As we all know, Belgium is a country of SMEs, and in these difficult economic times, SMEs need extra support. To encourage SMEs in their investment policies, the legislature has dusted off the standard investment deduction for company tax, which has been frozen since 2007. For 2014 and 2015 investments, a temporary investment deduction of 4% was introduced. Because the standard investment deduction cannot be combined with the deduction for risk capital, and because of the low deduction percentage, the former was not often used.
To address these issues, the legislature has made the investment deduction permanent for investments made on or after 1 January 2016, and raised the deduction percentage to 8%. As a result, it has turned this "new" measure into a useful planning tool.
1. The concept
As the name suggests, the standard investment deduction applies to tangible and intangible fixed assets, regardless of their nature. This includes capitalised borrowing costs (relating to capital borrowed for the construction of fixed assets), improvements to existing buildings (insofar as no recovered materials were used) and non-recoverable VAT. It is a one-off deduction of 8% that is applied to the purchase price or production cost of the asset in the financial year of purchase or production. So an investment of €100,000, for example, attracts a deduction of €8,000, which can be offset against the taxable result.
If the deduction cannot be fully used, it is transferable to the next taxable period. Note: In this respect the standard investment deduction differs from the specific investment deductions which apply to things like energy-saving investments, investments for research and development, etc. For the deductions for specific investments provided by law, there is no time limit on transferability.
- The legislature has placed several conditions on the application of the standard investment deduction:
- The company must be a SME within the meaning of Article 15 of the Companies Code;
- The fixed assets must be used for business activities in Belgium;
- The investments must be made in depreciable tangible and intangible fixed assets (i.e. not land, paintings, etc.);
- The assets must be acquired new or be newly-made;
- The depreciation must be spread over at least three taxable periods.
To claim the investment deduction, taxpayers must submit Form 275U (company income tax) or 276U (personal income tax) along with their return.
To prevent tax abuse, the legislature has formulated several specific exclusions.
1) Fixed assets that are not exclusively used for business activities in Belgium
The legislature has stressed that the assets must be directly related to the existing or planned economic activities actually carried on by the company. This means that it is not enough that the investment falls within the company’s corporate purpose. Furthermore, fixed assets whose value would be deducted when calculating the risk capital deduction are, for the purpose of the investment deduction, deemed not to relate to the company’s economic activities. In the Explanatory Memorandum for the introduction of the temporary 4% investment deduction, the example was given of a partnership of doctors which cannot apply the investment deduction for the purchase of a seaside apartment. Even if the corporate purpose allows for or describes such investments, or if a benefit in kind is applied for the use of such investments, the deduction still cannot be applied.
Investments in fixed assets of which the cost unreasonably exceeds the needs of the business are also excluded. What is considered to be ‘unreasonable’ is of course a question of fact, the assessment of which may depend on what business activities the company carries on, the financial results it achieves, etc.
Fixed assets used for private purposes as well as business activities are not eligible for the investment deduction. A common example is that of an immovable asset which is partly used as a residence. In such a case the investment deduction may be applied only in relation to the rooms and spaces that are used exclusively for business purposes and are separated from the private areas. If for example you had improvements carried out on your house, it would be best to have a separate invoice prepared for the work relating to the rooms used exclusively for business purposes, such as a consulting room or office.
2) Fixed assets that are acquired or made with the intention of transferring the right to use them to a third party through leasing, long leasing, superficiary rights or similar property rights
This exclusion only relates to situations where the fixed assets are in principle depreciable by the rights holder. For example, a leasing contract under which the leased property is depreciable by the lessee and not by the lessor. This exclusion prevents the lessor from applying the investment deduction, which is a right reserved for the lessee (provided the other conditions are met).
3) Fixed assets, the use of which is ceded to third parties in a manner other than those described above
In the past, the Constitutional Court found this exclusion discriminatory because the funds were not equal to their purpose. As a result, the legislature mitigated the exclusion by stating that fixed assets would be eligible for the investment deduction to the extent that their use was ceded to a natural person or SME which could then itself claim the investment deduction as if it was the owner of the property. This was an attempt to prevent taxpayers who are eligible for the deduction being tempted to purchase fixed assets then hire them out to taxpayers who fall outside the scope of this measure, such as large enterprises.
The administrative guidelines give several examples of this exclusion, such as letting rooms to students.
4) Private cars and cars with a dual use
With the exception of cars belonging to a driving school which are used exclusively for that activity and cars that are exclusively used for a taxi service or are hired with a driver.
5) Buildings acquired with the intention to re-sell (inventory)
6) Additional charges, if not depreciated together with the assets to which they relate
4. The standard investment deduction as a tax planning tool
It should be noted that the standard investment deduction cannot be combined with the deduction for risk capital, (i.e. the notional interest deduction). Since the standard investment deduction has been increased to 8% and the rate of the deduction for risk capital is going down each year (for the 2017 assessment year, it’s only 1.631% for SMEs), it’s a good time to consider which measure is the best one to use.
Let’s illustrate it with a simple example:
Company A is a medical partnership whose financial year closes on 31 December. In 2015 it ended the financial year with equity capital of €400,000. In 2016 they purchased new medical equipment worth €120,000. The question is whether in its tax return for the 2017 assessment year (for the financial year ending 31 December 2016), it would be better for Company A to apply the deduction for risk capital, as it has done in previous years, or whether it should instead apply the standard investment deduction.
On the hypothesis that the basis for the risk capital deduction for Company A is equal to the initial state of its equity capital, the notional interest deduction would amount to €6,524 (i.e. €400,000 x 1.631%).
The standard investment deduction would produce €9,600 (i.e. €120,000.00 x 8%). Accordingly, applying the standard investment deduction would be best in this case.
However, it should be noted that the above exercise does not tell the whole story, since the order of the tax deductions must also be taken into account. The standard investment deduction is the second-to-last deduction that can be applied on the list of company income tax deductions:
1) Non-taxable items
2) Definitively-taxed income and exempt income from movable property
3) Deduction for patent income
4) Deduction for risk capital
5) Losses carried forward
6) Investment deduction
7) Deduction for risk capital transferred from the previous taxable period
For example, if the deduction for tax losses carried forward is available, this will be used first, before the standard investment deduction is offset against the taxable result. Since there is a time limit on the transferability of tax losses carried forward, in some cases it may be more useful (usually if the difference between the deduction for risk capital and the standard investment deduction is not too large) to opt for the risk capital deduction instead.
Let’s go back to the earlier example, and suppose that Company A’s taxable result before the application of tax deductions is €14,600. It also has €20,000 of tax losses carried forward from previous years.
Despite the fact that the standard investment deduction is higher than the deduction for risk capital, in this situation it would be better to use the risk capital deduction. Because of the order in which the deductions are applied, by opting for the risk capital deduction Company A would only have to use €8,076 (i.e. €14,600 - €6,524) of the losses carried forward. If they had applied the standard investment deduction, the full amount would have been cancelled out by the losses carried forward.
Note that the above exclusion does not affect any transferred risk capital deduction which has already been built up in the past. The exclusion applies only to the risk capital deduction for the current assessment year in which the standard investment deduction is applied.
In summary, the standard investment deduction is a useful measure which should not be overlooked when planning new investments. While the deduction for risk capital often provides a small tax benefit for SMEs with limited equity capital, the investment deduction gives taxpayers a significant tax saving of up to 8% of the amount of their investment. If you’re looking for assistance, we are at your disposal to provide further advice and work out a tax simulation as soon as you start thinking about making an investment.