Global Tax Alert | 7 November 2017
Belgian Government approves draft law on corporate tax reform including 100% participation exemption
Following the Belgian Federal Government’s announcement of corporate tax reform and major tax measures during the summer,1 the Government has approved the draft law on 25 October 2017. In addition to the gradual decrease of the corporate tax rate to 25% in 2020, introduction of tax consolidation as of 2020 and implementation of the European Union (EU) Anti-Tax Avoidance Directives, Belgium will grant a 100% participation exemption as of 2018.
The draft law will now be sent to the Council of State for review. It will then be finalized and submitted to the Belgian Federal Parliament, which is expected to approve the corporate tax reform before year-end.
This Alert summarizes the key topics of the reform.
Gradual decrease of the corporate tax rate to 25%
The corporate tax rate will be gradually reduced from 33.99% currently to 25% in 2020 (fiscal years (FYs) starting as of 1 January 2020). For 2018 and 2019, the rate goes to 29.58% (29% plus 2% crisis surtax). The 16.995% exit tax upon exit of the common tax system into a regulated real estate company is reduced to 12.75% (12.5% plus 2% crisis surtax) in 2018-2019 and goes to 15% in 2020.
Reduced rate for SMEs
As of 2018 (FYs starting as of 1 January 2018), small and medium-sized enterprises (SMEs) will benefit from a 20% tax rate on the corporate tax base below €100,000. The reduced rate is subject to the payment of a minimum salary of €45,000 to an individual manager. The minimum salary requirement will not apply to start-up companies in the first four years. For SMEs, the investment deduction will be increased temporarily from 8% to 20%.
100% participation exemption and other improvements to the holding company regime
Belgium will grant a 100% participation exemption on dividends (instead of the current 95%) as of 2018 (FYs starting as of 1 January 2018). Capital gains on shares will also be fully exempt as of 2018. The separate tax rate of 0.412% on capital gains on shares (shareholding more than one year) will be abolished. The conditions to benefit from the exemption will be brought in line with the participation exemption conditions. In addition to the subject-to-tax test and the one-year holding period, a minimum shareholding requirement of at least 10% or €2,500,000 will apply. This new requirement would not apply to shares held as coverage assets by insurance companies.
Belgium will introduce tax consolidation as of 2020 (FYs starting as of 1 January 2020). The Belgian regime is inspired by Scandinavian group contribution regimes. Companies that are in a tax-paying position can make a group contribution to group companies that are in a loss position, subject to conditions and limitations (see below). The receiving company can offset the group contribution with available tax attributes. The new rules will apply to Belgian resident companies as well as Belgian establishments of foreign companies resident in a Member State of the European Economic Area (EEA). Direct parents and subsidiaries as well as companies with a joint parent resident in Belgium or an EEA Member State will qualify, subject to having met a minimum 90% holding requirement for at least five years. Historic losses incurred before 2020 will be excluded. The tax consolidation regime will also apply to “final” losses of foreign subsidiaries established in the EEA in order to avoid discrimination with the deduction of “final” losses incurred in foreign permanent establishments (see below).
Tax benefits for innovation
In addition to the new innovation deduction introduced earlier this year, the payroll tax exemption for scientific personnel will be extended to certain bachelor degrees as of 2018. The research and development (R&D) investment deduction and the R&D tax credit are maintained. As a result of the lower corporate tax rate, the effective tax rate on income that qualifies for the new innovation deduction will drop to 3.75% as of 2020.
Compensating measures applicable as of 2018
A number of compensating measures aim at broadening the corporate income tax base and increasing tax compliance. These measures will apply in two phases, with a first series of measures applicable as of 2018 (FYs starting as of 1 January 2018):
- Limitation on certain tax deductions – minimum tax base: The use of certain deductions will be limited to €1,000,000 plus 70% of the tax base exceeding this amount. Therefore, 30% of the tax base in excess of €1,000,000 cannot be offset. The limitation applies to the carried forward tax losses, the carried forward participation exemption, the carried forward innovation income deduction and the carried forward notional interest deduction (NID), as well as the new “incremental” NID (see below). The limitation will also apply to group contributions made in the context of the tax consolidation regime that will be introduced as of 2020.
Other deductions can, however, be applied without the limitation: the participation exemption, the patent deduction, the current-year innovation deduction, the investment deduction and the R&D tax credit. Furthermore, the limitation does not apply to start-up companies during the first four taxable periods. Existing limitations applicable to the carried forward investment deduction and the carried forward NID remain in place.
- Reform of the notional interest deduction: NID will be calculated on the average incremental net equity over the last five years, and no longer on the full prior-year net equity. Other rules remain unchanged.
- Pro rata allocation of capital reductions: Capital reductions will be pro rata allocated to the paid-in capital and to the reserves. The portion allocated to the reserves is considered as a dividend for tax purposes that is in principle subject to withholding tax. The portion allocated to the reserves is first allocated to the taxed reserves and then to the tax-exempt reserves (if any). Therefore, to the extent taxed reserves are available, the tax-exempt reserves (if any) would not be affected. The liquidation reserves meant by Article 537 Income Tax Code will also not be affected.
- Minimum salary requirement: Any company should pay a salary of at least €45,000 to an individual manager. For companies with limited profit, the minimum salary should at least be equal to the taxable result. To the extent that the minimum salary is insufficient, a special tax assessment will be imposed at the rate of 5% in 2018-2019. The rate will be increased to 10% as of 2020. The special tax assessment is tax deductible. The special tax assessment does not apply to start-up companies during the first four taxable periods. For groups of companies managed by one individual, the minimum salary amounts to €75,000 for the entire group (instead of €45,000 for each company that is part of the group).
- Minimum tax base in case of tax adjustments: Tax adjustments imposed as a result of a tax audit will constitute the minimum taxable base against which no tax deductions other than the current-year participation exemption will be allowed. This will apply if a tax increase of at least 10% is imposed. Therefore, the minimum tax base rule will not apply in the absence of a tax increase.
- Limitation of exemptions for employment activation companies: The corporate tax exemption for employment activation companies (inschakelingsbedrijven – entreprises d’insertion) will be limited to €7,440 for each qualifying employee and also includes an elimination of double exemption of regional grants.
- Tax neutral reorganizations: The limitation of carried forward tax losses in the context of tax neutral restructurings such as mergers will be extended to the carried forward participation exemption.
- Deductibility of pre-paid expenses: A matching principle will be introduced into Belgian tax law so that pre-paid expenses will only be deductible in the tax year to which they relate.
- Provisions/tax rate applicable to reversal of provisions and of capital gains subject to spread taxation: Provisions will only be tax-exempt provided that they relate to contractual, legal or regulatory obligations existing at the end of the financial year. The new rule does not apply to provisions or additions to provisions established in taxable periods starting before 1 January 2018. In order to avoid that companies could take advantage of the future drop of the corporate tax rate, reversals of provisions will be taxable at the rate applicable at the moment the provision was recorded. Furthermore, in the absence of timely reinvestment, capital gains for which the taxpayer opted for spread taxation will become taxable at the rate applicable at the moment the gain was realized.
- Tax prepayments: Companies will be encouraged to make more tax prepayments by an increase of the base interest rate to calculate the penalty in case of insufficient prepayments to 3%.
- Minimum tax base in case of non-reporting: In case of non-reporting, the minimum taxable lump-sum will gradually increase to €40,000, resulting in a corporate tax due of €10,000.
- Interest for late payment and moratorium interest: Late payment interest due by the taxpayer and moratorium interest due by the Belgian Treasury will be linked to the OLO2 interest. Late payment interest due by the taxpayer is minimum 4% and will always be 2% higher than the moratorium interest due by the Belgian Treasury.
Compensating measures applicable as of 2020
A second series of compensating measures intended to broaden the tax base and to increase tax compliance will be applicable as of 2020 (FYs starting as of 1 January 2020):
- Transposition of the EU Anti-Tax Avoidance Directives – timing: The transposition of the measures of the EU Anti-Tax Avoidance Directives (ATAD 1 or ATAD 2) into Belgian domestic law is scheduled for 2020. However, apart from exit taxation, ATAD 1 must be transposed as of 2019. Therefore, Belgium will likely be required to bring the entry into force forward to 2019.
- Transposition of the EU Anti-Tax Avoidance Directives – interest limitation rule: Under the interest limitation rule provided for by ATAD 1, the tax deductibility of net interest charges will be limited to the higher of (i) €3,000,000, and (ii) 30% of the taxable earnings before interest, taxes, depreciation and amortization (EBITDA). Interest will include economically equivalent expenses to be defined by Royal Decree. The taxable EBITDA is defined as the taxable result, plus tax-deductible depreciation and net interest charges, less non-taxable items, such as the participation exemption, 85% of the innovation income, 80% of the patent income and treaty exempt income.
For groups of companies, the interest limitation will apply on an ad hoc consolidation basis with the possibility to transfer excess interest charges between group companies. Companies will also be able to carry forward interest disallowed under the 30% EBITDA rule.
Exceptions will be provided for standalone entities, the financial sector and public infrastructure projects. Loans concluded before 17 June 2016 will be grandfathered, but will remain subject to the current 5-to-1 thin capitalization rule. The 5-to-1 thin capitalization rule will also remain applicable to interest payments made to tax havens.
- Transposition of the EU Anti-Tax Avoidance Directives – other rules: The other measures provided for by ATAD 1 and 2 will also be transposed. This includes rules on hybrid mismatches and exit taxation, as well as controlled foreign company (CFC) rules. Under the CFC rules, Belgium will provide that non-distributed profits realized by a CFC that constitute an artificial construction should be added to the tax base of the Belgian parent if the CFC is held for at least 50% and is subject to tax at a rate below 12.5%. To avoid double taxation, the participation exemption will be granted upon distribution of previously taxed CFC income to the Belgian parent.
- Tax deductibility of fines: All fines imposed by public authorities will be fully disallowed. Therefore, proportional value added tax fines will no longer be tax deductible.
- Secret commissions tax: The tax deduction of the secret commission tax will be disallowed. It will no longer be possible to reintegrate hidden profit in the company’s books at the 50% secret commission tax rate.
- Tax deductibility of car expenses: The tax deductibility of car expenses will be amended. The deductibility of car expenses will be based on the CO2-emission. If the CO2-emission exceeds 200g/km, the tax deductibility will be limited to 40%. The deduction for fuel expenses will no longer be fixed at 75%, but will also be linked to the CO2-emission. Car expenses relating to chargeable hybrid cars with limited battery capacity (so-called ”fake” hybrid cars) purchased as of 1 January 2018 will be deductible in the same manner as their non-hybrid counterparts. Finally, expenses related to electric cars will be deductible at 100% instead of 120% currently.
- Voluntary taxation of tax-exempt reserves: During a period of two years, taxpayers will be allowed to convert certain tax-exempt reserves that existed before 1 January 2017 into taxed reserves at a reduced tax rate of 10% or 15%. The 10% tax rate will only be applicable to the extent that the converted reserves correspond to new investments during the taxable period in certain depreciable assets. The converted reserves will constitute a minimum taxable basis.
- Tax deductibility of losses incurred in foreign establishments: The deductibility of losses incurred in foreign establishments will be restricted to final losses, i.e., losses which are no longer deductible in the foreign jurisdiction upon final closure of the foreign establishment.
- Definition of Belgian establishment: Belgian establishments will be defined more broadly taking into account a more economic approach in line with the Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting Action 7. In particular, the rules on independent agents will be aligned.
- Tax deductibility of interest on debt positions without fixed term: The deductibility of interest on debt positions without fixed term, including interest on current account debt positions, will be capped based on a reference rate published by the Belgian National Bank, increased with 2.5%. An exception is provided for framework agreements for cash pooling.
- Rules on amortization for tax purposes: The double declining balance amortization method (degressieve afschrijvingen – amortissements dégressifs) will be abolished for assets acquired or established after 1 January 2020. SMEs will be required to apply a pro rata amortization on the first annuity.
- Tax deductibility of financial expenses in connection with discount debt: Financial expenses recorded for accounting purposes in connection with interest-free debt or debt with an interest rate lower than the market rate will be disallowed to the extent it relates to assets that cannot be depreciated and these assets have been acquired below fair market value.
- Exemption for capital gains on commercial motor vehicles: A tax exemption was available for capital gains on commercial motor vehicles (trucks), subject to reinvestment in more ecologically friendly vehicles. This exemption will be abolished.
Future Alerts will report on legislative developments regarding corporate tax reform.
1. See EY Global Tax Alert, Belgian Federal Government announces major corporate tax reform, dated 27 July 2017.
2. “OLO” is the Dutch abbreviation for the 10 year Belgian Government Bond rate.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Consultants SCCRL/BCVBA, Brussels
- Steven Claes
- Herwig Joosten
- Peter Moreau
- Arne Smeets
Ernst & Young Tax Consultants SCCRL/BCVBA, Antwerp
- Werner Huygen
Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York
- Max Van den Bergh
EYG no. 06235-171Gbl