Fairness Tax (FaTa)
Some practical pointers and considerations
The FaTa does not apply to all forms of distributions to shareholders
- Capital reductions, share redemptions and dividends distributed on the occasion of a liquidation (‘liquidation boni’) are excluded from the scope of the FaTa.
- To the extent business reasons support such a decision, a company could decide to declare a stock dividend, leaving shareholders the choice between receiving a cash dividend or additional shares representing the amount of cash foregone. To the extent the shareholders opt to re-invest the dividend into the share capital of the company, a capital reduction in subsequent years will not trigger the LIFO rule whereas a simple dividend distribution in subsequent years would trigger the LIFO-rule. In the latter case the FaTa would first need to be paid on the earnings that have been retained post-FY2013.
Careful timing of dividend distributions may considerably reduce the FaTa liability.
- A company may consider distributing all of its retained earnings when closing a financial year in which the ‘gross’ taxable basis was zero or negative. Under those circumstances, the proportionality factor will be reduced to zero and no FaTa is due.
- The amount of profits that has been effectively subject to tax in a given tax year, can be distributed FaTa-free in the course of the same tax year and, at the latest, on the closing of the annual accounts. In general, it is recommended to at least distribute said amount of profits as there is a risk that a retaining such profits and distributing them in a subsequent tax year might nonetheless trigger a FaTa liability (i.e. despite the initial exemption).
- In general, the lower the ratio of NID and loss carry-forwards (NOL’s) used when compared to the ‘gross’ taxable basis in a given tax year, the lower the FaTa liability will be on distributing a given amount of profits and retained earnings.
As the FaTa liability can be disproportionate to the tax benefit gained by using NID and/or NOLs (see ‘Impact of certain forms of exempt income’), a company may have an interest in waiving the NID.
- It is uncertain, however, whether the more beneficial outcome will be respected by the tax authorities, either as a result of the constitutional principle of legality or as a result of the general anti-abuse clause.
A company may have an interest in accelerating the use of its NOLs in years during which the company is not planning to distribute dividends.
- To the extent it is supported by financial and business reasons, a company may account for a taxable step-up in the value of certain assets and offset the resulting taxable base by using NOLs.
- When a dividend distribution is planned in a subsequent year, the NOLs have already been absorbed and can no longer trigger (an increased) FaTa liability.
All other things being equal, the R&D tax credit is treated more favourably under the FaTa provisions than the R&D investment deduction.