Belgian Tax Reform: Further Implementation of the Tax Shift

The end of another year is fast approaching. Like each year, this is a good time to take a closer look at  tax developments that could impact your business. As in previous years, the three most important factors this year have been: (i) the importance of maintaining Belgium's attractiveness to (foreign) investors; (ii) budget deficits necessitating additional tax revenue and/or spending cuts; and (iii) measures proposed by the OECD to counter base erosion and profit shifting (BEPS). Most of the measures described below entered into effect in 2016 or will enter into effect early next year.

Company cars now more expensive for employers

As Belgian personal income tax rates are (still) amongst the highest in the European Union, Belgian employers tend to opt for more tax friendly ways to remunerate their employees. One of the most popular benefits in kind is a company car with a fuel card. The employee is not taxed on the actual value of the benefit received but rather on a lump sum (based on the vehicle's emissions, age and price). Recently, however, the legislature introduced a measure disallowing 17% of the expense to an employer granting a company car (calculated on the lump sum taxable in the hands of the employee). As of 1 January 2017, this disallowed percentage will be further raised to 40% if the company bears in whole or in part the fuel costs associated with use of the car for private purposes. In practice, most employers providing company cars to their employees also grant fuel cards. Moreover, while under the current rules the employee's contribution towards use of the car can be deducted from the calculation basis for the disallowed expense, this will no longer be the case as from 1 January 2017. While in theory this tax increase relates solely to corporate tax, it is clear that employees will (also) suffer the consequences.

Mixed news for investors

The government and parliament are in the process of further implementing the tax shift, i.e. a shift from taxes on earned income to taxation of other forms of income (e.g. from direct to indirect taxes, such as VAT and excise duties, or from earned income to investment income). The measures taken in 2015 included an increase in the withholding tax rate on dividends, interest and royalties from 25% to 27%  and the introduction of a speculation tax on the resale of qualifying listed shares within six months. As of 1 January 2017, the withholding tax rate on dividends, interest and royalties will be raised further to 30%. However, the speculation tax will be abolished. For the sake of completeness, please note that while the government is currently discussing the possibility of introducing a general capital gains tax (not limited to qualifying listed shares), no agreement has been reached yet. While no predictions can be made in this regard, it is not very likely that a general capital gains tax will be introduced by the current government.

Stock exchange tax

A stock exchange tax is levied on the purchase and sale in Belgium of certain financial instruments on a secondary market through a professional intermediary. The applicable rate varies, depending on the nature of the instrument, with the tax being due by each party to the transaction. This tax is not due, however, if no professional intermediary (in Belgium) is involved in the transaction or, if a professional intermediary is involved, the transaction is carried out on behalf of an exempt person acting on its own behalf. Exempt investors include non-resident investors, provided they submit an affidavit to the financial intermediary in Belgium confirming their non-resident status, and certain Belgian institutional investors. As of 1 January 2017, several measures will be introduced to increase the revenue from this tax: first, the ceilings will be raised to twice their current levels and, second, the tax will be due if a Belgian resident purchases or sells financial instruments through a professional intermediary that is not located in Belgium. More specifically, the new rules provide that Belgian resident investors must pay the tax themselves if the non-Belgian financial intermediary does not do so.

Stricter rules on internal capital gains

The repayment to investors of paid-up capital and issue premiums is not subject to withholding tax. All payments in excess of these amounts, however, are treated as dividends and subject to withholding tax. For example, assume a shareholder founds a successful company which accumulates cash reserves and/or value. If the shareholder wishes to transfer this value to his or her personal estate, dividend withholding tax will be due. Until recently, however, under certain circumstances (determined by the Belgian ruling commission), shareholders could contribute the shares of an operating company to a holding company, with the paid-up capital being deemed the value of the operating company at the time of the contribution. As a result, at a later point in time (e.g. upon liquidation of the holding company), no withholding tax was due on the value of the operating company. For contributions  made to companies as from 1 January 2017, however, the paid-up capital will no longer be based on the value of the contributed operating company but rather on the acquisition price paid by the shareholder for the contributed shares.

Towards a European financial transactions tax

The European Commission has published a proposal for a directive on a common financial transactions tax (the "FTT") , applicable in Belgium, Germany, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the "participating Member States"). The proposed FTT has a very broad scope and could, if introduced in its current form, apply to certain transactions in debt instruments. Notwithstanding the European Commission's proposals, a recent statement by the participating Member States (with the exception of Slovenia) indicates that progressive implementation of the FTT is being considered and that the FTT could initially be applied only to transactions involving shares and certain derivatives. While initially intended to be implemented by 1 January 2016, no implementation deadline was set at the last meetings of the Economic and Financial Affairs Council on 17 June 2016,11 October 2016 and 6 December 2016. Belgium, together with other Member States, has decided to continue its efforts to introduce a European FTT. Further information is not available at this time, and the proposed FTT remains subject to negotiation between the participating Member States. If Belgium implements the FTT, it will have to abolish the abovementioned stock exchange tax.