Tax Alert

Five years Unified Employment Status Act

Local contact

EY Belgium Tax

27 Jun 2019
Subject Tax alert
Categories Corporate tax
Jurisdictions Belgium

Approximately 5 years ago, the notice periods for blue-collar and white-collar employees were harmonised following the Unified Employment Status Act. At that the time, it was agreed to compensate employers for the increased dismissal costs via a temporary exemption of taxable profits, the so-called ‘social liability exemption’ (vrijstelling inzake het sociaal passief / exonération relative au passif social) (art. 67quater ITC). As of 2019, the compensation mechanism starts to have effect.

General, but temporary exemption

The aim of the social liability exemption is to temper the extra cost associated with the prolonged notice period for blue-collar workers. The law provides for a general, but temporary, deduction from taxable income to be claimed in the income tax return.

The exemption is general because the employer can deduct a certain amount from his taxable profit for each employee, both blue-collar and white-collar workers, who have reached a seniority of 5 years after 1 January 2014. For employees hired after 1 January 2014, the employer has to wait until the 5 years seniority is reached in order to be able to claim the exemption.

The exemption is temporary since at the moment the employee leaves the company, for no matter what reason (dismissal, pension,…), the related exempted amount needs to be added back to the taxable profit of the taxable period in which the employment ends. In case of a dismissal, the additional taxable profit due to the reversal of the exemption will be compensated with the actual dismissal cost. In case there is no dismissal cost, the reversal will result in an additional taxable basis.

Calculation of the tax exemption

The exemption amounts to 3 weeks of the qualifying remuneration as from the 6th until the 20th year of seniority (after 1 January 2014). For subsequent years, the exemption is limited to 1 week of qualifying remuneration.

The qualifying remuneration is determined for each employee separately, taken into account the average gross monthly remuneration and the number of months of the taxable period for which the exemption is claimed. Certain items are excluded.

The exemption is calculated according to a formula with different exemption percentages to tranches of the qualifying remuneration with a maximum exemption per qualifying employee in a certain year of 1.267 EUR. The law of 11 February 2019 imposes that this exemption is spread over 5 years. Therefore, the deduction in the first eligible year will be reduced to 253 EUR per qualifying employee. The remaining 80% will be spread over the next 4 years.

The budgetary impact of the measure is limited by Royal Decree (50 mEUR for 2019). It is however currently unclear how this will be dealt with. Although the calculation method was essentially confirmed by the Royal Decree of 4 April 2019, we cannot exclude that it could be modified going forward.

Accounting aspects

From an accounting perspective, no bookings are required to claim this exemption. The tax exemption (or reversal of the exemption) will only have an impact on the current year income tax expense to be booked.

Tax compliance aspects

The tax exemption is treated in the income tax return as a deduction from the taxable basis. By consequence, the exemption can only effectively be used if there is a positive taxable basis. The social liability exemption will be one of the first exemptions/deductions that apply (before Dividend Received Deduction, Patent Income Deduction, Innovation Deduction, Investment Deduction…). Note however that there is no carry-forward mechanism.

At the moment the employee leaves the company, the exempted amount should be reversed through a recapture via non-deductible expenses.

Given the qualification as a non-taxable element, the deduction is not subject to the limitations of carried forward tax deductions as imposed by the corporate income tax reform (cfr. 1 mEUR + 70% rule).

From an administrative perspective, the employer must keep a list, per employee for whom the exemption is claimed, indicating the identity of the employee, the starting date of the employment, the number of years after 1 January 2014 and the qualifying remuneration of the employee. The law does not impose a certain form to be added to the corporate income tax return.

Timing

Taken into account that the law requires a seniority of five years after 1 January 2014, in most cases, the tax exemption can be claimed for the first time in the tax return of tax year 2020 (accounting year ending as per 31 December 2019 or later). However, in case of an accounting year ending in the course of 2019, the exemption can already be claimed in the tax return of tax year 2019.

Conclusion

In 2019, the social liability exemption which was introduced 5 years ago, will apply for the first time. Notwithstanding its temporary nature, and the administrative burden, we recommend to apply the exemption in determining the current year tax liability, especially in case of employers with a large (and rather stable) workforce.

Do not hesitate to reach out to your EY contact for further questions or assistance in guiding you through the calculation methodology for this exemption.