The Corporate Income Tax Reform Act of 25 December 2017 has introduced major changes to the Belgian tax landscape. The tax regime of capital gains on shares has for example experienced significant amendments. Given their investment profile (securities including listed securities), private investment companies are particularly impacted by this reform. We will briefly discuss below the main measures relating thereto.
1 Reduction of corporate income tax rate to 25%
The corporate income tax rate amounts to 29.58% as of 2018 (financial year starting no earlier than 1 January 2018). It will be reduced to 25% as of 2020 (financial year starting no earlier than 1 January 2020).
Under certain conditions (including the granting of a minimum remuneration to one of the managers of the company), a reduced rate of 20.4% (20% as from financial year starting no earlier than 1 January 2020) applies on the first tranche of EUR 100,000 tax base.
Most private investment companies should however not benefit from this reduced rate. Indeed, companies which hold participations for an acquisition value that exceeds 50% of the paid-up capital, taxed reserves and booked (revaluation) gains are excluded from the benefit of the reduced rate. As an exception, participations of at least 75% are not taken into account for the benefit of the 50% threshold.
Lowering the corporate income tax rate has been welcomed in particular by private investment companies whose profits consist largely of taxable interest income. However, it represents a small consolation for private investment companies which benefited until now from the notional interest deduction (shrunk to almost nothing in the context of the reform) or from the exemption of capital gains on shares (and which will potentially be excluded therefrom, given the tightening of the exemption conditions, cf. infra).
2 Full exemption of dividends qualifying for the participation exemption regime
Dividend qualifying for the Belgian participation exemption regime are from now on 100% exempt (95% previously).
The conditions in order to benefit from the participation exemption regime remain unchanged, namely:
- minimum participation of at least 10% or with an acquisition value of EUR 2,500,000 million;
- held for an uninterrupted period of at least one year (or commitment to hold if that period is not reached); and
- meeting the subject-to-tax requirement in the hands of the distributing company, as well as its direct and indirect subsidiaries (condition set down under the form of eight cases of exclusion).
In addition, the costs relating to the shareholding concerned remain fully deductible.
3 Changes to the tax treatment of capital gains on shares
The tax treatment of capital gains realized on shares has also been modified.
First, the conditions to benefit from the exemption for capital gains on shares are aligned with the conditions for applying the participation exemption. This implies that the conditions are tightened since the minimum participation threshold requirement of either 10% or EUR 2,500,000 acquisition value is extended to capital gains on shares. To the extent that the participation exemption can only partially be granted, the exemption of the capital gains on these shares will be granted to the same extent.
The introduction of this minimum participation condition affects in particular the private investment companies investing in shares as short-term investments (like participations in listed companies) because they will often not reach the thresholds that are required. For these companies, the tax rate of the capital gains on disposal rises consequently from 0% to 29.58% (25% as of 2020).
This minimum participation condition will also be an issue for companies holding qualifying participations, but which are disposed of gradually. Indeed, if, as a result of successive disposals, a company only holds a participation lower than 10% and with an acquisition value of less than EUR 2,500,000, the disposal of the outstanding amount of this participation will not qualify for the exemption because the participation condition is to be assessed on the day of disposal.
Furthermore, the minimum capital gains tax of 0.412% applicable to large companies (the ones which do not meet the notion of small company within the meaning of article 15 of the Companies Code) is removed as of 2018.
Finally, the distinct rate of 25.75% applicable to capital gains realized within the one year period will be abolished as of 2020 since the standard corporate income tax rate will also equal 25% at that time.
The new tax regime applicable to the capital gains on shares can now be summarized as follows: