You will no doubt have discovered from one of the many news stories that the federal government reached an agreement on 26 July 2017 on the corporation tax overhaul and its decreased rates. Other measures resulting from this ‘summer agreement’ are the tax on securities accounts, the expansion of flexible jobs, the option to make the rental of property subject to VAT and the reform of the tax on savings, with the emphasis on encouraging investments in shares. The overhaul shall take place in two stages, with the first series of measures to take effect next year and the second phase scheduled for 2020.
At present it remains a political agreement, and the actual impact and timing of the various fiscal measures shall only become clear once the technical details have been hammered out and translated into legislation. Below we sketch out an overview of the major changes to the tax rules, based on information publicly available at present.
Corporation tax measures
The measure that received the most media publicity is, of course, the reduction of the corporate tax rate from 34% to 25% (and 20% for SMEs for the first €100,000 bracket). The reduction is set to be performed in two phases, with a cut to 29% in 2018. Meanwhile the ‘crisis contribution’ of 3% will also be abolished over two phases.
In the future more companies will most likely also be able to benefit from the SME rate, with the scope of which companies are defined as an SME set to be expanded in this context. It will not just be the companies that fulfil the traditional criteria set out in article 215.3 of the Income Tax Code 1992, but also those ‘small companies’ within the meaning of company law (article 15.1-15.6 of the Companies Code) that will be eligible for the SME rate. That’s certainly good news.
Moreover, a company will henceforth be obliged to pay out at least €45,000 per year to a manager, with failure to do so leading to the payment of a special assessment of 10% of that sum (or of the difference between €45,000 and the effective lower remuneration). The €45,000 sum will also be the new minimum remuneration under article 215.3.4 of the Income Tax Code 1992 (replacing the previous €36,000 sum). This means that noncompliance with this rule will not only result in a special assessment but also in the loss of the SME status. The sum only has to be paid to one manager. Startups are still indemnified from this measure (i.e. for the first four years after being incorporated).
Introduction of the minimum tax rate
Quid pro quo, of course, and it seems as if a minimum tax rate of 7.5% is set to be introduced. How will it work in practice? Firstly, the deduction of previous losses is to be (considerably) limited. That’s because the previous losses are, together with the notional interest deduction, the DTI-deduction that is carried over and the deduction for income from innovations that is carried over, placed together in a basket that limits the maximum sum that can be deducted. That ‘basket’ amounts to €1 million plus 70% of the sum of the deductible items that exceed a million euros. That means that 30% of the deductible sum cannot be effectively deducted (but can still be carried over to the next and following years), and the upshot is that this 30% then forms a minimum taxable base – the company is taxed on it, even though no actual taxable base remains because the previous losses (or other deductible elements) are greater than the profit. This explains that ‘minimum tax rate’ of 7.5% (25% - the minimum tax rate as of 2020 – of 30% is 7.5%, not accounting for the €1 million base for which the full deduction can still be applied).
Limited notional deduction
The notional deduction is to be limited to the growth of the risk capital over the previous five years (on the basis of a weighted average), while the transfer measure remains in effect unchanged and the investment reserve is to be abolished (with existing reserves being slowly phased out). Another notable measure is that the costs pertaining to activities or income for future years are only deductible in that year. In other words, the matching principle is extended here in a fiscal sense. This means that it will no longer be possible to deduct rent paid in advance in the year it is paid in one shot.
Capital reductions will in future be charged on a pro rata basis to the paid-up capital and the taxed reserves (that are incorporated in the capital). The option of charging the reduction preferentially and exclusively to the paid-up capital (Com. IB 92, no. 18/30) will no longer apply. Reserves included in the capital are (logically) not targeted thanks to the holding measure under article 537 of the Income Tax Code 1992. The fiscal benefits for companies employing jobseekers (double exemption for the growth of taxable profits) will be abolished.
Capital gains taxation on shares
The capital gains taxation on shares under the corporation tax is once again set to be amended. To date large companies were required to pay a minimum of 0.412% tax on capital gains on shares that were held for more than a year, but this will now be scrapped. As of 2018 capital gains on shares will be subjected to a rate of 25% under the corporation tax. Meanwhile, the exemption for capital gains on shares will be curtailed by subjecting them to the condition of participation that holds for the DTI-deduction – aside from the other conditions for that DTI-deduction. This means that a threshold participation of at least 10% or an acquisition cost of €2.5 million is expected, with ownership retained for more than a year. So capital gains on a share participation of less than 10% (and with an acquisition cost of less than €2.5 million) is in principle still subjected to a 25% taxation rate.
There will also be changes in respect of the reinvestment of capital gains. If the rate is set to be reduced, it could have been an attractive proposition to have the capital gains either exempted or taxed with them spread out (article 47 of the Income Tax Code 1992), even when you were aware that you do not comply with the conditions because you are not planning to reinvest that sum. So when the capital gains are later taxed after the expiry of the reinvestment period, you would still gain from the corporation tax rate that had been lowered in the interim. Bad news for those who saw this as a fresh option for optimisation as, for this very reason, the rate applicable at the time the capital gains were realised shall be applied. The overhaul does not only entail the abolishing of deductible items, it also covers new incentives. The investment deduction is to be temporarily increased from 8% to 20%, although this is only for SMEs and self-employed persons, while the exemption from paying withholding tax for academic research will be ‘extended in phases’ (for example, for bachelor degrees where it previously only applied to master’s degrees).
Package of measures that will take effect in 2020
A second and major package of measures will take effect in 2020. A measure shall be in effect for two years that enables the conversion of tax-free reserves into taxed reserves at a rate of 15% or 10%. The (possibly net) interest expenses will only be tax deductible to a limited extent – amounting to 30% of the EBITDA. For loans dating from before 17 June 2016, a grandfathering clause will provide an exemption. The option to depreciate assets through degressive depreciations is to be scrapped, after which SMEs shall only be able to depreciate assets in the year in which they are acquired on a pro rata temporis basis. There will be stricter restrictions on deductions for car-related expenses.
There will also be an ‘economic interpretation’ for countering the concept of permanent establishments for shifting international profits (a diverted profits tax). Belgium shall also introduce CFC legislation, in accordance with the EU Directive of 12 July 2016, under which the income of a ‘controlled foreign company’ can still be taxed in Belgium. As of 2020 a fiscal consolidation system will also be introduced in Belgium, a country that to date has been one of the few where this was not possible. The losses and profits of various group companies will then be able to be set off against each other. This will only be applicable for profits and losses after that time (i.e. there can be no setting off of profits from one company through the losses carried over from another group company dating from prior to 2020). We are curious as to how this will be worked out legislatively. Finally, the deductibility of both the assessment on secret commissions and VAT penalties will be abolished and the benefits for additional staff will likewise be scrapped/