On Tuesday 5 July 2022, Professor Delanote of the University of Ghent published his vision note regarding the broad tax reform. The note includes recommendations for potential amendments in the scope of a broader tax reform.
The note was drafted at the request of several ministers, however, there is no consensus among the Federal and/or Regional levels regarding any amendments. Furthermore, for many of the recommendations no budgetary analysis has been performed. No recommendations are made regarding future tax rates itself (with exception of movable income), as the author opines that this depends on the budgetary possibilities. The overview presented here does not include the broader recommendations with respect to green taxation (e.g. taxation of CO₂), nor VAT.
The following leading principles were applied when drafting the note:
- Reduction of charges on labour
- Broadening of the taxable base
- Reduction of the number of tax reductions and/or deductions
- Decisions should, in the end, be made based on macro- and micro-economic data regarding budgetary impact
- The new system needs to contribute to climate goals
- Efficiency should be in obtained in recuperation of taxes due to simplification
Below we give an overview of the most important recommendations per topic. Certain recommendations which have in the meantime been implemented are not listed below (e.g. the amendment to the special social security contributions).
The civil status of an individual should have less impact
- Taxes are calculated where possible on an individual level (which is already the case in most instances). Individuals living factually together are also considered as cohabitants for tax purposes.
- Regarding the tax-free amount:
- Increase to the amount of the legal minimum wage (differentiation between single taxpayers and cohabiting tax payers).
- A person is dependent in the case where the taxpayer takes care of the individual (who no longer needs to be part of the household of the taxpayer; the only criteria would be the financial dependence).
- The abolishment of the marital quotient. Under this system, part of the income of the working partner is considered as taxable income from the non-working partner, benefitting from the progressiveness of the tax rates as well as a tax-free amount. Instead the partner would be a dependent of the partner who has taxable income.
- The tax-free amount per child should not depend on the number of children.
- The deduction (and taxation) of alimony payments should be cancelled.
The unemployment and promotion trap needs to be solved
- The system should incentivise unemployed individuals to restart working. Currently, earning professional income and unemployment income in the same year will, in certain cases, cause the tax due on the unemployment income to increase. This should be amended.
- The promotion trap is the effect that an additional euro in professional income can be taxed at 70%-80% due to the so-called work bonus being lost. This should also be amended.
With respect to activity income
- The difference between profits (winsten/bénéfices) and benefits (baten/profits) should be abolished. There remains, however, a difference between profits and remuneration.
- Each form of remuneration should be taxed in the same way:
- All ad hoc exemptions should be questioned (meal-, sport-, culture- and eco vouchers)
- Company cars should be taxed at their real value instead of a lump sum value
- Proposal to limit the application of the law of 26 March 1999 (Stock Option Law) to options on shares of the employer only and therefore abolish the so-called one-day warrants or one-year options.
- Abolishment should be considered for certain systems: copyrights, flexi-jobs, athletes, etc.
- The definition of remuneration in social security law and income tax law should be harmonised. Specific reference is made to the example of costs proper to the employer.
With respect to income from capital and the conversion of income
- Proposal to potentially tax income from capital as professional income in case the person concerned would not have acquired this income should he/she not have performed this function. Specific reference to the issue of carried interest and management incentive plans.
- The return on investment generated by the assets invested by an entrepreneur in his/her company is considered an income from capital. The main principle is that this amount is deducted from the taxable profit but taxed in the hands of the shareholders directly. Expressed in the note is the concern that it might be difficult to determine the amount to be taxed as income from capital. The suggestion is to potentially apply the rate of a 10-year OLO (Linear Bond issued by the Belgian State) to be increased with a risk premium of 4% as a working hypothesis.
- Only the part of the gain realised on goods, used for professional purposes, equal to the previously accepted depreciations and losses in value is considered as professional income. The remaining gain is considered an income from capital.
With respect to profits
- Even after ending the professional activity, gains realised on fixed assets previously used for professional purposes should be taxed as professional income for an amount equal to the accepted depreciations and losses in value.
- All professional expenses should be deductible. Therefore, all remuneration costs should be accepted provided they remunerate actual provided services.
- The notion of professional expense should be more strictly defined.
- Consideration should be given to imposing maximum lump sum amounts and/or ceilings for certain costs like representation allowances and gifts.
- The system of costs proper to the employer should be reevaluated.
- The efficiency of current existing economic exemptions should be measured.
- Losses should continue to be carried forward, however they cannot be deducted from other income (in particular professional income).
With respect to remuneration
There is an overall tendency to avoid (favourable) lump sum benefits in kind but rather tax the real value of benefits. Furthermore, the recommendation is to:
- Harmonise the definition of remuneration between social security law and income tax law.
- Limit the use of lump sum costs proper to the employer.
- Limit the deduction of professional expenses and reevaluate the use of lump sum cost deductions.
- Reevaluate the tax landscape regarding mobility. This includes among others the taxable benefit in kind of company cars, reimbursement of commute expenses, etc.
With respect to the exemption of paying on wage withholding tax it is advised that the system is revaluated. The system was originally intended for specific sectors and employees but is now applied in many sectors. Furthermore, it could be considered to limit the system to, for example, a certain percentage of the gross income. Furthermore, the question is raised whether such a system should not be implemented as a structural deduction in the social security system.
With respect to pensions
Reference is made regarding the necessity of pension reform and an agreement between the ministers of Finance, Social Affairs and Pensions. Some actions can, however, already be taken from a tax point of view
- The amount of the tax reduction should be increased in case of changes in rates and the tax-free amount to continue granting pensioners the required net income.
- For the prorate of the tax reduction, income from capital should be included as it is now with exception of gains.
- With respect to specific replacement income, it could be provided, however the grant of a replacement income cannot give rise to a higher net income.
For 2nd pillar pensions the main recommendations are to reevaluate the 80% limit. The suggestion is made to:
- include pension accrual in the 3rd pillar
- no longer project pension benefits but only apply information known at the time of calculation
- use the average salary of the last ten years
- potentially limit pension accrual to the highest pension of a civil servant
- reevaluate the use of the so-called backservice.
The biggest change however would be that the part of the premium which exceeds the 80% limit would be taxable in the hands of the beneficiary, while now it is considered a rejected expense in the hands of the company. Reference is also made to the favourable tax rates on lump sum payments compared to annuities.
Finally, the usefulness of the 3rd pillar pensions is being questioned and it is proposed that the tax benefits are granted to those who do not exceed the 80% limit.
With respect to income of capital
all income is, in principle, taxable, and as such capital gains on shares would become taxable. On the other hand, capital losses would also become tax deductible. These tax losses should be carried forward from year to year or be taken into account when determining the final tax liability (i.e. potentially the reimbursement of tax can be netted with the tax on professional income).
All income would be taxed at the same rate (currently 30%) whereby any exception must be justified. For dividends and capital gains such an exception is potentially recommended as otherwise the same income is considered taxed twice (once in the hands of the company and once more as dividend). Two alternative options are given:
- The tax rate is reduced to 15% to (partially) avoid double taxation.
- The tax rate remains at maximum 30%, but actions are made to lower the taxes incurred by the company.
Furthermore, the VVPRbis system would also be phased out. Finally, a recommendation is made for a tax-free amount for income of capital. This tax-free amount should be transferable from year to another.
Finally, the use of so-called management companies or personal services companies should be evaluated in so far as that the tax rate on capital gains and dividends remains a separate flat rate. In case such income would be taxed at the normal progressive rates, the use of management companies would automatically be reduced. The application of the reduced tax rate of 20% is also questioned for management companies.
With respect to the tax return,
it is proposed that an individual needs to declare all his/her income of capital in any case as the movable withholding tax would no longer be liberating.
With respect to immovable income,
the main proposed change would be that income earned by renting out immovable property would be taxed based on the actual earned income instead of the cadastral revenue + 40%. It is proposed to determine the expenses based on a fixed percentage (for example 15% for buildings and 3.75% for land), but also to allow the deduction of certain other specific costs on top of this lump sum amount.
We will continue to monitor any developments. Please reach out to your regular PwC advisor if you have any questions in this regard or Dominique Vanhove (firstname.lastname@example.org / +32 497 67 15 03).