed profits and the proportionality factor determined?

The ‘untaxed’ part of the distributed profits is equal to the amount of the dividends distributed: minus the (final) taxable result that has effectively been subject to 33,99% corporate income tax; and, minus the amount of retained earnings that are included in the dividends distributed. However, only earnings that have been retained up to FY 20131 (or FY 2012) qualify for this deduction (‘grandfathered reserves’). Profits that are retained as of FY 2014 (or FY 2013) onwards and are distributed as dividends in a subsequent year, will not be excluded from the ‘untaxed’ part of the distributed profits. There is uncertainty as to whether the grandfathering applies to earnings retained over FY 2013. On the basis of the French version of the FaTa legal provisions, there are good arguments to defend that also earnings retained in the course of FY 2013 are grandfathered and can thus be exempt from FaTa upon distribution in later years.

1 Assuming the accounting year of the company coincides with the calendar year