Belgium has enacted a major corporate income tax reform and is now preparing a new company code which is expected to be adopted by the parliament later this year.
Decrease of the corporate income tax rate
Some provisions of Belgium’s corporate income tax reform went into effect on January 1, others will enter into effect on January 1, 2019, or January 1, 2020. As part of this reform, Belgium reduced its corporate tax rate from 33.99% to 25%. This rate drops further to 20% for the first EUR 100,000 of profits for SMEs.
For 2018 and 2019, a transitional 29.58% rate applies in lieu of the upcoming 25% rate.
100% dividends received deduction and tax consolidation regime
The tax reform includes an increase from 95% to 100% of the tax deduction for dividends received (applicable from this year) and an optional tax consolidation regime between Belgian companies and permanent establishments (PEs) within a group (applicable as from next year).
Under the consolidation regime, companies within a group are allowed, subject to certain conditions, to transfer for tax purposes all or part of their taxable profit to their parent, subsidiary, or “sister” company with which they have a direct relationship in terms of capital of 90% at least.
To compensate the transferee for receiving the taxable result (and subsequently being subject to taxation thereon), the transferor must pay compensation equal to the saved taxes.
Compensatory measures – EU ATAD Directive
Certain measures have been taken to ensure the budget neutrality of the corporate income tax reform, partly by taking advantage of the obligation to implement the so-called EU Anti-Tax Avoidance Directive (ATAD, Directive 2016/1164/EU as amended by Directive 2017/952).
The reform links the conditions for the capital gains exemption on shares to those applicable to the dividends received deduction, being a minimum participation of 10% of EUR 2.5 million for a period of at least one year in an entity that satisfies the subject-to-tax condition (applicable as from this year).
Correlatively, Belgium’s 0.412% minimum tax on exempt capital gains, which often constituted an obstacle to restructurings, was abolished
Further, it is no longer possible to attribute a capital reimbursement from a tax perspective entirely to the paid-up capital if the company has reserves (applicable from this year). In such case, a proportional attribution of the capital reimbursement to capital and the existing reserves is prescribed.
The part of the capital reimbursement that is attributed to reserves will represent a dividend from a tax perspective. On this part, a 30% withholding tax is in principle due, subject to exemptions and reductions that may be available pursuant to domestic law or applicable double taxation conventions.
Moreover, the significance of the notional interest deduction (NID) is drastically reduced, by changing it from an annual deduction calculated on the entire qualifying equity to a deduction based on the incremental qualifying equity spread over a five years period (applicable from this year).
Finally, the use of certain tax assets (for example tax losses carried-forward) is limited under the new law for any taxable year to EUR 1 million plus 70% of the taxable income above 1 million, leading to a “minimum taxation” of the remaining 30% (applicable from this year).
At the same time, the current minimum tax limiting the use of carried-forward losses and NID is expected to be abolished (applicable from this year). This tax, the so-called “Fairness Tax,” was considered partially inconsistent with EU law by the Court of Justice of the European Union (Case C-68/15, May 17, 2017).
Further, effective taxation will in principle be due if a tax audit leads to a tax correction with a penalty of at least 10% (applicable from this year).
In such case, the additional tax base can no longer be offset by tax assets of the current taxable year or previous taxable years (save for the dividend received deduction for the current year). This puts in most instances an end to cashless resolutions of tax and transfer pricing disputes.
In the framework of the corporate tax reform, the rules of the ATAD are implemented into Belgian law: an interest deduction rule (applicable from 2020), rules regarding exit/entry taxation (as from 2019), controlled foreign corporation (CFC) rules (applicable from 2019), and rules against hybrids (applicable from 2019).
According to the interest deduction rule, Belgium will for the first time have an interest deduction based on the fiscal EBITDA instead of a balance sheet approach. The current 5:1 debt-equity ratio will only continue to exist for interest paid to tax havens, and no longer to interest paid to group companies.
As a consequence of ATAD, a CFC rule will be introduced in Belgium. Belgium has opted for the so-called “transactional approach”, which is implemented in a strict manner: no credit for taxes paid abroad, no proportional reduction in accordance with the participation in the CFC, and no de minimis rule.
Planned reform of company law
Although the legislative texts for Belgium’s new company law are not yet public, the outlines of the envisaged reform are generally known. The aim is to modernize Belgian company law by making it more simple, flexible, and attractive.
Under the new law, the private limited liability company (BV/SRL) will become the “default company” and the public limited liability company (NV/SA) will become the appropriate legal form for large companies that are listed or have a large shareholder base.
Private limited liability companies
There will no longer be a (minimum) share capital for BV/SRLs. Instead, the founding shareholders will, at the time of incorporation, simply be required to demonstrate that the company will have sufficient initial equity for its operations. Dividend distributions will be subject to both a net assets test and a liquidity test.
Public limited liability companies
NV/SAs can opt for either a one-tier governance structure (consisting of a board of directors or one single director) or for a two-tier governance system with a management board and a supervisory board, inspired by the German model.
The shareholders’ absolute right to dismiss directors of an NV/SA at any time, without cause and without severance pay can, under the new regime, be removed in the articles of association of the company. The requirement for NV/SAs to have at least two shareholders will be abolished.
Cap on liability of directors
The liability of directors will be capped by an amount which depends on the amount of the relevant company’s turnover and balance sheet total (ranging from EUR 125,000 to EUR 12 million). Exemption from liability clauses or indemnification arrangements entered into by a company for the benefit of its directors will be prohibited.
Multiple voting rights
Under certain conditions, it will be possible to issue shares that carry multiple votes. For listed companies, this flexibility will be limited to a double voting right for “loyal shareholders” holding the relevant shares for at least two years.
Statutory seat doctrine
The corporate law applicable to companies and associations will no longer be determined by the location of the head office or effective place of management or conduct of business but, rather, by the location of the company’s registered office