On 27 October, the Federal government published a press release and note on the corporate income tax reform. The reform will be part of the so-called “Revival-Act” to be enacted before the end of the year.
The reform will be budget-neutral and will be implemented in two phases.
The standard corporate income tax rate will be reduced from 33% to 29% in 2018 and will be reduced further to 25% in 2020. SMEs will benefit from a tax rate of 20% for the first EUR 100,000. The surcharge will be reduced from 3% to 2% in 2018 and abolished from 2020.
Instead of the current 95% deduction, corporate shareholders may deduct 100% of the dividends received.
The investment deduction for SMEs and sole entrepreneurs will increase from 8% to 20% for investments between 1 January 2018 until 31 December 2019.
The salary withholding tax exemption for research and innovation will also be available for employees holding bachelor degrees in biotechnic, industrial sciences and nautical sciences, product development and business administration (department computer science).
Also, the reform provides for a tax consolidation from 2020 to improve the international position of Belgium. The tax consolidation will be off-balance and will, basically, be achieved by a compensation to be paid by the company benefiting the tax advantage to the company incurring the loss.
The reform provides for two harmonization measures in the personal income tax. The calculation of the deductibility of car expenses will be put at the same footing as under the corporate income tax and the tax rate for capital gains on the termination of a sole proprietorship will be set at 10%.
Compensatory measures: first phase
Because the reform should be budget-neutral the following first phase (2018 and 2019) compensatory measures are provided for:
- The notional interest deduction will be limited to the incremental equity capital, calculated on a five-year average;
- Gradual abolition of the investment reserve;
- A minimal taxable base. The right to deduct notional interest, patent income, losses and dividends carry forward, dividends received, will be limited to a deductible basket. This basket is equal to 1 million euro + 30% of the profit, implying a minimal taxable base of 30% of profit above 1 million euro;
- An increase of the minimal amount of director’s fees to 45,000 euro or equal to the taxable profit of the company under which an SME can benefit from the 20% rate;
- Capital decreases will have to be imputed on a pro rata basis on paid up capital and build up reserves, the latter as a rule subject to withholding tax;
- The abolition of the separate capital gains tax of 0,412% for large companies;
- Capital gains on participations will only be exempt if they meet the conditions of the participation exemption (taxation conditions, holding period of one year and minimal participation of 10% or 2.5 million euro).
- The interest rate for late payments (currently 7%) will be minimal 4% and maximal 10%, depending on the OLO-rate on 10 years;
- The abolition of the double profit exemption for integration enterprises
- The increase of the minimal amount of taxable profit if no corporate income tax return is filed (34,000 euro for 2018 and 2019, and 40,000 euro as of 2020);
- The abolition of the tax increase threshold when insufficient prepayments have been made;
- The introduction of the matching principle (reporting of expenses in the same accounting period as the related revenues);
- Limitations for provisions for risks and costs;
- An anti-abuse provision for capitals gains which could benefit from deferred taxation in case of reinvestment;
- The effective taxation of the increase of the taxable base after an investigation even if losses or other carry forward items are available;
- The limitation of dividends carry forward in case of a reorganization (similar to losses carry forward).
Compensatory measures: second phase
The second phase (as of 2020) compensatory measures are the following:
- The implementation of the ATAD I and II Directives into Belgian legislation. This implies:
- An interest deduction limitation based on the highest of (i) 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA) and (ii) an amount of Euro 3 million. For loans entered into before 17 June 2016, the current 5/1 debt-equity ratio remains applicable;
- The implementation of the second option under the controlled foreign company rule. Belgium shall include in the tax base the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage;
- The introduction of an exit tax and step-up for assets transferred from the head-office to a permanent establishment or visa-versa; and
- The implementation of rules against hybrid mismatches;
- A broader definition of the Belgian establishment, to include certain commissionaires;
- The limitation of certain losses of foreign permanent establishments;
- The non-deductibility of discounts on debt related to non-depreciable assets;
- The temporary mobilisation of tax-exempted reserves for which the corporate income tax rate will be set at 15%;
- The replacement of the term “market interest”(to be applied on e.g. current accounts with the MFI interest rate on loans up to 1 million euro, to be increased with 2.5%;
- The abolition of accelerated depreciation;
- The non-deductibility of “all” penalties and the secret commission tax of which the reduced rate of 50% will be abolished too;
- The adjustments of the formulas to calculate the deductible car expense; and
- The abolition of various exemption (e.g. capital gains exemption on lorries if re-invested in more ecological friendly lorries).