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Belgian tax reform proposal: impact on holdings and investment companies
The Belgian Minister of Finance recently announced a proposal for a “first phase of a broader tax reform”. The proposal contains a significant number of tax measures which aim at shifting the tax burden from labour to wealth and consumption, and making the tax system more transparent, fair and consistent. Currently no final political agreement has been reached on the proposal. The proposal, if adopted, could take effect as of 1 January 2024.
The proposal includes certain changes to the taxation of dividends and capital gains on shares in the hands of Belgian companies. The proposal confirms that holding companies can fully benefit from the Belgian tax consolidation regime. It furthermore includes targeted changes to the Belgian holding company regime which could have a significant impact on certain shareholders with a stake of less than 10%.
Summary of the current holding company regime
Dividends received by corporate shareholders are included in the corporate tax base and are then, as part of the various steps in the tax return, deducted from the corporate tax base via the so-called dividend received deduction (DRD) regime. The DRD regime is subject to the following conditions: (i) the shareholder must hold a stake in the distributing company of either at least 10% or with an acquisition value of at least EUR 2,500,000 (the minimum participation condition), (ii) the shares must have been held (or will be held) for at least one year (the holding period condition) and (iii) a number of conditions relating to the minimum level of taxation in the hands of the dividend distributing company and the absence of abuse (the taxation condition). Any dividends that cannot be “deducted” due to insufficient taxable income, can be carried forward to subsequent years.
Capital gains realised on shares are fully exempt under the same three conditions. However, the capital gains tax exemption is a real exemption as the exempt gain is ab initio excluded from the tax base (via an increase of the initial state of the taxed reserves).
The dividend received “deduction” becomes a dividend received “exemption”
The DRD regime concerns the implementation in Belgium of the EU parent-subsidiary directive (PSD). At various occasions, the Court of Justice of the EU has clarified that member states which have implemented the PSD via the so-called “exemption method” (like Belgium), should provide for a “real exemption”. This requirement would not be fulfilled if the holding company is taxed more heavily in one way or another than would have been the case if it had not received the dividends (eg. by forfeiting another tax benefit). This case law for instance caused Belgium to allow unused DRD to be carried forward to subsequent years (see above), as the “exemption” could not be made subject to the condition that the holding company has sufficient other taxable profits in the year in which the dividends are received.
Until today, the DRD regime is not fully compatible with the PSD. As discussed in a previous blog, one important remaining incompatibility relates to Belgium’s tax consolidation regime which allows a profit-making company to shift tax base (via a “group contribution”) to a group company to offset the latter’s current-year losses. However, the Belgian income tax code provides that no DRD can be deducted from a “group contribution”. This means that the group contribution regime cannot be effectively used to the extent the holding company receives dividends in the same year. Put differently, the dividends are not (fully) exempt as required by the PSD – they are indirectly taxed. A further condemnation of the Belgian DRD regime was thus (and is still) to be expected.
The Minister of Finance now proposes replacing the DRD by a “dividend received exemption” (DRE). The received dividend would thus no longer be first included in the tax base but will instead ab initio be excluded from the tax base via an increase of the initial state of the taxed reserves, just like the way capital gains on shares are currently already “exempt”. The “real” participation exemption would apply to any dividends fulfilling the minimum participation condition, the holding period condition and the taxation condition, and not only to dividends in scope of the PSD.
This is a welcome change that should put an end to EU incompatibility issues, including the one referred to above.
Companies holding less than 10%: participation must qualify as financial fixed assets
Companies holding a minimum participation of less than 10% but with an acquisition value of at least EUR 2,500,000 will in the future only benefit from DRE and capital gains tax exemption if the participation qualifies as “financial fixed assets”.
The notion “financial fixed assets” is an accounting principle and should in principle be interpreted accordingly. For Belgian companies that apply Belgian GAAP, shares are recorded as financial fixed assets under the subsection “Relates entities” (implying the exercise of “control”), under “Entities with which a participation relationship exists” (implying the exercise of “influence on the management of the company”) or under “Other financial fixed assets”. Shares are recorded as other financial fixed assets if the shares, by creating a durable and specific relationship with the issuing company, contribute to the own business activities of the shareholder. The latter condition, which is the “minimum requirement” for shares to qualify as financial fixed assets, is highly factual and may become a discussion point in future tax audits.
Shares merely held as investment of “excess liquidities” would normally not qualify as financial fixed assets. On the other hand, shareholdings in companies with which the company has a specific business relationship (eg. supplier or customer) or shareholdings that ensure the financing of certain business projects (relying on the issuing company’s dividend policy) may for instance be considered strategic and qualifying as financial fixed assets.
The question whether shares qualify as financial fixed assets should be determined by the management body of the shareholder in the first place. Companies are advised to duly document the reasons why shares are considered as financial fixed assets and obviously to record the shares accordingly in the accounts.
However, what matters most is that shares are financial fixed assets in nature. While a recording of shares qualifying as financial fixed assets under one of the above subsections is the normal consequence for companies that are subject to Belgian GAAP, an (incorrect) recording as “investments” should not per se prevent companies from claiming DRE or capital gains tax exemption. Furthermore, certain categories of companies are not subject to general Belgian GAAP and may be subject to accounting rules that provide different classifications. This is eg. the case for Belgian credit institutions and insurance companies. In addition, under general Belgian GAAP, shares qualifying as financial fixed assets that are intended to be transferred within 12 months can be moved to the entry “Other investments”. Such transfer should also not prevent the shareholder from claiming DRE on dividends received prior to such transfer or capital gains tax exemption on the capital gain realised upon such transfer.
For the same reason, the fact that the introduction of the financial fixed asset condition causes companies to revise and rectify the accounting treatment of shares should not be considered problematic or abusive if the accounting classification as financial fixed assets can be justified.
For certain shareholders it could be useful to obtain an accounting ruling on the nature of the shareholding.
It is finally to be noted that qualifying non-resident shareholders that hold a participation in a Belgian company of less than 10% but with an acquisition value of at least EUR 2,500,000 benefit, subject to certain conditions and limitations, from an exemption from Belgian dividend withholding tax that can be claimed via a reimbursement procedure or even at source (Article 264/1 ITC). This exemption would now also become subject to the financial fixed asset condition. This may cause interpretation questions as non-resident shareholders may apply different accounting classifications. This is particularly true because the Belgian GAAP financial fixed assets condition (i.e., requiring the presence of a durable and specific link with the issuing company, to contribute to the shareholders own business activity) constitutes an inaccurate implementation of the EU accounting directive, which stipulates that fixed assets are “those assets which are intended for use on a continuing basis for the undertaking's activities”. While recording shares as fixed asset under local GAAP may therefore create a presumption that they qualify as such for Belgian tax purposes, it cannot be excluded that such nature would be challenged by the Belgian tax authorities on the basis of the Belgian GAAP concept of financial fixed asset. In order to benefit from this dividend withholding tax exemption, the classification as financial fixed asset will have to be confirmed by the shareholder in a written attestation. The dividend distributing company can normally rely on such attestation when applying the exemption at source and does not have an active investigation duty in this respect.
Minimum participation and holding period condition: exception for investment companies abolished
Under the current regime, the minimum participation and holding period conditions do not need to be fulfilled with respect to shares held in investment companies (and regulated real estate companies) and with respect to shares held by investment companies (and regulated real estate companies). Dividends and capital gains on such shares are fully exempt provided that the taxation condition is fulfilled, regardless of the size or holding period of the participation.
The Minister of Finance proposes abolishing such preferential treatment: in order to benefit from dividend and capital gains tax exemption, the minimum participation condition and holding condition would have to be fulfilled in all circumstances, in addition to the taxation condition.
One of the obvious and clearly intended “victims” of this proposal are the so-called “DBI-beveks/Sicavs-RDT”, i.e., tax-exempt regulated investment companies (UCITS) that meet the taxation condition (because they invest in normally taxed companies and distribute at least 90% of their net income). DBI-beveks have become a rather popular and commercialised investment product for Belgian companies as it offers a tax-free return on their excess cash regardless of the size of the investment.
However, the proposals are much further reaching as today many investment structures rely on the exception, including those involving the Belgian private equity fund “Private Privak/Pricaf Privée” (namely the Private Privak of the so-called “second category”, which does not have the full tax-exempt status). Belgian companies that invested less than EUR 2,500,000 in such funds would automatically lose the current tax exemption on their return and companies that invested less than 10% but with an acquisition value of at least EUR 2,500,000 would only keep the exemption if the new financial fixed asset condition would be fulfilled.
In addition, if the fund invests in shares with an acquisition value below EUR 2,500,000 (and representing less than 10%), which is for instance not unusual in early-stage financing rounds of start-ups, the fund itself would also be taxed on its return. This would lead to a cascade of taxation, first at the level of the fund and then at the level of the corporate investor (in addition to, pro memory, regular income at the level of the portfolio company and tax when the corporate investor distributes the proceeds to its individual shareholder).
The situation of the Private Privak is however very different from the aforementioned “commercialised” DBI-bevek.
A DBI-bevek is in principle a way for companies to generate a return on their (excess) liquidities. DBI-beveks (usually) invest in a diversified portfolio of listed companies that have broad access to debt and equity financing. For a Belgian investor, a DBI-bevek could therefore be seen as an alternative to a direct investment in such underlying listed companies. Given that companies will no longer be able to benefit from dividend and capital gains tax exemption (considering the introduction of the financial fixed asset condition – see above) it seems a valid political question whether such specific investment product should still be favored over other similar investment opportunities.
Conversely, the Belgian companies that invest less than EUR 2,500,000 in a Private Privak typically do not have access to a direct investment in the underlying privately held companies. Such investments also come with a high degree of risk and limited liquidity (whereas any capital loss on the investment will not be tax-deductible). In addition, the underlying companies, in particular if it concerns Belgian start-ups, often entirely rely on private equity (venture capital) for their financing needs. If such companies find it more difficult to obtain equity financing from Belgian investors, they will find it abroad which may weaken their Belgian anchoring. These seem to have been the reasons why the Private Privak has been intentionally promoted by the Belgian legislator and government as vehicle for private equity investment, including by further improving its regulatory framework in 2018 and offering certain attractive tax features (for both companies and individual investors).
Requiring such condition in the hands of a Belgian corporate investor in such fund can certainly be "explained" by reference to the fact that a fund structure should in principle be "tax neutral" and that the investor should be taxed in the same way as if it had invested directly. However, it would reverse a significant incentive intentionally created by previous governments and would fundamentally deny the specific position of privately held companies, and start-ups in particular, as described above. The proposal is particularly harsh given that such fund structures are rather illiquid and that no grandfathering of existing fund structures (which are in any case of limited duration) seems contemplated.
Requiring the minimum participation condition at the level of the Private Privak would furthermore result in a a cascade of taxes. Here, the investment structure would even no longer achieve tax neutrality for investors which is inconsistent with established tax policy.
There therefore seem compelling reasons to reconsider the proposal, at least as far as the Private Privak is concerned.