1. Adaptation of the Belgian Income Tax Code following the introduction of the new Belgian Code on Companies and Associations
Due to the changes induced by the new Belgian Code on Companies and Associations ("BCCA"), the Belgian Income Tax Code ("BITC") has been modified in order to ensure the tax neutrality of the corporate law reform.
Some provisions of the BITC had to be modified extensively as they rely on concepts or notions included in the BCCA. The BITC was modified in order to take into account, amongst other things, the new incorporation doctrine regarding the registered seat of companies (depending on the incorporation), the abolition of share capital for the BV/SRL, the new possibilities regarding the transfer of seats and restructuring, etc. These changes entered into force together with the new BCCA.
Below, we discuss some of the changes brought to the BITC attached to the new BCCA.
Please note that beyond these required changes for neutrality, the new BCCA opens up new and alternative ways to undertake various projects. Its scope is very broad and we would be happy to discuss this with you in examining your case.
2. Tax consequences of the abolishment of "capital"
One of the key features of the new company code is the abolishment of the "share capital" for BV/SRL (while the NV/SA remains with).
Instead of "share capital", the equity of the limited liability companies will be comprised of (i) the contributions of shareholders, (ii) reserves and (iii) profit carried forward that will serve as a protection for creditors. In addition, the minimum share capital requirement will be replaced by the obligation of the shareholders of a BV/SRL to ensure that the company has sufficient funds upon incorporation to carry out its envisaged activities.
At the tax level, specific definitions of "capital" and "paid-up capital" have been introduced in the BITC:
- Because the concept of share capital is included in various corporate tax provisions, these provisions are amended. Every single reference to the "statutory" capital or to the "share" capital has been replaced by a specific tax concept of capital. An autonomous capital concept for tax purposes is defined in Article 2 of the BITC. This autonomous concept includes the equity of companies not having a "share capital", but limited to the contributions made in cash or in kind and excluding any labour contribution.
- The concept of paid-up capital, previously defined by the BITC, has been updated to clarify that this concept is applicable to all operations relating to Belgian and foreign companies with the tax treatment attached hereto.
- In the accounts, the share capital and legal reserves of existing BVs/SRLs are automatically converted into statutory unavailable equity accounts. Additional contributions will increase the equity in available accounts, with a need for precise identification of the amounts that are capital for tax purposes, especially for the tax treatment of subsequent distributions, as the BVs/SRLs are able to distribute not only profits or available reserves but also make contributions booked in the available accounts.
- For share premiums, a statutory unavailability was previoulsy required, with other conditions, to allow a tax treatment as capital. This requirement of statutory unavailability has disappeared, being in line with the new equity concept of BVs/SRLs. This is a welcomed simplification, mainly for share premiums of foreign companies, as before this reform, the statutory unavailability requirement led to difficulties and the potential disqualification as capital.
- In case of capital decrease, the corporate tax reform of 2017 already modified its tax treatment, with the introduction of a pro rata on the equity to qualify (part of) the cash flow to the shareholders as a dividend for tax purposes. This rule remains applicable, with certain technical adaptations due to the fact that BVs/SRLs have no more share capital.
3. The abandonment of the "real seat theory" in favour of the "incorporation theory"
Thus far, under Belgian Law, the nationality of a company is determined on the basis of the place of its real head office (theory of the "real seat"). According to the new BCCA, the applicable company law is determined by the location of the company's registered office rather than by the real seat theory, irrespective of where the effective place of management is located.
This should enable Belgium to export its own company law abroad and foreign companies to choose a Belgian legal form by establishing their registered offices in Belgium, without needing to conduct business within the Belgian territory.
For tax purposes, this change has major consequences. In order for a company to qualify as a resident for Belgian corporate income tax purposes, the place of effective management becomes the main criterion. Making a clear governance scheme to avoid any discussion around the place of effective management has thus become even more fundamental for tax purposes. Moreover, to avoid any gap in the tax residency of an entity incorporated in Belgium but arguing that the place of its effective management is outside Belgium (where no country outside Belgium would consider such company as a resident for tax purpose), a company having its statutory seat in Belgium must be presumed to be a tax resident, unless such company demonstrates that another country considers that this company is a tax resident based on the tax legislation of that country.
Since the tax rules are based on accounts which arenot necessarily be established under Belgian GAAP with the incorporation theory (e.g. foreign statutory seat with effective place of management in Belgium), a new tax provision requires the establishment of accounts and inventory under Belgian GAAP to be enclosed in the Belgian tax return when the company is resident for tax purpose. This new provision is also applicable to some non-resident companies.
4. International transfer of seat
Aside from the reinforcement of legal certainty with the BCCA, the BITC is updated to levy uncertainties in case of immigration, especially in terms of the hidden gains relating to the period before arrival in Belgium. The same is applicable in case of a change in the Belgian tax regime of the entity (mainly switch from the legal entity tax regime to the corporate tax regime).
5. New "tax fiction" introduced for shares buy-back
Under the previous rules of the Company Code, a company was authorised to buy-back its own shares up to maximum 20% of its share capital. From a tax point of view, if the share buy-back was aligned with the conditions set up by the Company Code, the taxation of the acquisition bonus/dividend could be time-delayed until the occurrence of some events (e.g. annulment or destruction of the shares, sale of the shares, etc.).
This cap of 20% is suppressed in the new BCCA. As consequence, this cap of 20% is expressly introduced in the BITC to ensure the tax neutrality of the corporate law reform (Article 186, al. 6 BITC). If the cap of 20% is exceeded, own shares exceeding this cap will be deemed as destroyed for tax purposes. This new tax fiction implies an immediate taxation of the acquisition bonus/dividend subject to a withholding tax, if and when applicable.
The purpose of this new tax fiction is to prevent a shift from the ordinary dividend distribution (giving rise to immediate taxation) to shares buy-back (generating a possible deferral of taxation).
In case of a share buy-back from different shareholders and/or at a different prices, the company is allowed to choose which shares would be considered as destroyed for tax purposes. If no choice is made, the 'destruction' occurs based on a proportional base.
For own shares held by a company that are deemed as destroyed for tax purposes (i.e. own shares exceeding the cap of 20%), the net fiscal value of these own shares will be zero, which could lead to difficulties in some circumstances.
6. Considerations and uncertainties relating to the interaction of the new BCCA and BITC
Previously, there was a link between the value of the contribution and the rights attached to the shares. The new BCCA entails an entirely new way of governing the economic and membership rights attached to BV/SRL shares (please refer to the other sections "Start/Scale-Ups" and "Capital and profit distributions" for more information on these topics). Hence, there is no longer any connection between the value of the contribution (upon incorporation or afterwards) and the rights attached to the BV/SRL shares.
The New BCCA now allows:
- labour contributions in consideration for shares and;
- multiple voting rights per share (the freedom to tailor these multiple voting rights will be nearly unlimited in non-listed companies).
As mentioned, the BITC now contains specific fiscal definitions of "capital" and "paid-up capital" as the BITC frequently refers to theses notions. Various uncertainties related to the interaction of the new BCCA and the BITC will certainly arise in the short term. We mention for example:
- Both tax definitions added in the BITC exclude the labour contributions from the definitions of "capital" and "paid-up capital". Is there any argument around the (future) qualification of the income earned against a labour contribution (dividend or professional income)?
- According to the new BCCA, a very limited contribution in cash or in assets could allow multiple voting rights. This could have significant consequences around the "participation threshold" set out in several provisions of the BITC. For example:
- Article 90, 9°, 2nd bullet BITC (taxation of capital gains realized on shares sold to a company with registered seat outside of EEA) is applicable if and when the shareholder holds - directly or indirectly - "more than 25% of the rights of the company which shares are sold".
However, a person having contributed in labour could have more than 25% of the voting and economic rights but less than 25% of the capital and vice versa.
- Article 192, § 1 BITC (regarding the exemption of capital gains on shares realized by companies), Article 202, § 2, 1° BITC (regarding the application of the dividend received deduction) and Article 105 of the royal decree implementing the BITC (regarding the withholding tax exemption on dividends distributed to some companies) require a participation of at least 10%. However, a person having 90% of the voting and economic rights could have a participation of less than 10% in the capital. Could the fundamental change of the concept of capital generate arguments for a broader approach than a participation in the meaning of capital?
These examples (many others exist) illustrate the possible difficulties of tax interpretation and application that shareholders will face in the future in counterpart to the new opportunities offered by the new BCCA.