By now it’s hardly news that Belgian corporation tax will be comprehensively reformed as part of the Summer Agreement. The proposed reforms as set out in the drafts of the Programme Act (authorising government expenditure measures) and the Recovery Act were approved on 27 October by the Cabinet. The government presented the Programme Act bill to the House of Representatives on 6 November 2017, while the Recovery Act bill (which includes the corporation tax reforms) is still on the way.
What has become clear from the draft version of the Recovery Act, which is presently in the hands of the Council of State awaiting its opinion, is which reforms were retained by the government. A number of these reforms are due to EU legislation, specifically the European ATAD Directive1, the EU Anti-Tax Avoidance Directive that combines a number of points for action under the OECD’s BEPS plan² with a number of other international anti-tax avoidance measures.
The original ATAD Directive contains 5 concrete measures:
- An interest limitation rule;
- Exit taxation;
- A controlled foreign company (CFC) rule;
- A rule on preventing hybrid mismatches; and finally
- A general anti-abuse rule.
The first 4 points for action are also a part of the reform measures for corporation tax as presently set out in the draft version of the Recovery Act. Below we provide further details on the various ATAD measures and their proposed transposition into Belgian law. At present no final legislative texts are available, which means that there could still be some changes.
The interest limitation rule
Under the Summer Agreement a new thin capitalisation measure is introduced in the form of limiting the deductibility of debt interest. The measure aims to counter the erosion of the taxable base of companies by means of employing excessive interest payments.Whether or not interest payments are excessive is determined by comparing the difference between the interest payable and interest received and other costs that are the financial equivalent of interest with the profit and earnings before interest, taxes, depreciation and amortization (EBITDA) of the taxpayer in question. The concept of EBITDA is interpreted in fiscal terms, which entails that only taxable income is eligible, so tax-exempt income is not eligible for the EBITDA assessment. This measure replaces the current Belgian tax law on thin capitalisation, which was introduced on 1 July 2012 in the form of a debt/equity ratio, with the proportion of debt capital to equity capital set at 5:1. Under the ATAD Directive Member States have a number of different options when it came to thin capitalisation measures.
In the present draft bill the government has proposed to transpose the thin capitalisation measure as follows for Belgium:
- The new measure shall apply to loans taken out as of 17 June 2016. Interest payable as a result of loan agreements concluded before that date continues to fall under the present thin capitalisation rule (i.e. debt/equity ratio of 5:1). A transitional measure will be put in place in that respect;
- A de minimis threshold of €3,000,000.00 applies, which means that (irrespective of how the EBITDA is composed) interest will remain deductible up to that sum;
- In order to prevent payments of interest to tax shelters becoming fully deductible as a result of the de minimis threshold, the extant thin capitalisation rule remains applicable to interest that is paid to tax shelters (i.e. debt/equity ratio van 5:1);
- Belgian companies and Belgian establishments that are a part of a group must assess their EBITDA and the de minimis threshold in a consolidated manner;
- Interest that cannot be deducted under the new interest limitation rule can be carried over to following years without restriction;
- The interest limitation rule does not apply loans taken out as a result of performing a public-private partnership project that was awarded in accordance with the regulations for government procurement contracts.
- Independent entities (those companies that are not part of a consolidated group, are not affiliated with other companies and have no permanent establishments) and financial institutions as defined in the ATAD Directive do not fall under the scope of this measure.
This new thin capitalisation rule is anticipated to take effect before the 2021 tax year (for taxable periods that will not commence earlier than 1 January 2020).
Exit taxation (and the ‘step-up’ rule)
Under the ATAD Directive Member States are also required to impose an exit tax on companies if their assets are re-located across the border. It is hoped that this will avoid the loss of the national taxation right, given that under this rule companies must first ‘settle up’ before they can relocate their assets to another (EU or non-EU) state. At present an exit levy exists under Belgian legislation should companies decide to move their corporate seat, as well as if assets are withdrawn from a Belgian establishment. On the basis of the ATAD Directive, as it was transposed into the draft bill for the Recovery Act, the scope of the current exit tax will now be extended to include the relocation of assets from a Belgian company to a permanent establishment abroad.
In order to prevent such an exit levy constituting a violation of the principles of freedom of establishment within the European Economic Area, an option has been provided for (in the event of transfers within the EEA) for collecting tax over a period of time. This condition had, under the influence of prevailing EU jurisprudence, already been introduced into Belgian legislation in the form of the Law of 1 December 2016, and it gives taxpayers the option of choosing between paying the exit tax immediately or paying ‘the outstanding sum of the income tax payable’³ over a maximum of 5 years. The new aspects of the exit tax regulations will evidently be applicable to all relocations that take place after 1 January 2020.
Further, thanks to the provisions of the Directive, a step-up rule is also included where the relocation of asset components, a permanent establishment or the domicile for tax purposes by a company to Belgium. This rule means that the value of the transferred components as determined in the Member State of origin (with regard to the exit levy) will be accepted as the starting value in Belgium, unless such does not correspond to the market value. The Belgian rule is also extended to apply to such transfers from non-EU countries.
The CFC rule
Another important ATAD Directive action, and a major novelty for the Belgian tax laws, is the obligation imposed upon Member Stares to introduce CFC rules.CFC (Controlled Foreign Companies) rules are anti-tax avoidance rules that aim to tax the non-distributed profits that are generated in or through foreign subsidiaries or permanent establishments in low-tax countries in the ‘homeland’ of the controlling shareholders/taxpayers. This is how the artificial shifting of profits to these foreign entities or permanent establishments can be countered.
The relevant article of the ATAD Directive provides for the application of the CFC rules to both foreign companies and foreign establishments, because some EU Member States opt, on national legislative grounds, to exempt profits generated in foreign establishments located in countries with which a double taxation treaty does not exist. But this rule does not exist in Belgium as, under national Belgian tax law, domestic companies are taxed in full on their international profits, unless that profit is exempted under a double taxation treaty. This exemption is governed solely by the applicable double taxation treaties. In order to avoid interfering with the coherence of the Belgian income tax system and in order to avoid introducing provisions in the national law that impact upon the provisions of those double taxation treaties concluded by Belgium, it was decided to exclude the foreign establishments from the scope of the CFC law when transposing it into Belgian legislation. Belgium has however opted to devise a similar measure that will treat foreign establishments and foreign companies equally.
Under the ATAD Directive EU Member States have a various options for introducing national CFC legislation, with the draft version of Belgium’s CFC law opting for the ‘transactional approach’. The transactional approach, as set out in the draft bill, is in the form of a profit adjustment on the part of the Belgian company. The profit realised by a foreign company as a result of artificial constructions that were essentially created for the purpose of gaining a tax advantage are the target here. This approach is also the preferred OECD one, as it is more accurate and proportional when it comes to taxing CFC income. Moreover, the approach appears to be more reconcilable with the double taxation treaties of which Belgium is a partner. The Belgian CFC provision will evidently be in effect as of the 2021 tax year (for taxable periods that will not commence earlier than 1 January 2020).
The war on hybrid mismatches
Finally, the war on hybrid mismatches is an action point of both the ATAD Directive as well as ATAD II4, which extends the scope of the original Directive in this respect. Hybrid mismatches can be defined as instruments that exploit the differences in the way an entity or payment is treated in terms of taxation under the legislation of two or more tax jurisdictions, which can result in a double deduction or the deduction of specific costs on the part of one or more of the parties without corresponding taxation in the recipient’s nation.
Following on from ATAD and as amended by ATAD II, the draft bill of the Recovery Act introduces regulations that endeavour to tackle such hybrid mismatches, for which it can be assumed that they were created for the purpose of ‘arranging’ the taxable bases of the companies concerned. Among others, these are constructions created between affiliated companies, between parties that constitute a part of the same company or that act within the framework of an arrangement where the tax advantage obtained was already taken into account in the conditions or that was set up for the purpose of obtaining such a tax advantage.The intention of the proposed measures is to refuse deduction in the payer’s country, to include a corresponding income in the taxable income of the recipient, or to restrict the deduction of the fixed percentage of foreign tax.
The regulations combating the consequences of hybrid mismatches are expected to take effect as of the 2021 tax year (for taxable periods that will not commence earlier than 1 January 2020). As stated at the beginning of this article, no definitive legislation exists to date, and we will naturally closely follow any further developments in both this respect as well as the other reform measures aimed at Belgian corporation tax.
1. The Anti Tax Avoidance Directive – Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
2. Base Erosion and Profit Shifting: The BEPS plan contains points for action for combating international tax avoidance and profit shifting. These actions are primarily constructed around three pillars: coherence, substance and transparency.
3. Spreading out the collection of the exit levy can only be applied to ‘the outstanding sum of the income tax payable’, which corresponds to the sum of the payable income tax plus any tax increases and after the deductible components (such as withholding tax, the fixed percentage of foreign tax credit, tax credits, etc) and the advance payments made are included. This total is then limited to the proportionate share of the exit levy in the total outstanding tax sum.
4. Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.