In our Newsletter of 27 March 2018, we briefly discussed the main measures of the tax reform impacting private investment companies. One of the measures consists in aligning the conditions for the exemption of capital gains on shares with the conditions of the participation exemption regime applying to dividends. This implies that a minimum participation requirement is added to the existing exemption regime (minimum 10% or EUR 2,500,000 acquisition value). This measure particularly affects companies investing in listed securities as they will often not reach the aforementioned thresholds.
What practical solutions can be found in order to continue to benefit from the exemption of capital gains? Does this alignment with the participation exemption regime offers new opportunities ? What other investments allow to benefit from a tax exemption? We briefly analyze these questions hereunder.
Increase the participation thresholds
Provided the private investment company has sufficient resources, the most obvious solution would be to increase the shareholding up to the above thresholds of 10% or EUR 2,500,000.
Usually, however, this solution will not be suitable in terms of risk diversification. Moreover, it will only provide a partial answer to the problem. Indeed, in the event of successive disposals (which will often be the case for listed securities), the private investment company will no longer benefit from the exemption as soon as its shareholding has fallen below the aforementioned thresholds. This is because the minimum participation requirement is assessed on the day of each disposal.
Invest through a joint venture with one or more other investors
An alternative would be to pool the financial resources of several investors in a joint venture (normally subject to tax), so that the above thresholds could be reached more easily at the level of that subsidiary.
Provided that each investor holds a participation of at least 10% or EUR 2,500,000 in the joint venture, the returns from this subsidiary may also qualify for the participation exemption regime in the hands of the private investment company. However, this alternative does not solve the problem of successive disposals at the level of the joint venture.
Invest in an “investment company” within the meaning of the Income Tax Code (Art. 2, §1, 5°, f) ITC)
As an exception, the minimum participation requirement and the minimum holding requirement (at least one year in full ownership) do not apply with respect to an “investment company” (Art. 202, §2, para. 2, CIR). This exception applies both to dividends received by the “investment company” and to those distributed by the latter.
Since the tax regime for capital gains is fully aligned with the participation exemption regime as of 2018, this exception now also applies to capital gains on shares realized (i) by the investment company and (ii) by the investors on the shareholding in the investment company.
Any Belgian or foreign company making investments can potentially meet the tax notion of “investment company”. Indeed this concept is not linked to any tax or regulatory approval. However, it assumes that the investment company is normally subject to tax, without benefiting from an exorbitant tax regime under ordinary law (which will be the case if it is a Belgian company) and that it federates a “plurality of third-party investors” among themselves around a “plurality of investments”.
In other words, in a Belgian context, investing in an investment company allows to benefit from a total tax exemption on returns (dividends and capital gains) from the underlying participations, without regard for the percentages or the holding period, both at the level of the investment company and at the level of the investors. Only the subject-to-tax condition provided for in Article 203 CIR must be respected, which will always be the case for listed securities, save for some exceptions.
However, in the absence of objective criteria linked to the minimum number of investors and investments, a validation by the Ruling Commission will be welcome. It will also be necessary to ensure that the investment company’s activity remains outside the regulatory scope (AIFM legislation in particular).
Invest in open-ended investment companies qualifying for the participation exemption regime
Open-ended investment companies qualifying for the participation exemption regime (“RDT Sicavs”) are definitely an attractive investment for tax purposes.
Dividends distributed by a sicav (under Belgian or foreign law) are in principle fully taxable in the hands of the private investment company (the subject-to-tax requirement is in principle not met given that this type of regulated vehicle is as a rule exempt from tax or taxed at a very low rate).
As an exception, dividends from an RDT sicav are fully exempt (even if the RDT sicav does not comply with the subject-to-tax requirement). In addition, investors do not have to comply with the minimum participation and holding requirements when investing in the RDT sicav.
The exemption applies (i) provided that the articles of association of the RDT sicav provide for the annual distribution of at least 90% of the income received (after deduction of fees and commissions) and (ii) only to the extent that the income distributed accordingly comes from dividends or capital gains which themselves meet the conditions of the participation exemption regime at the level of the RDT sicav. In the event that part of the investments made by the RDT sicav do not meet these conditions, the exemption of dividends distributed will be allowed on a proportional basis.
Since the tax regime for capital gains is fully aligned with the participation exemption regime as of 2018, capital gains realized on the shares of an RDT sicav will be tax exempt as well to the same extent (i.e. also on a proportional basis if applicable).
This regime is also applicable to foreign sicavs, provided that they comply with the same conditions. The Ruling Commission has already granted a favorable ruling with respect to a Luxembourg sicar.
Invest in private pricafs
The private pricaf is an alternative undertaking for collective investment which invests exclusively in financial instruments issued by unlisted companies. It benefits from the same tax regime as RDT sicavs and therefore does not meet the subject-to-tax requirement either.
Dividends distributed by a private pricaf benefit from the participation exemption regime under the same conditions as those applicable to RTD sicavs, with the exception of the minimum distribution requirement (90% of the income collected), which is not required.
However, capital gains realized on shares in private pricafs will only be exempt as long as they invest all their assets in investments which meet the requirements of the participation exemption regime (or, on an ancillary or temporary basis and under certain conditions, in investments with a maturity of six months or in cash). Otherwise, the entire capital gain realized will be taxable for corporate income tax purposes.
In order to stimulate the use of private pricafs, the Belgian government has filed a draft Royal Decree which aims a.o. at lowering the minimum investment threshold from EUR 100,000 to EUR 25,000 per investor.
Transfer the place of effective management of the company to a country with a more attractive parent-subsidiary regime
A more radical alternative would consist in transferring the place of effective management (and the registered office) of the private investment company to a country that applies less restrictive exemption conditions (including in particular the minimum participation requirement). Luxembourg will a priori not be an attractive alternative in this respect since it requires a participation of at least 10% or an investment value of EUR 6,000,000 (for dividends, however, only a participation of 10% or EUR 1,250,000 is required). Switzerland applies a participation condition of 10% or CHF 1,000,000 of market value for dividends but requires a participation of at least 10% for capital gains (except in the case of successive disposals where the CHF 1,000,000 threshold will also apply as from the second disposal).
If a Belgian resident private investment company transfers its tax residence to another country, this will in principle be regarded as a deemed liquidation of the company. As a result, all unrealized capital gains become subject to corporate income tax in respect of shareholdings that do not meet the conditions of the participation exemption regime. Provided that the transfer can be carried out without interruption of legal personality and in accounting continuity, it will not be treated as a deemed liquidation in the hands of the individual shareholder, which will also prevent withholding tax being due on this occasion.
However, such a scenario can only be conceived if the company has a real substance in the State of arrival (offices, staff and/or local managers, etc.) and if it is effectively managed locally. It will also be necessary to take into account the new anti-abuse provisions which aim to deny the benefit of the parent-subsidiary regime when a structure is set up solely for tax purposes. In other words, such a scenario will often have to be accompanied by a transfer of residence of the economic beneficiary to the State in question, in order to avoid any tax risk.