26 November 2013

New Tax Director Circular clarifies application of Net wealth Tax reduction

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Executive Summary

Circular I. Fort. n°47 dated 14 November 2013 clarifies certain aspects of Net Wealth Tax Reduction that need to be considered as from 2013 onwards. This clarification is particularly relevant when preparing the annual financial statements and hence estimating tax liabilities of the year. The key point is the limitation of the net wealth tax reduction to the amount of minimum corporate income tax (including contribution to the employment fund and prior to any tax credit) that is applicable as from 2013 on for all taxpayers subject to corporate income tax. This restriction also applies in case of group taxation, since no net wealth tax reduction is granted up to the amount of the minimum tax (including contribution to the employment fund and prior to any tax credit) which would be due individually by each company of the group in case there were no group taxation.

The Circular furthermore clarifies a point that used to create uncertainty over the past due to a lack of specific provision in the law: it confirms that the net wealth tax reduction in case of demerger within a fiscal unity can be maintained under the same conditions as for a merger or takeover.

Detailed Discussion

The Tax Director has issued a Circular I. Fort. n°47 dated 14 November 2013 on the net wealth tax reduction foreseen by paragraph 8a of the Net Wealth Tax law. This Circular mainly recalls the general principles set forth by the aforementioned legal provision, but it also points out the limitations applicable to the net wealth tax reduction as from fiscal year 2013 on (introduced by the 2013 Budget law) and provides for clarifications on two further issues regarding net wealth tax.

According to applicable legal provisions, net wealth tax reduction is limited to the amount of corporate income tax (including contribution to the employment fund) due for the same year, without considering any applicable tax credits such as tax credit for investment, tax credit for recruiting unemployed persons, tax credit for further professional education and domestic and foreign withholding taxes. In this context, the Circular points out that as from 2013 onwards, the net wealth reduction is limited to the amount of minimum corporate income tax (including contribution to the employment fund) which would be due according to the provisions of article 174 paragraph 6 of the Income Tax Law.

As a reminder, a new minimum tax for all taxpayers subject to corporate income tax has been introduced in the framework of the 2013 Budget law. The tax ranges from EUR 535 to EUR 21,400 (including the contribution to the employment fund), depending on the amount of the balance sheet total as at financial year’s closing date. As regards holding companies (i.e., taxpayers who are subject to corporate income tax, who are not required to operate under a busine ss license and whose financial assets (e.g., participations, securities, loans towards affiliates, cash) exceed 90% of their total assets), the minimum tax as from 2013 on is EUR 3,210 (EUR 1,575 in 2012).

Consequently, a company has no entitlement to a reduction corresponding to the minimum tax it would be liable to, including contribution to the employment fund and prior to tax credits.

The same restriction applies in case of group taxation. The current law does not provide for any group taxation as regards net wealth tax, implying that each company that is part of a fiscal unity for corporate income and municipal business tax purposes remains liable to net wealth tax on a stand-alone basis. A net wealth tax reduction can still be granted at the level of the various companies of the fiscal group, but such reduction cannot exceed the amount of corporate income tax (including contribution to the employment fund), due by the group, prior to any tax credits. The Circular points out that no net wealth tax reduction is granted up to the amount of the minimum tax (including contribution to the employment fund and prior to any tax credit) which would be due individually by each company of the group in case there were no group taxation.

The Circular furthermore outlines the judgment dated 1 October 20131, wherein the Administrative Court ruled that paragraph 8a of the Net Wealth Tax law does not require the mandatory liability to net wealth tax for the five years following the year for which the reduction was claimed. This judgment follows the conclusions of the Court of Justice of the European Union2. The Circular however points out that the aforementioned judgment affects in no way the cancellation of a net wealth tax reduction on the sole grounds that the company is liquidated (outside a restructuring) before the expiry of the five-years period.

Finally, the Circular brings clarification as regards the impact of a demerger of a company within a fiscal unity on the net wealth tax reduction. The law states that a net wealth tax reduction is not cancelled in case a company of the fiscal unity ceases to exist, following a merger or a takeover within the five-years maintaining period of the special reserve, provided such reserve is taken over by another company that is part of the fiscal group. However, nothing was mentioned for the case a company disappears following a demerger, creating uncertainty for instance. The Circular now clarifies that the net wealth tax reduction in case of demerger within a fiscal unity can be maintained under the same conditions as for a merger or takeover.

 

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