On 26 July 2017, the Belgian Federal Government reached an agreement on the corporate tax reform originally announced in 2016. The corporate tax basis will be broadened and a number of existing tax deductions or specific exemption regimes will be reduced or abolished, to reflect the three main aims of the reform: simplification, fairness in taxation policy and budget neutrality.
Start-ups, innovative companies and SMEs should benefit the most from these reforms. Furthermore, personal income tax measures are included in the reform..
The corporate tax reform will be implemented in two phases. Most of the measures are intended to be in force from 2018 and the remaining measures should be in force by 2020.
Although some amendments may be made as the bills are debated, based on the information currently available, we summarise below the key measures:
Corporate income tax
Gradual decrease of the corporate income tax rate: The corporate tax rate will drop from 33.99% to 29.58% in 2018 and to 25% in 2020.
Special reduced tax rate for SMEs: if conditions are met, as from 2018, SMEs will benefit from a reduced rate of 20,4% on profits below EUR 100,000 (the rate will reach 20% as from 2020). The investment deduction for SMEs is increased to 20%.
Reform of the holding company regime – an improvement: the reform provides that the 0.412% tax on capital gains realised on shares by non-SMEs would be abolished. The capital gains on shares would be fully exempted under the same conditions as for dividends. Hence, to benefit from this exemption, a minimum participation threshold has to be met (minimum shareholding of 10% of the share capital or an acquisition value of at least EUR 2.5 million) in addition to the existing conditions (shares owned in full ownership for at least one year and a “subject to taxation” condition).
Tax consolidation: a tax consolidation regime, which does not currently exist in Belgium, will be introduced in 2020. This would mean the tax losses of a Belgian entity could be deducted from the taxable profits of another Belgian entity within the consolidated group.
Tax incentives for innovation: in addition to the new Innovation Income Deduction, which could, if conditions are met, result in an effective tax rate of 3.75% from 2020, new incentives will be created for innovative companies. The exemption regime of payroll tax for scientific personnel will be extended to certain bachelor degrees. Furthermore, the research and development (R&D) investment deduction and the R&D tax credit will be maintained.
To ensure budget neutrality, several compensating measures were also announced to limit a number of tax deductions and broaden the income tax basis:
- Reform of the notional interest deduction (NID): The Belgian NID currently applies to the full adjusted equity. As from 2018, the “new” NID would only apply to the increase in equity, compared to an average based on the five preceding years.
- Limitation on the use of certain tax deductions – minimum taxable basis: The use of some (carried forward) tax deductions will be limited to the taxable profit below EUR 1,000,000. Above this threshold of EUR 1,000,000, only 70% of the taxable profit will be eligible for the application of carried forward tax deductions. This means that the profits above the threshold of EUR 1,000,000 will be a minimum taxable base subject to an effective rate of 7.5% (e. 30 % of the new rate of 25% applicable as from 2020). The limitation will apply to the carried forward dividend received deduction, the carried forward innovation deduction, the carried forward tax losses, the carried forward NID, and the NID. Special rules regarding carried forward losses should be applicable for start-ups during their first four years.
- Transposition of the European Union Anti-Tax Avoidance Directive (ATAD): Certain measures of the ATAD will be implemented in 2020 into Belgian domestic law, including the interest deduction limitation rule (30% of the EBITDA beyond EUR 3,000,000 million of interest expenses), the exit tax, the rules on hybrid mismatches and the controlled foreign company rules.
- Discouraging use of management companies by individual taxpayers: Given the decrease of the corporation tax rate, measures were announced to discourage the use of companies by individuals to achieve a lower tax rate. For example. a minimum remuneration of EUR 45,000 – instead of the current minimum EUR 36,000 – will have to be paid by the company to its director in order to benefit from the reduced rate for SMEs.
- Other measures: Various other compensating measures were announced by the Federal Government, including new rules regarding disallowed expenses on: i) company car-related expenses; ii) secret commission tax; and iii) the deductibility of tax fines, (exempted) provisions for risks and charges, expenses paid in advance, tax prepayments, accelerated depreciations and the compensation of losses incurred in permanent establishments outside Belgium.
Personal income tax
Withholding tax exemption for dividends up to EUR 627: dividends received by a private individual will be exempt from tax up to an amount of EUR 627 per year.
Subscription tax on custody accounts: a yearly subscription tax of 0.15 % would be levied on portfolios (shares, securities, bonds, units of UCI/funds) having an aggregate value exceeding EUR 500,000. The tax will be levied on the full amount, i.e. “from the first euro” if the threshold of EUR 500,000 is exceeded (e.g. on a portfolio of EUR 1,000,000 the tax will amount EUR 1,500) . However, pension saving scheme and life insurances (and securities held as such) will fall outside the scope of this new tax.
Withholding tax on capital reduction: Capital reductions will become partially subject to withholding tax, in proportion of the reserves (if any) compared with the tax capital. The portion of the capital reduction resulting from paid-up capital will remain untaxed.
Other measures: Various other measures were announced by the Federal Government, including: a reduction of 50% in the tax exemption on interest on savings accounts; taxation on capital gains on units of UCI’s (the threshold of 25% of debt receivable could be abolished); and reinforcement of the Cayman tax (look-through taxation for income deriving from legal constructions such as trusts and foundations).
Tax on stock exchange transactions: the rates of tax on stock exchange transactions will be increased again in 2018, from 0.09% to 0.12% for bonds and from 0.27% to 0.35% for securities.
What happens next?
All of these measures will now be cast into bills. Most of these measures will then be effective from 1 January 2018 (or could potentially have effect on income in the second half of the 2017 financial year) and the rest from 2020.