Internal capital gains
An individual who is a shareholder of a domestic company or of an EU company, and who contributes or transfers shares into this company, may realize a capital gain on such a transfer or sale. Such capital gains are often referred to as "internal capital gains".
If the individual does not realize this internal capital gain in a professional context, but it is deemed to be realized within the scope of the normal management of private assets, the individual will not be taxed on the capital gain (article 90, §1, 1° in fine and article article 90, §1, 9°, sect. 1 ITC of the Belgian Income Tax Code 1992, "ITC").
Since January 1, 2017, the standard withholding tax rate on dividends has been increased to 30%. Since this tax rate has been significantly increased over the past few years, the contribution of shares by individuals into a personal holding company has become a popular tax planning technique. Indeed, more and more taxpayers contribute shares – generally at the highest price possible – into their own holding company. Any capital gain realized upon this contribution will, in principle, remain tax exempt for the individual if the contribution transaction qualifies as an act of normal management of his or her private assets.
At the same time, by making such a contribution, the statutory and fiscal capital ("paid-up capital") of the acquiring holding company will increase substantially. Later on, the holding company can carry out a capital reduction up to the amount of the increased fiscal capital. If the capital reduction occurs in accordance with the Belgian Company Code, the acquiring holding company will not be liable to corporate tax, nor to withholding taxes on the distributed fiscal capital. By applying this tax planning technique, the acquiring company can often distribute a substantial amount of liquidities to the shareholder without being subject to corporate taxes or to withholding taxes.
The Belgian Parliament recently modified the relevant tax law provisions in order to close this tax planning route, or to make it at least less attractive (Article 96-99 of the Program Law of 25, 2016, published in the Moniteur belge of December 29, 2016).
New rules on contributed capital gains
As of January 1, 2017, a new definition of fiscal capital or paid-up capital has been included in Belgian tax legislation.
Indeed, if a taxpayer contributes shares into a company and if the capital gain realized upon such a contribution is tax exempt (on the basis of article article 90, §1, 9°, sect. 1 ITC), the acquiring company will only enjoy an increase of its paid-up capital in an amount equal to the acquisition value the shares had in the hands of the individual. If there is no acquisition value, the contribution of shares into the acquiring company will only qualify as paid-up capital to the extent of the paid-up capital that is represented by the contributed shares.
The excess part of the contribution, based on the above principles, will not be considered as paid-up capital, but as a taxable reserve. When this reserve is distributed to the shareholder by the holding company, the latter will need to apply a withholding tax of 30% on the dividend amount.
Pete Johnson buys shares for a price of EUR 1,000,000 in Company X. Five years later, he contributes these shares into Company Y. At that moment, the Company X shares have an objective market value of EUR 5,000,000. This value is also applied as the contribution value into Company Y. Pete Johnson will not be taxed on the capital gain realized upon contribution into Company Y assuming he realized this capital gain outside any professional context but within the normal management of his private assets. The paid-up capital of Company Y will, however, not increase by EUR 5,000,000, but only by EUR 1,000,000, which equals the initial purchase price of the shares by Pete.
The new regulations are applicable, not only if the acquiring company is a Belgian company, but also if the shares are contributed into a foreign company (modified article 18 and 198 ITC).
It is important to note that the new rules apply only on contributed capital gains. As a result, capital gains on shares realized in any other way, such as for instance by means of a sale of shares, are not affected by the new rules and remain entirely subject to the same tax regime as the one applicable before January 1, 2017.
Entry into force
The new tax rules on contributed capital gains apply as of January 1, 2017.
Any contributed capital gains realized before 2017, as well as the paid-up capital contributed or increased before 2017, will not be affected by the new rules.
The Minister of Finance announced, however, severe tax inspections on recent contribution transactions to verify their legitimate character. The Minister of Finance also announced that the tax authorities may seek to apply the general anti-abuse rule to tackle such last-minute contribution transactions (article 344, §1 ITC).