Update on the qualitative threshold for the revised DRD participation exemption

The Program Law of July 18, 2025 introduced a first set of important tax measures (read our previous Tax Alert). One of these measures relates to the dividend received deduction (‘DRD’) participation condition, establishing a qualitative threshold for participations below 10% but with an acquisition value above the 2,5 million EUR. Such participations will only qualify for the DRD if they qualify as “fixed financial assets”. This new condition is however not applicable for shareholders that qualify as a small enterprise.

With Circular Letter 2025/C/63 of 0ctober 3, 2025 (NL / FR) the tax authorities discussed the amendment to the threshold included in the participation condition for the application of the DRD, as well as to the withholding tax exemption for dividends granted to certain foreign companies. The Circular Letter also outlines the direct impact of this amendment on the capital gains tax exemption regime.

This tax alert highlights the key take-aways related to the new qualitative threshold as discussed in the Circular Letter.
 

Dividend Received Deduction (DRD)

Under Belgium’s DRD regime, in addition to the minimum holding condition and the subject-to-tax condition, the company receiving the dividend must hold a participation of either at least 10% in the capital of the distributing company or an acquisition value of at least 2,5 million EUR (participation condition). The Program Law introduced a new qualitative threshold for participations below 10% but above the 2,5 million EUR acquisition value. Such participations are eligible for the DRD regime only if they qualify as “financial fixed assets”. This new condition is however not applicable for shareholders that qualify as small enterprises. The Circular Letter clarifies that the definition of a small enterprise should follow the criteria outlined in the Belgian Code of Companies and Associations.

Introducing such new qualitative threshold for medium and large Belgian companies – irrespective of the size of the company held – results in a more stringent application of the DRD regime.

It is important to keep in mind that this new requirement already applies as from assessment year 2026. By way of anti-abuse provision, the new legislation foresees that any change to the closing date of the income year after 3 February 2025, not motivated by reasons other than tax avoidance, will be disregarded.
 

Capital gains tax exemption

The amendment to the alternative participation condition in the DRD regime affects the capital gains tax exemption, as capital gains may be exempt to the extent that any income from those shares is eligible for the DRD regime.

Hence, for medium and large Belgian companies, the capital gains tax exemption on shares in case the 10% threshold is not met but the participation has a value of at least 2,5 million EUR, will also be subject to the additional requirement that the participation qualifies as a financial fixed asset. The fulfillment of this condition must be assessed at the moment the capital gain is realized.

As the amendment to the capital gains tax exemption is a consequence of the change to the DRD regime, this new requirement will also apply as from assessment year 2026.
 

Withholding tax exemption

It should be noted that the amendment to the alternative participation conditions is also introduced for the withholding tax exemption on dividends paid to certain foreign corporate shareholders with a participation below 10% (i.e. the so-called ‘Tate & Lyle exemption’). Foreign shareholder companies may, under certain conditions, qualify for a withholding tax exemption on dividends received when their participation in the Belgian company is less than 10%, but the acquisition value of their shares is equal to or greater than 2,5 million EUR.

Hence, for medium and large Belgian companies distributing dividends, it is necessary to evaluate whether the foreign company’s participation qualifies as a financial fixed asset in order to determine whether a withholding tax exemption can be applied (next to the assessment of the other conditions). According to the Circular Letter, the qualification of financial fixed asset should be assessed on a case-by-case basis, considering criteria outlined in Belgian legislation (cf. below). Reference can also be made to the definitions set out in Directive 2013/34/EU, as well as to the guidance provided by IFRS 10.

Whereas the changes regarding the DRD regime will enter into force a of assessment year 2026, the abovementioned changes with respect to the withholding tax exemption already entered into force on the date of the publication of the Program Law in the Belgian Official Gazette, being on 29 July 2025.
 

Fixed financial assets

For the qualification as fixed financial assets, one must refer to the interpretation of accounting legislation. Shares can be booked under three different categories within the fixed financial assets on the balance sheet: (i) affiliated companies; (ii) companies in which there is a participating interest; (iii) other fixed financial assets. To qualify for the DRD regime and the withholding tax exemption, the minimum participation requirement of EUR 2,5 million will generally be assessed in light of the third category of fixed financial assets (i.e. other fixed financial assets).

In practice, this category entails the shares held in another company that do not constitute a portfolio interest and that are intended to promote the shareholder company’s own business activities by creating a long-lasting and specific link with the other company. Consequently, classifying such a participation as a fixed financial asset requires an analysis of both purposes of the participation as well as its long-term nature. Participations that do not meet these criteria, and in other words a participation held solely for investment purposes, cannot be classified as fixed financial assets.

Although the qualification as a fixed financial asset is mainly determined by the factual circumstances of each case, the Circular Letter provides a number of examples illustrating the presumed long-lasting link and strategic business relationship between the companies involved. Examples of such specific link include:

1. The initial acquisition of a modest shareholding with the aim of subsequently increasing that shareholding, with a view to a merger, takeover or as part of a group strategy;
   
   
2. Holding shares in a company that has additional activities, which allows the company-shareholder to promote or expand the supply of goods or services to its customers; and
   
   
3. Holding shares in a company of technological importance, thereby promoting the development of the activities of the shareholder company.

Additionally, the Circular Letter refers to the Accounting Standards Commission’s opinions, which may serve as a useful reference.

Finally, credit institutions, insurance companies and stock exchange companies are, in principle, not subject to general accounting law. Thus, different rules apply to these companies. In this regard, the preparatory works of the program law clarify which shares in these companies can be considered fixed financial assets.
 

Practical key take-aways

In practice, this new legislation will result in a more stringent application of the DRD regime, the capital gains tax exemption and the withholding tax exemption on dividends paid to certain foreign corporate shareholders. As of assessment year 2026, to apply the DRD regime and/or the capital gains tax exemption, an additional qualitative check should be conducted by medium and large Belgian companies that hold a participation of less than 10% but with an acquisition value of at least 2,5 million EUR.

Also for medium and large Belgian companies distributing dividends, it will be necessary to evaluate whether the foreign company’s participation qualifies as a financial fixed asset. It is important to consider that for withholding tax purposes this additional qualitative threshold is already applicable since 29 July 2025.

EY is available to assist with analyzing whether the participation held by either the Belgian company (for DRD and capital gains tax exemption) or by the foreign company (for withholding tax purposes) qualifies as a fixed financial asset and hence whether the conditions for the application of the DRD regime, capital gains tax exemption of withholding tax exemption are fulfilled. EY is also available to assist with the correct implementation of these deductions / exemptions. Please reach out for tailored support regarding your specific tax situation.