Global Tax Alert | 14 April 2014

Belgian Tax Authority releases circular on Fairness Tax

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Executive summary

The Belgian Tax Authority released a circular to clarify the application of the Fairness Tax (Circular AAFisc Nr 13/2014 (nr. Ci.RH.421/630.788) of 3 April 2014).1

The Fairness Tax calculation has a number of unexpected consequences.2 Furthermore, its compatibility with the Belgian constitution, EU law and double tax treaties can be questioned.

After a brief recap on the background of the Fairness Tax and its calculation, this Alert summarizes the key items addressed in the Circular.

Detailed discussion

Background

The Fairness Tax is a separate corporate tax assessment of 5.15% on distributed profits which have not been effectively taxed as a result of the notional interest deduction (NID) or the deduction of tax losses carried forward (TLCF). The Fairness Tax was introduced in July 2013 in order to tackle the perceived abuse of NID and TLCF. It applies as of assessment year 2014 (FYs ending on or after 31 December 2013). The Fairness Tax applies to Belgian resident companies as well as Belgian permanent establishments of nonresident companies.

Calculation for Belgian companies

Fairness Tax = Untaxed distributed profit x Proportionality factor x 5.15%

The “untaxed distributed profit” refers to the dividends distributed by the company in excess of its corporate tax base subject to 33.99%. Taxed reserves established prior to and including assessment year 2014 are in principle grandfathered, subject to a special transitory rule and a LIFO-rule. On the basis of a fraction, the so-called “proportionality factor,” the Fairness Tax is limited to the part of the distributed profit which was not effectively taxed as a result of the deduction of NID or TLCF.

Transitory rule

The Circular clarifies the special transitory rule for assessment year 2014 (FYs ending as from 31 December 2013 until 30 December 2014). The Circular confirms that, for the calculation of the Fairness Tax in assessment year 2014, grandfathering only applies to reserves established and taxed prior to and during assessment year 2013 (FYs ending as from 31 December 2012 until 30 December 2013). Consequently, distributions of current-year profit realized in assessment year 2014 would not qualify for grandfathering. It appears from the Circular that the transitory rule only applies to dividends distributed in connection with assessment year 2014 and not to subsequent assessment years.

Intermediary dividends

In relation to the transitory rule for assessment year 2014, the Circular also confirms that grandfathering applies when an intermediary dividend is distributed by the general shareholders’ meeting from reserves established and taxed no later than assessment year 2013.

According to the Circular, grandfathering also applies to interim dividends approved by the board of directors provided that the interim dividend stems from reserves established and taxed prior to and including assessment year 2013. But grandfathering does not apply if current-year profit of assessment year 2014 is distributed during the same year by way of an interim dividend.

Although not specifically mentioned in the Circular, it appears that grandfathering should also apply to intermediary dividends and interim dividends distributed in connection with assessment year 2015 (FYs ending as of 31 December 2014 until 30 December 2015) distributed from reserves established and taxed prior to and including assessment year 2014. Indeed, as the transitory rule does not apply to the calculation of the Fairness Tax for assessment year 2015, grandfathering is available for distributions of reserves constituted in assessment year 2014.

LIFO-rule

Under the LIFO-rule, the reserves that were last established are considered to be distributed first. In other words, taxpayers are not able to freely draw from the oldest reserves in order to benefit from grandfathering and avoid the Fairness Tax.

It was unclear whether the LIFO-rule would also apply to current-year profit. Under such interpretation, dividends would be deemed to stem first from non-grandfathered current-year profit. The Circular does not confirm this interpretation, but rather indicates that the LIFO-rule only applies to the extent that dividends stem from reserves established in prior years. This is specifically mentioned in relation to assessment year 2014, but again it appears that this should also apply to subsequent years.

Fairness Tax on capital gains on shares mitigated

In order to limit the application of the Fairness Tax on the part of the distributed profit which was not effectively taxed as a result of the deduction of NID or TLCF, the proportionality factor is defined as a fraction:

  • The numerator includes the NID and/or TLCF effectively deducted during the year;
  • The denominator includes the so-called “tax base after the first operation” in the corporate tax return, an intermediary step in the calculation of the Belgian corporate tax base.

Based on the preparatory works, it appeared that capital gains on shares subject to tax at the rate of 0.412% would be excluded from the denominator. This would considerably amplify the effect of the Fairness Tax.

But according to the Circular, capital gains on shares subject to corporate tax at the rate of 0.412% should be included in the denominator together with other separately taxed items. This mitigates the effect of the Fairness Tax in case of distribution of such capital gains.

Unresolved issues

Many questions highlighted in the previous Alert (see endnote 2) remain unresolved. In particular, the Circular does not provide guidance on how the Fairness Tax should be calculated for Belgian permanent establishments of nonresident companies. Furthermore, apart from capital gains on shares, the amplifying effect of tax exemptions and deductions is not addressed.

Finally, the fundamental issue of the possible incompatibility of the Fairness Tax with the Belgian constitution, EU law or double tax treaties remains. Meanwhile, a request to annul the Fairness Tax is pending before the Belgian Constitutional Court.

Impact

While the Circular provides useful clarifications on important practical aspects, it does not provide comprehensive guidance. Many questions remain unresolved. Companies are recommended to reassess the potential impact of the Fairness Tax on their tax liability and financial reporting taking into account the new Circular. This may require companies to revise their dividend policy.

(Endnotes)

1. Click below for the full text of the Circular:

  • In Dutch
  • In French

2. For details, see EY Global Tax Alert, Belgian Parliament adopts tax measures from 2013-2014 budget including the Fairness Tax, issued 24 July 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Consultants SCCRL/BCVBA, Brussels
  • Herwig Joosten
    +32 2 774 9349
    herwig.joosten@be.ey.com
  • Werner Huygen
    +32 2 774 9404
    werner.huygen@be.ey.com
  • Steven Claes
    +32 2 774 9420
    steven.claes@be.ey.com
  • Kurt Van Der Voorde
    +32 2 774 9281
    kurt.van.der.voorde@be.ey.com
  • Peter Moreau
    +32 2 774 9187
    peter.moreau@be.ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Global Tax Desk Network – New York
  • Bart Desmet
    +1 212 773 3068
    bart.desmet@ey.com
  • Bart Baeteman
    +1 212 773 4488
    bart.baeteman@ey.com

EYG no. CM4350