Belgium introduced the so-called Fairness Tax ("FT"), a corporate income tax
on certain dividend distributions, in the summer of 2013. Both the interpretation
of the transitory provisions of the FT and the treatment of certain capital gains
on shares under the FT gave rise to uncertainty. In a circular letter of April 3,
2014 (the "Circular Letter"), the tax authorities have now commented on these
The FT was introduced as a sort of minimum tax for companies which distribute
dividends originating from profit which is deemed not to have been effectively
taxed because of the use of notional interest deduction ("NID") of the year
and/or tax losses carried forward ("NOLs").
Under the FT, dividend distributions are subject to a separate 5.15% corporate
income tax, but only to the extent that the dividend distributed exceeds the
distributing company's taxable base (i.e. the amount which has effectively been
subject to corporate income tax) of the year in which the distribution is made. A
further reduction is made for the part of the dividend which originates from socalled grandfathered retained earnings (see section 2 below).
In a final step, a proportionality factor is applied with the sum of the deducted
NID of the year and deducted NOLs as the numerator, and the gross taxable
result as the denominator (i.e. the taxable result before the deduction of tax
The FT calculation can be summarized in the following formula:
gross dividend distributed
- final taxable base of the year
- grandfathered retained
x deducted NID of the year + deducted NOLs
gross taxable result
A company has an accounting profit of 10,000 and disallowed expenses of 500.
The company's taxable profit is reduced by NID of the year and tax losses
carried forward for a total amount of 5,000. The company also benefits from an
investment deduction of 200.
The company distributes a dividend of 9,000, not originating from grandfathered
The tax return would look as follows:2 Important clarifications on application of Fairness Tax
Movement of taxable retained earnings 1,000
Disallowed expenses 500
Dividend distributed 9,000
Gross taxable result 10,500
NID of the year + NOLs -5,000
Investment deduction -200
Taxable base subject to 33.99% CIT 5,300
The taxable base of the fairness tax will be calculated as follows:
9,000 dividend - 5,300 taxable base x 5,000 deducted NID of the year and NOLs
10,500 gross taxable result
Fairness tax would thus be due on 1,762. At the abovementioned rate of
5.15%, the fairness tax would be equal to 90.74.
2. Grandfathered retained earnings and assessment
year 2014 dividends
The FT is applicable as of assessment year 2014 (i.e. all financial years ending
on or after December 31, 2013 but before December 31, 2014).
However, as already generally understood on the basis of the law and now
further confirmed by the Circular, dividends which originate from retained
earnings generated during assessment year 2014 or previous assessment
years are not subject to FT, subject to what is said below. The dividend
distributions are allocated first to the most recent retained earnings (LIFO-rule).
Importantly, for dividends distributed in relation to assessment year 2014, the
legislation provides that such dividends can never be deemed to originate "from
taxed retained earnings for the same assessment year ". This transitory
provision gave rise to different interpretations. The Circular Letter now provides
further clarification in this respect.
For dividends distributed in relation to assessment year 2014, it is now
confirmed that - contrary to the general rule - only dividends originating from
retained earnings generated at the latest during assessment year 2013 (FY
2012) are not subject to FT. For dividends originating from retained earnings
generated during assessment year 2014 (FY 2013) and distributed in
assessment year 2014, the FT in principle applies. From a practical
perspective, we believe that the Circular implies the following for dividend
distributions relating to assessment year 2014:
Normal dividends (i.e. dividends declared by the annual general
shareholders' meeting and which must still be reflected in the financial
statements of FY 2013) may be subject to FT, but only to the extent
that they originate from the FY 2013 result. Under the LIFO-rule, the
dividend is first allocated to such FY 2013 result, and will therefore be
exempt from FT only to the extent it exceeds the FY 2013 result.
One could argue that the LIFO-rule does not apply to current year profit
(on the basis that such profits cannot yet be considered as taxed
retained earnings). Based thereon and on the basis of certain
statements in the Circular, one could then argue that dividends are to
be allocated first to the taxed retained earnings of previous assessment
years, and not the current year (i.e. the FY 2013) result, and that
therefore normal dividends relating to assessment year 2014 would3 Important clarifications on application of Fairness Tax
only be subject to FT to the extent such dividends exceed the amount
of taxed retained earnings generated prior to assessment year 2014, as
they would only then be allocated to the assessment year 2014 result.
Taking into account that such reading would de facto exclude the
application of the FT in assessment year 2014 to a large extent (thus
rendering the transitory provisions for assessment year 2014 almost
entirely without practical effect), it is highly uncertain whether the tax
authorities will accept such point of view.
Intermediary dividends (i.e. dividends declared by an extraordinary
general shareholders' meeting, usually after the annual general
shareholders' meeting, out of retained earnings of previous financial
years) should not be subject to FT, as they are deemed to originate
from taxed retained earnings of the years prior to assessment year
2014 (FY 2013).
Interim dividends (i.e. dividends declared by the Board out of current
year profit and profits carried forward) may be subject to FT, but only to
the extent they originate from the profit of the current year in which they
are paid out, i.e. the FY 2013 profit. Here also, following the LIFO-rule
and according to our reading of the Circular, the dividend is first
allocated to such current year result (as taken into account for the
interim dividend), and will therefore be exempt from FT only to the
extent it exceeds the FY 2013 result.
The Circular seems to confirm that taxed retained earnings generated during
assessment year 2014 can be distributed without FT as of assessment year
2015 on the ground that retained earnings generated in assessment year 2014
convert from "bad" non grandfathered retained earnings (in case of a
distribution in assessment year 2014) to "good" grandfathered retained
earnings (in case of a distribution in assessment year 2015 or later). Therefore,
dividends declared in 2014 by an extraordinary general shareholders' meeting
following the annual general shareholders meeting approving the annual
accounts in relation to FY 2013 (and which are therefore intermediary dividends
relating to assessment year 2015) should be considered to be grandfathered,
as such dividends are deemed to fully originate from retained earnings
established in assessment year 2014 and previous years.
3. Capital gains
Capital gains realized on shares by Belgian companies (other than SMEs) are,
as of assessment year 2014, subject to a separate 0.412% corporate income
tax, provided that the subject-to-tax condition of the Belgian participation
exemption regime is met and that a minimum holding period is met.
Until assessment year 2013, such capital gains were fully exempt from
corporate income tax, and such exemption was technically achieved in the
corporate income tax return through an increase of the taxed retained earnings
at the beginning of the taxable period. Therefore, such capital gains were
excluded both from the final taxable base which is deducted from the FT base
and from the gross taxable result which constitutes the denominator of the FT
As many expected that the capital gains subject to the separate 0.412%
corporate income tax would still be technically processed in the same way, the
concern was that such capital gains would now also be subject to FT, even
though this would clearly not be in line with the purpose of the FT. The following
example shows how such unwanted taxation would occur.4 Important clarifications on application of Fairness Tax
Company X realizes a profit of 2,100, i.e. a capital gain on shares of 2,000 and
other operational profit of 100. The company's taxable profit of 100 is fully offset
with NID of the year and tax losses carried forward.
The company distributes a dividend of 2,000.
The taxable base would be determined as follows:
Increase of retained earnings 100
Increase of the starting position of the retained earnings -2,000
Disallowed expenses 0
Dividend distributed 2,000
Gross taxable result 100
NID of the year + NOLs -100
Taxable base subject to 33.99% CIT 0
The taxable base of the FT will be calculated as follows:
2,000 dividend - 0 taxable base x 100 deducted NID of the year and NOLs
100 gross taxable result
FT would thus become due on 2,000, while the NID of the year and NOLs
used only amount to 100. At the above mentioned rate of 5.15%, such boils
down to a FT of 103.
The Circular Letter now clarifies that the capital gains subject to the new
separate 0.412% corporate income tax will not be reported in the corporate
income tax return as an increase of the starting position of the retained
earnings, and will therefore not be excluded from the gross taxable result. As
a consequence, such capital gains on shares are excluded from FT.
The Circular also confirms that excess withholding tax and/or tax prepayments
can be credited against the FT. Furthermore, also the foreign tax credit, the
fictitious withholding tax and R&D tax credit can be credited against the FT.
5. Unresolved issues
Certain issues are not mentioned in the Circular and remain somewhat
unclear. These include the calculation of the FT to Belgian permanent
establishments of foreign companies, the question whether the FT constitutes
a kind of minimum taxable base, the application of the FT to dividends
originating from previously taxed undervaluations of assets or overvaluations
of liabilities. Hopefully, these issues will be addressed in future circulars.
Apart from these interpretation issues, the more fundamental question as to
the compatibility of the FT with the Belgian Constitution, EU law (the Parent
Subsidiary Directive and the freedom of establishment) and the double tax
treaties remains. In this respect, a request for annulment of the FT legislation
has recently been filed with the Constitutional Court.