Belgian corporate tax reform takes effect

Transcription

1 from International Tax Services Belgian corporate tax reform takes effect February 1, 2018 In brief The Belgian Parliament on December 22, 2017, approved the major corporate tax reform announced in July. Most provisions of the new law (the Act) went into force on January 1, The Act should positively affect Belgium s international business competitiveness, while reinforcing the importance of tax compliance. The Act s key provision is a gradual decrease in the corporate income tax rate from 33.99% to 25%. Other important provisions are a 100% participation exemption and the introduction of a grouping system. In detail Overview The combined corporate income tax rate of 33.99% will decrease to 29.58% in 2018 and to 25% in The participation exemption regime increases from 95% to 100% with a full capital gains tax exemption for qualifying shares. The Act also introduces a group contribution system. For the first time in Belgian tax history, Belgian companies in the same group can offset their tax losses against profits of another Belgian affiliate. To ensure budget neutrality, the Act includes some compensating measures to raise revenue. The two most important of these provisions are a minimum taxation for companies realizing over one million euro profit, and a 30% EBITDA limitation for net borrowing costs, similar to regimes in many other European countries. The Act also includes several measures aim to boost job creation and corresponding investments in the active economy. Note: Companies should assess the tax accounting impact of the reform since they will have to book the full deferred tax impact in the financial year 2017 accounts. This is because the Act substantively was enacted for IFRS (IAS 12) purposes on December 22, 2017 and for US GAAP (ASC 740) purposes on December 25, Corporate income tax rate decrease The Act is designed to create a simplified corporate income tax system with increased legal certainty by reducing the nominal rate and broadening the tax base. The Act lowers the standard corporate income tax rate of 33% to 29% in 2018 and to 25% in Furthermore, the Act replaces the reduced progressive rate for small and medium-size entities (SMEs) in 2018 by a flat rate of 20% for the first bracket of EUR 100,000 taxable profit. The crisis tax, currently 3%, will be lowered to 2% in 2018 and abolished in Below is a summary of the changes:

2 Rate 33% 29% 25% Crisis tax 3% 2% 0% Rate incl. crisis tax 33.99% 29.58% 25% SMEs 24.25% 1 25 keur 31% 25 keur 90 keur 34.5% 90 keur 322,5 keur 20% On profit 100 keur 29% On profit > 100 keur 20% On profit 100 keur 25% On profit > 100 keur 2018 measures Minimum tax (basket system) To broaden the tax base, the Act revises the system of tax deductions. Beginning in 2018, a new sequence of deductions applies: Order of deductions Non-taxable elements Dividends Received Deduction (DRD) Patent income deduction (PID) Innovation Income Deduction (IID) Investment deduction Group contribution under consolidation regime (see below) Incremental notional interest deduction (NID) (see below) Carried-forward DRD Carried-forward IID Carried-forward tax losses Carried-forward NID Limitation Fully deductible Basket There are no limits on certain deductions, such as DRD, IID, and the investment deduction. Other deductions may offset only 70% of the taxable amount exceeding EUR 1 million. These deductions are the incremental NID as well as DRD, IID, tax loss, and NID carry-forwards. The remaining 30% will be fully taxable at the new rate. Incremental NID Going forward, the NID will be calculated based on the incremental equity over a five-year period and not on the total amount of a company s qualifying equity. Incremental equity generally will equal one fifth of the positive difference between the equity at the end of the tax period and the fifth-preceding tax period. 2 pwc

3 Participation exemption Under prior law, capital gains realized on shares are exempt from tax if the investment meets a subject-to-tax condition and has been held in full ownership for at least one year. For large companies, however, a separate capital gains tax of 0.412% applies with no possibility for offset. Beginning in 2018, the separate 0.412% capital gains tax will be abolished, but taxpayers must meet an additional minimum participation threshold of a 10% shareholding or at least EUR 2.5 million acquisition value for the full capital gains exemption to apply. The participation exemption on qualifying dividends will increase from 95% to 100%. As a result of the 100% participation exemption, a dividend withholding tax exemption will be available when a shareholder owns a participation of less than 10% capital of which the acquisition value is at least equal to EUR 2.5 million (instead of the current withholding tax of %). Following European case law (the Tate & Lyle case), the Belgian withholding tax on dividends distributed to non-resident shareholders will be aligned with the tax burden of resident companies that could apply the Belgian participation exemption. Other measures Capital reductions will be deemed to be derived proportionally from paid-up capital, then to reserves. The capital reduction allocated to reserves will be deemed a dividend for tax purposes and subject to withholding tax, if no exemption applies. Provisions for risks and charges will be exempt only if they result from a contractual, legal, or regulatory obligation at year-end closing to which the company commits during the tax period or a previous tax period. The reversal of tax-exempted provisions for risks and charges that have been recognized in a financial year that ends between January 1, 2017 and December 30, 2020, will be taxable at the tax rate applicable in the tax period at which the exempted provision is recognized. A FIFO mechanism applies to the provision s reversal. Under prior law, prepaid costs can be deducted in the tax period in which they are paid, even if they are fully or partially related to future tax periods. Beginning in 2018, costs can be deductible only in the tax period in which they are paid, or booked as debt, or in succeeding tax periods to the extent the costs relate to any such period. Companies that do not grant a fee, equal to the lesser of EUR 45,000 or taxable profit, to at least one director (a private individual) will be subject to a distinct taxation of 5% for 2018 and The rate increases to 10% beginning in The tax rate is applied to the positive difference between the minimum fee and the highest director s fee borne by the company. Exceptions may apply. Tax supplements resulting from a tax audit (correction or ex officio assessment) may no longer offset tax deductions, including currentyear losses and tax attributes such as tax loss carry-forwards and other carry-forwards, but not the DRD for the year. This limitation will apply if a tax increase equal to or higher than 10% would be levied. A minimum 3% threshold will be introduced for determining the basic interest rate to calculate the penalty in absence of tax prepayments. Beginning with assessment year 2019, the penalty for insufficient prepayments will be 6.75%. The fairness tax is expected to be eliminated for financial years starting on or after January 1, Note that this was not included in the Act. We expect enactment of a law to eliminate the fairness tax in the near future measures Group contribution system (tax consolidation) Belgian parent companies, subsidiaries, sister companies, or permanent establishments (PEs) of the foregoing will be able to transfer taxable profit of a given period to a company or PE in a loss position via a group contribution. The amount of such an intra-group transfer will be fully deductible by the profit-making company. This requires a direct shareholding of at least 90% for the previous five years. The taxable profit that may be transferred is limited to the loss of the transferee company or PE of the relevant taxable period. The transferee company or PE will receive remuneration for the reduction of its tax losses from the transferor company or PE that is able to deduct the transferred amount from its tax base. To safeguard the neutrality of the consolidation regime between group companies, the remuneration will be exempt from corporate income tax for the transferee company or PE and will qualify as a disallowed expense for the profitable company or PE. The two companies involved will have to conclude a formal agreement. 3 pwc

4 Each company or PE involved in the group contribution will have to file a separate tax return. (There is no consolidated Belgian tax return). Anti-Tax Avoidance Directives (ATAD) I and II The Belgian government will introduce an anti-abuse measure to tax undistributed profits realized by a low-tax controlled foreign company (CFC) in the hands of the controlling parent or head office. The CFC rules will apply when a Belgian company holds a direct or indirect participation of more than 50% of the capital, voting rights, or profit of a foreign entity, and the foreign entity either is not subject to tax under the applicable rules of its residence state or is subject to income tax that is less than half of the corporate income tax of the CFC computed based on Belgian rules. This measure is aimed at non-distributed income from predominantly tax driven arrangements. The tax authorities will assess the nongenuine character of such arrangements from an economic substance viewpoint. Belgium also will implement measures to remedy hybrid mismatches. These are arrangements in which multiple parties obtain tax relief or deductions, or in which a payor obtains tax relief or deductions but there is no taxable inclusion, or only inclusion at beneficial rates, for the payee. The measures will either include income in the tax base, deny a deduction for a payment, or limit the foreign tax credit. The measures also will target so-called imported hybrid mismatches. Belgium applies an exit tax when there is a transfer of tax residency and withdrawal of assets from a Belgian PE. In accordance with EU Directives, the exit rules will be broadened to cover the transfer of assets from a Belgian head office to a foreign PE. The Directives also provide for a stepup when the assets and tax residency of the business of a PE is transferred to another EU Member State measures Permanent establishments A tax deduction for PE losses at the Belgian head office level will be granted only for final losses within the European Economic Area (EEA). To that end, activities of the PE need to be terminated. In addition, there can be no compensation of PE losses by other income in the state of the PE, available either now or in the future. The losses also may not be transferred to an affiliated entity active in the same state. If the Belgian head office restarts activities in the same state within a three-year period, the final loss will be recaptured at the Belgian level. The definition of a Belgian PE will be broadened to include commissionaires that act in their own names but are closely connected with a foreign company. This implements some of the BEPS Action 7 measures. ATAD I and II Net borrowing costs that exceed 30% of the fiscal EBITDA will not be deductible. The excessive borrowing costs and EBITDA threshold will be computed separately for each entity without taking into account internal transactions at the Belgian level. A de minimis rule of EUR 3 million will apply on a consolidated basis. Excess interest may be transferred to a group entity that has EBITDA margin and that pays remuneration in return. The tax treatment of this remuneration will be the same as under the consolidation regime. Remaining excessive borrowing costs and nondeductible interest can be carried forward indefinitely. Other measures Tightening of business relief conditions: All administrative fines imposed by a public authority no longer will be deductible for tax purposes, nor will the secret commission tax. The current 120% deduction for electric cars will be replaced by a 100% deduction. Discounts on long-term interestfree debts, or debts carrying an abnormally low interest rate that relate to the transfer of nondepreciable assets no longer will be deductible if the purchase price is lower than the actual value of the asset increased by the discount. The double-declining depreciation method will be abolished for corporate income tax purposes. For the year of investment, SMEs must apply a pro rata depreciation, as is now the rule for large enterprises. For assessment years 2021 and 2022, certain exempted reserves can be converted into taxed reserves at a reduced rate of 15% or 10%. A new concept of market interest rate linked to the Monetary Financial Institution interest rate will be introduced to determine whether interest costs from nonmortgage loans without a fixed duration are deductible. The takeaway Through passage of the Act, Belgium seeks to demonstrate to both domestic and international investors its willingness to provide a competitive and sustainable tax system. The corporate tax rate reduction, 100% dividend exemption and group contribution system are at the heart of the reform that will be implemented during pwc

5 Although we expect more practical details and refinement during the next months via Royal Decrees, multinational enterprises should begin now to assess the possible impact of these changes. Let s talk For a deeper discussion of how this may affect your business, please get in touch with your local PwC contact or: Patrick Boone patrick.boone@pwc.com Philippe Vanclooster Philippe.vanclooster@pwc.com Evi Geerts e.geerts@pwc.com Isabel Verlinden isabel.verlinden@pwc.com Koen De Grave Koen.de.grave@pwc.com Maarten Temmerman Maarten.temmerman@pwc.com New York Belgian Desk Christian Van Craeyvelt christian.j.van.craeyvelt@pwc.com Singapore / Asia Belgian Desk Michael Vangenechten mich.vangenechten@sg.pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions 2018 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC, our purpose is to build trust in society and solve important problems. PwC is a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at 5 pwc