Is your non-profit organisation (NPO, such as ASBL/VZW) considering merging with another? Do you wish to convert your association into a cooperative company? Or perhaps you are contemplating a demerger to restructure your activities?
These types of restructuring operations are increasingly common in the non-profit sector as it undergoes rationalisation, but they entail a significant tax dimension that must be anticipated to avoid any unpleasant surprises. The Code of Companies and Associations (CCA), which entered into force in 2019, considerably broadened the restructuring possibilities available to non-profit associations and other entities of the sector; however, the tax legislator has not always followed suit with the same degree of consistency.
1. Legal Entities Tax or Corporate Income Tax: A Fundamental Distinction
Before any reflection on a restructuring operation, it is essential to understand the tax regime applicable to your association.
Most NPOs are subject to the legal entities tax (LET), a regime which taxes only certain items of income and expense that are exhaustively listed by law (real estate income, movable income, capital gains, car-related expenses, etc.).
However, in certain cases, associations carrying out commercial activities may shift into the corporate income tax regime (CIT). In this case, the tax is levied on the entity's adjusted accounting statement, at the standard rate of 25%.
2. Transition from One Tax Regime to Another: Consequences to Anticipate
It is not uncommon, in the context of a restructuring operation, for an entity subject to the LET regime to shift to CIT. In this case, the legislator has provided for a tax regime to govern this transition. For example, losses accumulated during the LET period cannot be deducted from the tax basis generated under the CIT regime.
The reverse situation — a transition from CIT to LET — is less common. In that case, the legislator organises a deemed tax liquidation. This means that the latent capital gains and the tax-exempt reserves accumulated under the CIT regime will be subject to tax.
3. Transformations (change of legal form)
The transformation of a Belgian NPO into an international NPO (INPO, or AISBL/IVZW), or vice versa, generally benefits from a regime of tax neutrality to the extent that the tax status of the entity (in principle the LET) is not modified. The same should hold true for registration duties and VAT purposes.
By contrast, the transformation of an (I)NPO into a cooperative company (approved as a social enterprise) calls for caution.
As a preliminary point, it should be reminded that the CCA requires the net assets of the NPO (including latent capital gains) to be allocated to an unavailable (and therefore non-distributable) reserve account in order to prevent the income generated under the non-profit form from being distributed to the shareholders following the transformation into a commercial company.
From a tax standpoint, it will always be necessary to consider whether a change of legal form can trigger a change of tax status. When a NPO is converted into a cooperative company, it is possible that it will shift from the LET to the CIT regime (in particular when the change of form corresponds to the development of commercial activities). In this case, there should be no taxation of the profits accumulated under the LET, provided that the unavailable reserve is constituted and maintained (see above). If the entity's status under the LET regime can be preserved after the transformation into a cooperative company (which is possible, under certain conditions), it should be possible to carry out the operation under tax neutrality.
With respect to registration duties, the transformation of an NPO into a cooperative company and vice versa is normally exempt from the proportional duty. Concerning VAT, the transformation will generally be non-taxable, although in certain cases the entity's VAT status could evolve, if the exemptions applied are linked to the entity's non-profit purpose.
Lastly, the transformation of a commercial company into an (I)NPO will be either subject to a tax liquidation regime (in the case of a transition from the CIT to the LET), or carried out under tax neutrality. Regarding registration duties and VAT, the operation should be neutral. The shareholders of the commercial company converted into an NPO will be required to record a capital loss on their shares (which is in principle non-deductible).
4. Mergers and Demergers: Beware of Combinations of Tax Regimes
Merger and demerger operations between associations or foundations require particular attention. The tax consequences vary considerably depending on the tax regime of the entities involved.
Between entities subject to the IPM (LET)
This is the simplest case: the merger or demerger is in principle carried out without any tax charge, to the extent that it constitutes a transfer for no consideration.
Between entities subject to the ISOC (CIT)
These operations may in principle benefit from the tax neutrality regime, provided they are motivated by valid economic reasons. In other words, the restructuring may not be carried out for reasons of tax optimisation.
Between entities subject to different tax regimes
This is where it becomes more complicated. Such a merger or demerger operation cannot, in principle, be carried out under tax neutrality. The nature of the merger (an entity subject to the LET is absorbed by an entity subject to the CIT, or the contrary) will affect the tax charge that is applied. It is therefore essential to carefully analyse the tax consequences of the operation beforehand.
5. Contributions of a Universality or of a Branch of Activity: An Essential Distinction
As an alternative to a merger or demerger, your association could consider contributing all or part of its assets to another entity (without dissolving itself).
Here too, the tax regime applicable to the contribution to a universality or to a branch of activity will depend on the tax status of the concerned entities (LET or CIT), and on whether or not the operation is carried out for no consideration or otherwise (i.e. in exchange for shares or not). A case-by-case analysis will need to be performed.
6. Conclusion: Anticipate and Seek Professional Support
Restructuring operations in the non-profit sector have become more accessible thanks to the CCA, but their tax aspect remains complex and at times fraught with pitfalls. The tax legislator has not always adapted its texts to the new possibilities offered by the law on associations, thereby creating areas of uncertainty.
Our recommendations:
- Always analyse the tax regime of all the entities concerned before initiating any type of operation.
- Verify your eligibility for the tax neutrality regime and the conditions attached to it.
- Anticipate the consequences of any potential tax regime change.
- Document valid economic reasons for the operation.
- Do not hesitate to seek an advance ruling from the Ruling Commission (Service des Décisions Anticipées) to secure complex operations.
Whatever the case, our tax team is at your disposal to assist you in the analysis and structuring of your restructuring projects. Thanks to rigorous upstream planning, it is possible to optimise the tax aspects and avoid costly tax reassessments.
Authors:
Thomas Daubit, Lawyer - Director at PwC Legal BV/SRL
Emilie Espinosa, Lawyer - Senior Associate at PwC Legal BV/SRL
