NEWSFLASH TAX REFORM NOVEMBER 2017
You will read below the details of the tax reform based on the draft bill submitted to the Council of State for comments.
Tax reform in a nutshell -- Corporate income tax rate -- Composition of the taxable base -- Notional interest deduction -- Minimum taxable base -- Interest deduction limitation -- Matching principle -- Transfer pricing rule for intragroup interest -- Accruals for risks and charges -- Exempt gains subject to reinvestment and other tax-exempt provisions -- Equity movements -- Capital decrease -- Conversion of tax-exempt reserves -- Belgium as investment platform -- Participation exemption for capital gains -- Participation exemption for dividends
Anti Tax Avoidance Directive (ATAD) -- Interest deductibility limitation rule (30%-EBITDA) -- Definition -- Excluded loans and taxpayers -- Interest deductibility limitation and carry-forward -- Group provisions -- CFC rule
Tax consolidation -- Qualifying taxpayers -- Agreement for an intragroup transfer
Tax procedure -- Non deductibility of fines and penalties -- Minimum taxable base in case of absence of later corporate income tax return -- Late interest and moratorium interest -- Effective payment in case of tax audit
We hope this will be useful to you.
Christophe Laurent and Ariane Brohez
Tax reform in a nutshell
Corporate income tax rate
Corporate income tax rate For Belgian companies1, BE-REIT2 and SREIF , the main measure to focus on is the decrease of the tax rate and the crisis contribution:
2018 (taxable periods starting on or after 1/1/2017)
20192020 (taxable periods starting on or after 1/1/2018)
2021 (taxable periods starting on or after 1/1/2020)
Old all-in rate
New allin rate
Old all-in exit tax rate
New allin exit tax rate
Important to note, the exit tax rate is lower than the half of the statutory tax rate for the tax years 2019 and 2020, but shall afterwards increase to 15% (instead of 12.50%) as from the tax year 2021, which should encourage conversion and corporate restructuring involving BE-REIT and SREIF in the coming two years.
Composition of the taxable base Compensatory measures will however apply, impacting the taxable base of a Belgian company.
Notional interest deduction NID will no longer apply to the total equity but only to the increase of equity measured over a rolling 5-year period as from the tax year 2019 (taxable periods starting on or after 1/1/2018). The equity base to calculate the NID shall be equal to 1/5th of the positive difference between (i) the corrected equity at the end of the taxable period and (ii) the corrected equity at the end of 5th preceding taxable period. Let's take a few examples.
-- Existing company with increase of equity
Equity for NID purposes
- Equity for NID purposes at the end of tax year 2019 = 125
- Equity for NID purposes at the end of the 5th preceding tax year = 100
- Positive difference = 25 - NID base = 5
1 The same tax regime applies to Belgian branches. 2 Socit Immobilire Rglemente (SIR) / Gereglementeerde Vastgoedvennootschap (GVV) 3 Fonds d'investissement immobilier spcialis (FIIS) / Gespecialiseerde vastgoedbeleggingsfonds (GVBF)
-- Existing company with decrease of equity, which shall be the case for a large majority of real estate companies that upstream excess cash through capital decreases
Minimum taxable base The principle of a minimum taxable base will be introduced by limiting the yearly use of certain tax deductions.
2014 2015 2016 2017 2018 2019
Equity for NID purposes
100 95 90 85 80 75
- Equity for NID purposes at the end of tax year 2019 = 75
- Equity for NID purposes at the end of the 5th preceding tax year = 100
- Positive difference = 0 - NID base = 0
-- Newly incorporated companies
Equity for NID purposes
-- Tax deductions not subject to limitations (other than enough taxable income): authorised gifts, dividend received deduction of the year, innovation deduction and investment deduction (first deduction)
-- Tax deductions subject to limitations: notional interest deduction, carried-forward dividend received deduction, carried-forward innovation deduction, carried-forward tax losses, carriedforward notional interest deduction (second deduction) -- No limitation up to 1,000,000 EUR -- Above 1,000,000 EUR, the applicable deduction is limited to 70% of the remaining taxable profit after the first deduction
This minimum taxable base shall apply as from tax year 2019 (taxable periods starting on or after 1/1/2018) and shall be further adjusted, with respect to the second deduction, with the introduction of a form of tax consolidation as from tax year 2021 (taxable periods starting on or after 1/1/2020). The unused tax deductions (because of this limitation) shall be carried forward.
2014 2015 2016 2017 2018 2019
0 This limitation shall have particular impact: -- for property companies that have built-up carried-
0 forward tax losses because of depreciation taken on the asset (and other deductible costs),
0 especially in a period of (high) vacancy; 0 -- in the commercial negotiations with respect to a
discount for tax latency on the share price; 0 -- in case of corporate restructuring implying a
BE-REIT or a SREIF since this limitation shall also 100 apply in case of tax liquidation of a company.
- Equity for NID purposes at the end of tax year 2019 = 100
- Equity for NID purposes at the end of the 5th preceding tax year = 0
- Positive difference = 100 - NID base = 20
Below an example on how this should work for a mixed holding, owning real estate and qualifying participation, having 5,000,000 EUR carried-forward tax losses:
Dividend Received Deduction (participation exemption)
Taxable base after first deduction
Maximum allowed utilisation ((4,000,000-1,000,000)*70%)+1,000,000
Notional Interest Deduction
Losses carried forward
Taxable base after second deduction
Tax losses to carry-forward (5,000,000-3,020,000)
3,100,000 <80,000> <3,020,000>
Interest deduction limitation As from tax year 2021 (taxable periods starting on or after 1/1/2020), the tax deductibility of interest shall be limited to 30% of the company's EBITDA, as adjusted to exclude exempt income. This measure may have a particular impact on the BE-REIT. Indeed, the excessive interest is considered a disallowed expense and will be subject to corporate income tax (at a rate of 25%) while this interest has not decreased the taxable base but the dividend to be distributed (subject to withholding tax).
For interest related to a period starting after 31 December 2019, the tax reform provides for the following limitations: -- for not mortgage-backed loan without fixed maturity
date (in other words, a current account outside of an organised cash-pooling as defined by the tax law): the maximum interest rate shall be equal to the MIF interest rate applied to loan granted to non-financial institutions, of a principal amount of less than 1,000,000 EUR and with a maturity of less than 1 year, increased by 2.5%; the reference rate for a given year shall be the rate of the month November of the preceding year (i.e. for the year 2020, the reference rate shall be the rate of November 2019) as published by the National Bank of Belgium (for example, the rate of the month September 2017 is 1.67%); -- for other loan: the market interest taking into account the specificities of the transaction, especially the financial situation of the debtor and the maturity of the loan for assessing the risk of the transaction.
Accruals for risks and charges Accruals for risk and charges are tax exempt subject to a series of conditions, one of them being that the charges that these accruals are covering are deductible as professional expenses for the year concerned; this item includes the charges that correspond to heavy repairs which are performed periodically during regular periods not exceeding 10 years.
This limitation is further detailed below (ATAD).
Matching principle As from tax year 2019 (taxable period starting on or after 1/1/2018), the tax deductibility of professional expenses shall follow the accounting matching principle, meaning that the deductibility costs paid in a given tax year but related to income or operations of following tax years will have to be spread over all tax years concerned.
Transfer pricing rule for intragroup interest Transfer pricing is a source of concern and reporting for all groups, and the Belgian TP cell is quite active in auditing intragroup (financing) transactions, incl. in the real estate sector. The current concept against which the administration performs an audit in intragroup financing is the "market interest".
As from tax year 2019 (taxable periods starting on or after 1/1/2018), only those accruals corresponding to either a contractual obligation (agreed upon during the taxable period or a preceding period) or a legal or regulatory obligation (other than deriving from accounting law) shall remain deductible. The parliamentary works especially specify that the purpose of this measure is to deny the possibility to exempt future provisions for heavy repairs.
Exempt gains subject to reinvestment and other tax-exempt provisions Certain capital gains benefit from a roll-over regime subject to reinvestment in defined assets and within a given period of time.
As from tax year 2019 (taxable periods starting on or after 1/1/2018), the absence of compliance with the roll-over conditions, or with the other conditions applicable to exempt such provisions, shall lead to a taxation of the underlying capital gain, or the related provision, at the corporate income tax rate applicable at the time the gain has been realised and subject to interest for late payment. In other words, the taxpayer concerned shall not benefit from the decrease of the corporate income tax rate.
Equity movements In addition to the notional interest deduction, equity movements shall in the future have a tax impact.
Capital decrease The up-stream of proceeds and cash through capital decrease is frequent in the real estate sector, most of the time because of absence of distributable profits due to depreciation taken on the asset. Capital decreases may also be performed even if the company has distributable profits.
Capital decreases decided as from 1 January 2018 shall be re-characterised into dividend distributions pro rata certain taxed and untaxed reserves of the company. Untaxed and unavailable reserves not incorporated to the share capital (e.g. revaluation surplus), the legal reserve and the negative taxed
reserve recorded further to a corporate restructuring are not considered by this new measure. The same rule applies to reimbursement of share premium and of profit participating shares.
For tax purposes, the capital decrease is deemed to be allocated pro rata between the share paid-up capital and the reserves, and within the reserves, exclusively and in the following order:
-- on the taxed reserves incorporated in the share capital; in such a case the dividend is subject to withholding tax (incl. the reductions and exemptions provided by law or tax treaty) and may benefit from the participation exemption in the hands of the recipient;
-- on the taxed reserves not incorporated in the share capital; in such a capital the tax treatment is the same as above; and finally
-- on the untaxed reserves incorporated in the share capital; in such a case the amount qualified as dividend shall first be subject to corporate income tax in the hands of the company and then subject to the tax treatment applicable to taxed reserves.
The paid-up capital of the company shall be deemed to decrease only to the extent of the amount of the capital decrease imputed on this paid-on capital.
Let's take the example of a company deciding to reduce its capital for an amount of 500.
including profit brought forward incorporated in share capital
including an unavailable reserve incorporated in share capital
Legal reserve (unavailable)
Profit brought forward
Pro rata or percentage
Share paid-up capital increased by share premium and profit participating shares assimilated to paid-up capital
Total of the taxed reserves (excluding the legal reserve) and the untaxed reserves incorporated in the share capital, and the numerator
From share paid-up capital From reserves
From taxed reserves incorporated in the share capital
500 150 100 200 500/2,200 500 (2,000-1,000-500)
500 113.64 = 386.36 386.36
Conversion of tax-exempt reserves As from tax year 2021 (taxable periods starting on or after 1/1/2020), the possibility shall be offered to companies to convert their tax-exempt reserves (e.g. reserves corresponding to revaluation surpluses) existing prior to 1 January 2017 into (available) taxed reserves. Such conversion shall be subject to 15% corporate income tax.
Belgium as investment platform Holding companies owning shares in Belgian or foreign companies shall also benefit from the tax reform as from tax year 2019 (taxable periods starting on or after 1/1/2018).
Participation exemption for capital gains The taxation of capital gain at 0.412% (subject to 1-year holding period) shall be abolished. The conditions to benefit from an exemption on realised capital gains shall be aligned on those applicable to dividends, i.e. a minimum participation of 10% in the subsidiary's share capital or an investment value of at least 2,500,000 EUR. Except for ancillary investments, this measure should not have an important impact for the sector.
Participation exemption for dividends The participation exemption for dividends received, which is now of 95%, shall be increased to 100%.
Anti Tax Avoidance Directive (ATAD)
The Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices (ATAD) contains two measures of importance for the sector:
-- the interest limitation rule (art. 4 ATAD) -- the "Controlled Foreign Company" (CFC) rule
(art. 7 and 8 ATAD)
Interest deductibility limitation rule In accordance with the ATAD, exceeding borrowing costs shall be tax deductible up to 30% of the company's EBITDA as from tax year 2021 (taxable periods starting on or after 1/1/2020).
Definitions "Borrowing cost" is largely defined in the ATAD and includes interest payment and finance cost element under a financial lease, but also payments under hedging, FX gains and loss under borrowings, guarantee fees, arrangement fees... In Belgium, the existing definition of interest shall be supplemented by a Royal Decree in order to capture those costs that are economically similar to interest. Only the "exceeding borrowing cost" shall subject to this limitation, and corresponds with the (theoretically) deductible borrowing costs that exceeds the taxable interest revenue.
EBITDA is defined as the result of the taxable period
-- increased by the depreciation, write-off and exceeding borrowing costs that are tax deductible; and
-- decreased by the tax-exempt revenue (e.g. dividends received, benefits exempt by virtue of a tax treaty) and the revenue realised through the execution of a public-private partnership where the operator, the interest costs, the assets and the revenue are all located in the EU.
Excluded loans and taxpayers Are excluded from the scope of application of this new interest deductibility limitation:
-- the loans concluded before 17 June 2016 and for which the taxpayer demonstrates that no
fundamental modification has been made since that date; -- the loans concluded to fund public-private partnerships (granted further to a public procurement procedure) when the operator, the interest costs, the assets and the revenue are all located in the EU.
The following taxpayers (as further defined by the applicable regulatory legislation) shall also not be subject to this limitation:
-- the credit institutions and investment firms; -- the AIFs and the managers of an AIF; -- the UCITS and the management company of
UCITS; -- the insurance undertakings and the reinsurance
undertakings; -- the institutions for occupational retirement; -- the pension institutions operating pension
schemes which are considered to be social security schemes, as well as any legal entity set up for the purpose of investment of such schemes; -- the central counterparties; -- the central securities depositories; -- the companies whose exclusive activity consists in the realisation of a public-private partnership granted further to a public procurement procedure; and -- the standalone entities, i.e. taxpayers that are not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment.
Interest deductibility limitation and carry-forward The exceeding borrowing cost shall be deductible, provided that all other standard deductibility requirements are met, up to the highest of 3,000,000 EUR or 30% of the borrower's EBITDA. The non-deductible interest may be carried-forward for an unlimited period of time and can therefore be used to compensate future profits, still within the aforementioned limit.
Group provisions Specific provisions, which shall be supplemented by a Royal Decree, shall apply to Belgian companies and establishments that a part of a group of companies in order to calculate:
-- their exceeding borrowing cost: interest paid between Belgian taxpayers should be excluded from the calculation;
-- their EBITDA: payments made between Belgian taxpayers should be neutralised;
-- the de minimis of 3,000,000 EUR, which should be spread between the Belgian taxpayers.
CFC rule In implementation of one of the options provided by the ATAD, the tax law shall provide, as from tax year 2021 (taxable periods starting on or after 1/1/2020) for a CFC rule for all income of a foreign company in case of non-genuine arrangement. In a nutshell, the income generated in a foreign subsidiary through a non-genuine arrangement and not yet distributed shall be attributed and thus added to the taxable base of the Belgian taxpayer. When distributed, this income will benefit from the participation exemption in order to avoid a double taxation.
To qualify as a CFC, the foreign company must meet the following cumulative criteria:
One can speak about a non-genuine arrangement when the foreign company concerned would not have owned the assets generating full or part of its profits nor would have borne the risks related to those assets if it would not have been controlled by the Belgian taxpayer.
As from tax year 2021 (taxable periods starting on or after 1/1/2020), Belgian tax law shall provide for a possibility to consolidate profits and losses within a group through a so-called "intragroup transfer" between a Belgian taxpayer and another qualifying taxpayer.
Qualifying taxpayers A qualifying taxpayer is a Belgian or a foreign company established in the EEA -- that holds a participation of at least 90% in the
capital of the Belgian taxpayer; or -- whose capital is owned for at least 90% by the
Belgian taxpayer; or -- that is a sister company of the Belgian taxpayer,
it being understood that their Belgian or foreign parent company must own at least 90% of their respective capital.
-- the Belgian taxpayer must own either - directly or indirectly the majority of the voting right of the foreign company, or - directly or indirectly a participation of at least 50% in the capital of the foreign company, or - a right to at least 50% of the benefits of the foreign company; and
-- the foreign company either - is not subject to an income tax in its state of residence; or - is subject to an income tax of less than 12.50% on its taxable income, determined in accordance with the Belgian rules applicable to that type of income.
Moreover, the qualifying taxpayer must -- qualify, without interruption, for the entire taxable
period and the 4 preceding tax periods; and -- have the same financial year starting date and,
either, the same financial year end date than the Belgian taxpayer or an earlier end date due to liquidation.
Certain taxpayers are excluded from the benefit of this measure: -- the Belgian taxpayers that benefit from a special
tax regime (e.g. investment funds); -- the companies that put real estate at disposal of
their manager (or their spouse or children); -- the foreign companies that benefit in their state
of residence of a special tax regime.
Subject to the specific case of termination of activities, the intragroup transfer is also only allowed between Belgian taxpayers. In other words, when it is referred to a foreign company, the transfer occurs with its Belgian establishment.
Agreement for an intragroup transfer Tax consolidation shall be achieved through the transfer of benefits between Belgian taxpayers of the same group in accordance with an agreement for an intragroup transfer. Key aspects of this agreement are as follows:
-- the parties to the agreement are the Belgian taxpayer and the qualifying taxpayer, i.e. either a Belgian company or the Belgian establishment of a foreign company;
-- the agreement only relates to one taxable period; it means, in practice, that the intragroup transfer is determined at the end of each taxable period and the agreement must provide for all relevant and precise amounts;
-- the amount of the intragroup transfer is mentioned in the agreement, and cannot be higher than the tax losses for the period concerned of the qualifying taxpayer;
-- the Belgian taxpayer must pay to the qualifying taxpayer a compensation corresponding to tax saving resulting from the intragroup transfer; this compensation is neither deductible in the hands of the Belgian taxpayer nor taxable in the hands of the qualifying taxpayer.
Let's take an example.
Tax consolidation through intragroup transfer
Taxable profits of Belgian taxpayer for the taxable period concerned
Tax profits (i.e. losses) of the qualifying taxpayer for the taxable period concerned
Amount of the intragroup transfer
Taxable profits of the Belgian taxpayer for the taxable period concerned, after intragroup transfer
Taxable profits of the qualifying taxpayer for the taxable period concerned, after intragroup transfer
Tax saving for the Belgian taxpayer
Compensation paid by the Belgian taxpayer to the qualifying taxpayer
500 1,000-500 <500>+500
0 125 125
Non deductibility of fines and penalties As from tax year 2021 (taxable periods starting on or after 1/1/2020), all administrative fines and penalties, even in the absence of criminal character and even when their calculation is based on a deductible tax (e.g. VAT or transfer taxes) shall be non-deductible for corporate income tax purposes.
Minimum taxable base in case of absence or late corporate income tax return The absence of filing of a tax return, or the late filing shall be sanctioned by the application of a minimum taxable base. For the tax years 2019 and 2020, this minimum taxable base shall be equal to 34,000 EUR, subject to a possible increase to be further determined by Royal Decree, this amount being set at 40,000 EUR as from tax year 2021, subject to indexation to be further determined by Royal Decree.
Late interest and moratorium interest As from 1 January 2018, the interest applicable for late payment shall not be equal anymore to the legal interest but to the average interest of the OLA 10-year for the months July, August and September of the preceding year, with a minimum of 4% and a maximum of 10%. The moratorium interest in case of reimbursement shall be determined the same way, and decreased by 2%.
Effective payment in case of tax audit As from tax year 2019 (taxable periods starting on or after 1/1/2018), a taxpayer shall not be authorised anymore to impute tax deductions (at the exception of the dividend received deduction) on a tax rectification with tax increase further to an audit. In other words, in case of tax audit leading to a rectification, the taxpayer will be obliged to make an effective payment.
Christophe Laurent Partner T +32 2 743 43 05 E firstname.lastname@example.org
Ariane Brohez Partner T +32 2 743 43 21 E email@example.com
Sophie Van Berkel Professional Support Lawyer T +32 2 773 23 41 E firstname.lastname@example.org
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