COVID-19-inspired incentive: A new temporary immediate labor cost reduction through the exemption of withholding tax

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EY Belgium People Advisory Services
2 Jul 2020
Subject Tax alert
Categories Covid-19 People Advisory Services
Jurisdictions Belgium

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The Belgian government reached an agreement in the beginning of June on various support measures for companies and citizens in the context of the COVID-19 crisis. Among these measures, a partial and temporary exemption of the payment of withholding tax is introduced for the so-called ‘most affected sectors' which had to apply temporary unemployment for (part of) their employees.

The purpose of this measure is to grant Belgian employers, who are restarting their activities, the required financial support through a substantial cost reduction meaning that withheld wage taxes should partially not be transferred to the authorities.

In the meantime, a legislative proposal has been submitted to and reviewed by the Council of State (Raad van State/Conseil d’Etat). Subject to further approval, the law will become effective upon its publication, probably at the beginning of July.

The temporary exemption in a nutshell

The exemption of the withholding tax will be equal to 50% of the difference between, on the one hand, the total withholding tax cost of their employee population for each of the months June, July and August 2020, and, on the other hand, the total cost of the withholding tax of the month May 2020. The month May 2020 will thus qualify as the reference month.

Concretely, this means that, if the withholding tax for the month of May 2020 was EUR 1.000, and the withholding tax of June amounts to EUR 1.800, a sum of EUR 400 (= 50% * EUR 800) should not be transferred by the employer to the authorities.

Is it that easy?

In line with the other existing withholding tax exemptions, also this law proposal lists a series of conditions. The main basic and application conditions can be summarized as follows:

  • The company must be part of a sector that was heavily impacted by the crisis. This will be assessed based on the fact that the company made use of the temporary unemployment regime for an interrupted period of thirty calendar days during the period 12/3/2020-31/5/2020 (these two days are included);
  • The withholding tax that will be taken into consideration for the exemption is the withholding tax paid on the “normal” remuneration, but not on the vacation payment, 13th month premium and severance payment;
  • The total withholding tax exemption for the three months June, July and August may not exceed EUR 20 million;
  • The exemption will be applied after all the other possible withholding tax reductions (R&D, overtime, night and shift work, etc.);
  • In the event that the employer would not be able to apply the full exemption for the months of June, July and August (because the amount of the withholding tax for these 3 months is not sufficient), the remaining balance of the exemption can still be applied on the withholding taxes of the following months or trimesters, until the end of the year 2020.

No application process or preliminary formalities are foreseen, which means that companies can apply this measure immediately, upon publication of the law, but could be audited by the authorities until the end of 2024.

Other conditions, mainly regarding the employer’s corporate structure (participation in, or any links with a tax haven) and exclusion when distributing to shareholders (e.g. dividend payments, share buyback) are also listed in the law proposal in order to avoid incentivizing companies who withdraw resources for distribution outside the company.

Any drawbacks or uncertainties?

Although the law is still subject to potential change and improvements, a few questions can be raised already, in particular to the scope: The thirty days minimum threshold should ideally be clarified to avoid uncertainty with employers.

Furthermore, the reference month (May 2020) might cause adverse consequences when the temporary unemployment occurred only in March and April, implying that the positive difference on which the 50% reduction can be applied, is minimal or even zero. This risk increases further when blue collar workers take their holiday leave in the application months June, July and August meaning the total withholding tax mass of the respective month compared to the reference month decreases.

Next steps

While Belgian employers are provided with an additional stimulus to resume work and can get a direct reduction on their labor cost, they are likely confronted with struggles to firstly identify whether they can apply the measure and secondly to process the exemption in a compliant manner.

Thinking ahead, employers who apply this measure should be duly prepared for potential inquiries in the next months and even years to avoid a negative correction with interest at an annual rate of 4%.

As the first deduction would be applicable on the withholding tax of June already, companies could activate the exemption within a very short notice or alternatively could apply the measure retroactively. Our team of experts, closely following up on this evolving measure, can assist you with any actions or questions you might have in this respect.