Belgian Tax Reform: The Tax Shift

As the budget deficit is increasing, the Belgian government has been actively looking to both cut expenses and increase tax revenue. Even though tax collection should rise, the government and parliament are also seeking to shift the tax burden from labour to other forms of income. This article briefly describes a number of measures which have been proposed or enacted in this regard.

The tax shift
Even though tax revenue is expected to increase, the government and parliament wish to implement a tax shift, i.e. a shift from taxes on labour to other forms of income (i.e. from direct to indirect taxes, such as VAT and excise duties). According to government sources, the tax shift will raise more than EUR 7 billion in the next two years through the following measures, amongst others: a reduction in employer's social security contribution from 33% to 25%, an increase in the withholding tax rate on dividends, interest and royalties from 25% to 27%,  an increase in VAT on electricity from 6% to 21%, an increase in excise duties on diesel, tobacco and beverages, and the introduction of a capital gains speculation tax when reselling shares within six months.

Key measures: increase in the withholding tax rate and the introduction of a capital gains speculation tax
During the months leading up to the summer recess, it was clear that these two measures would be discussed by the government. However, our sources have confirmed that, for the time being, only a political agreement on the main principles has been reached. The introduction of the 27% withholding tax rate on dividends, interest and royalties should not pose a problem (except for stakeholders that try to maintain reduced rates). However, the introduction of a tax on speculative capital gains raises a number of questions. As of 1 January 2016, such a tax will be levied on capital gains realised on the sale of shares held for less than six months. To date, several questions remain unanswered, such as whether the 27% tax rate will also apply to companies and to bonds, the treatment and carry-forward of capital losses, and who will assess the tax.

Measures voted into law by the Act of 10 August 2015
Firstly, the Act of 10 August 2015 (the "Act") amended the tax rate applicable to liquidation proceeds. As of 1 October 2014, liquidation proceeds are taxed at a rate of 25%.  However, pursuant to the Act, qualifying small and medium-sized companies can apply a 10% tax rate to their liquidation proceeds, for tax assessment years 2013 and 2014 and for tax assessment years as from 2015. The company can book a non-distributable reserve in its annual accounts, subject to a separate 10% tax payable in the year the reserve is recorded (by 30 November 2015 for tax assessment year 2013 and by 30 November 2016 for tax assessment year 2014). If the reserve is distributed within a period of 5 years, an additional tax of 15% will be due.  If distributed at a later date, the additional tax is only 5%. If the reserve is distributed upon liquidation, no extra tax is due.

Secondly, the Act introduced tax transparency for certain legal structures. As of 1 January 2015, in-come obtained by selected legal structures will be taxed in the hands of their founders or third-party beneficiaries. The tax transparency applies to all types of income, including real estate, miscellaneous and professional income.  The Act distinguishes between two types of structures: structures without legal personality and those with separate legal personality which are subject to an effective tax rate of less than 15%. The latter qualify if there is no real economic activity at their place of establishment and (for EEA-based entities) they are listed in a royal decree.

Thirdly, the Act provides for several measures to support start-ups: (i) a tax shelter for investments in start-ups, (ii) favourable tax treatment for loans made through crowdfunding platforms, and (iii) a partial exemption for the remittance of income tax. The purpose of these new measures is twofold: firstly, to help entrepreneurs raise sufficient funds to develop their activities and, secondly, to provide a solution to high labour costs in Belgium.

Finally, the Act provides for a number of other measures such as a new tax regime for the diamond sector (determination of the tax base of diamond merchants based on a percentage of their turnover (0.55%) and fees paid to directors), enhanced liability of the principal for the tax and social security liability of its sub-contractors, and a limitation on the notional interest deduction for banks and insurance companies.