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). This law was further complemented by the Law of 21 December 2013 containing miscellaneous tax and financial provisions and clarified by an administrative circular of 3 April 2014.
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 FaTa 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, exemption 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 .
- The movable withholding tax and prepayments are creditable against the FaTa and any excess is reimbursable. The same applies to excess payroll tax due by Belgian establishments of foreign companies. The fictitious movable withholding tax and the foreign tax credit are also creditable against the FaTa but there is no reimbursement of any excess. The R&D tax credit may also be credited against the FaTa.
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:
How is the proportionality factor determined?
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 bur from which other tax benefits have not yet been deducted (as explained below).
How is the ‘untaxed’ part of distributed profits 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. An special rule applies to dividends connected with FY 2013.
- 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 PEs. For purposes of the FaTa calculation, the actual amount of dividends distributed by a non-resident company with a Belgian PE is reduced pro rate 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 dividend distributions connected with FY 20131?
- Taxed reserves that have been accumulated in FY2012 or before, i.e. grandfathered reserves, are excluded from the FaTa calculation when they are distributed.
- As an exemption to the general rule on grandfathering, dividends from taxed reserves from FY 2013 that are distributed in FY 2013 are included in the FaTa basis and do not benefit from the grandfathering provision. This also applies to FY 2013 profit which is distributed in the course of FY 2013 as an interim dividend.
- 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.
1 Assuming the accounting year of the company coincides with the calendar year