The Belgian government has reached an agreement on an important tax, economic and social reform package. The contemplated changes aim to boost the Belgian economy through an investment friendly climate, but could also significantly impact deal structuring and due diligence processes. The highlights of the contemplated tax reform are the gradual reduction of the Belgian corporate income tax rate to 25% and the introduction of a fiscal consolidation regime.
As the tax reform should be budget neutral, the reduction of the corporate income tax rate will be compensated by several other measures along with the implementation of new EU ATAD directive which will have a direct impact on the M&A landscape.
This publication outlines the key issues of the tax reform that should be taken into account by Private Equity investors and Corporate Buyers.
Corporate income tax rate of 25% as from 2020
The corporate income tax rate will gradually decrease to 29% in 2018 and 25% in 2020. The exceptional crisis surcharge will be abolished completely as from 2020 and limited to 1,5% as from 2018.
Full exemption on capital gains on shares as from 2018
The current 0,412% capital gain tax on shares held longer than 1 year is expected to be abolished. Hence, if shares have been held for a period longer than 1 year and the profits have sufficiently been taxed, relating capital gains will be tax free once again. Some additional conditions in line with the Belgian participation exemption will be imposed (i.e. 10 % holding requirement or € 2,5 m).
Abolishment/modification of the Fairness tax regime as from 2018
The fairness tax in its current form is expected to be abolished, taking into account the ruling of the European Court of Justice and the pending case before the Belgian Constitutional Court.
Minimum taxable basis as from 2018
Profits exceeding EUR 1 million will trigger minimum taxation of 7,5% (i.e. 30% of 25% corporate income tax). 30% of the company’s profits exceeding this threshold cannot be offset against tax assets. This will be relevant for portfolio companies disposing of carried forward tax losses, carried forward participation exemption (‘DRD’), carried forward innovation income deduction, carried forward notional interest deduction and newly created notional interest deduction.
Effective taxation on tax audit adjustments – increased need for tax due diligence as from 2018
Any increase of the tax base of a company at the occasion of a tax audit, can no longer be offset against available tax attributes (with the exemption of carried forward Belgian participation exemption, but including losses of the current year). This implies that tax risks identified in the course of a tax due diligence would in general constitute tax cash out risks.
Withholding tax on capital reductions as from 2018
Capital reductions used to be tax neutral in the past both for private individuals and companies under certain conditions. Going forward, if a company disposes of taxed reserves (in the capital or recorded as available reserves), any capital reduction will propotionnally be requalified into a dividend distribution for withholding tax purposes (subject to exemptions).
More stringent rules on foreign branches
The concept of permanent establishment will follow a more economic approach in line with OECD/BEPS guidelines (although the Belgian government did not opt for the MLI) and the utilisation of foreign branch losses will be limited.
At arm’s length interest percentage included in the Belgian income tax code
On certain current account loans (and possibly other loans) the at arm’s length interest percentage will be mentioned in the Belgian tax code.
30% EBITDA interest limitation on intercompany and third party debt as from 2020
The Belgian government will implement European Anti-Tax Avoidance Directives I and II. This will lead to the introduction of rules on controlled foreign corporations (CFC legislation), a 30% EBITDA interest limitation (definition of EBITDA not defined), exit taxation (presumably 12,5%) and hybrid mismatch rules.
In terms of the 30% EBITDA rule, a grandfathering clause will exclude loans before 17 June 2016. Additionally, a minimum threshold of m€ 3 will remain unaffected (subject to the old interest deduction limitations). Note that the ATAD I directive targets the “net borrowing” cost, whilst historically 5:1 Debt Equity Belgian thin capitalisation rules targeted “gross borrowing costs” therefore excluding interest income.
Introduction of a tax consolidation regime as from 2020
The Belgian government intends to implement a tax consolidation regime in line with neighbouring countries such as for example the UK (i.e. group relief), limiting complexity and providing a solution for a wide range of intra-group tax inefficiencies within an intra-group context. Furthermore, tax consolidation could to a certain extent facilitate tax relief for acquisition debt. The government is currently reflecting on how such tax consolidation would work in practice.
Tax on stock exchange transactions to be increased – relevant for delisting operations
The rates of the stock exchange transaction tax will – again – increase. The rates of 0.09% and 0.27% will respectively increase to 0.12% and 0.35%.
Belgian private equity fund structure – PRIVAK – PRICAF
The private PRICAF system will be reviewed (less stringent of control rules, management activity, and notion of temporary investment).
In addition to the Belgian tax reform, the Belgian government is in the process of revising the Belgian Company Code which might impact a number of corporate transactions and restrictions such as more flexible financial assistance rules.