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20 March 2018 Belgium introduces 100% participation exemption The Belgian corporate income tax reform,1 in addition to decreasing the corporate income tax rate to 25% by 2020 (29.58% in 2018 and 2019), also amended a number of measures to increase the attractiveness of Belgium as a holding jurisdiction. Specifically, the dividends received deduction has been increased from 95% to 100% and a full exemption also has been introduced for qualifying capital gains on shares. In addition, further to the implementation of the European Union (EU) Anti-Tax Avoidance Directive (ATAD), Belgium has opted to implement controlled foreign corporation rules that only target non-genuine operations, which is a less intrusive method than targeting all low-taxed passive income. This Alert summarizes additional insights with respect to these developments and also highlights other provisions, such as a domestic withholding tax exemption for dividends to qualifying parent companies, which positions Belgium as an attractive holding jurisdiction. The Belgian DRD has been increased to 100% of the received dividend for financial years starting as of 1 January 2018. Previously, qualifying dividends were only exempt up to 95%. In order to benefit from the DRD, the following three conditions must be met: (i) a minimum holding of 10% in the subsidiary's capital or an acquisition value of €2.5 million; (ii) a minimum holding period of 12 months; and (iii) the subject-to-tax test. The subject-to-tax test looks at the tax regime of the direct subsidiary, its income, income from its branches and its lower-tier subsidiaries. Generally, the distribution of income that has not been taxed or taxed at a low rate may give rise to concerns, although certain safe harbor clauses are also provided. For financial years starting as of 1 January 2018, capital gains realized on shares are again fully exempt from tax in Belgium. Previously, a minimum tax of 0.412% was generally imposed. The exemption is subject to the following three conditions: (i) a minimum holding of 10% in the subsidiary's capital or an acquisition value of €2.5 million; (ii) a minimum holding period of 12 months; and (iii) the subject-to-tax test. Hence, the conditions to benefit from the capital gain exemption are now fully aligned with the conditions to apply the DRD. Capital gains realized with respect to short-term portfolio investments, i.e., shares sold within a period of 12 months after their acquisition (but where the minimum holding and the subject-to-tax test are met), are subject to tax at a rate of 25.5% for fiscal years 2018 and 2019 and at the general corporate income tax rate of 25% as from fiscal year 2020. Capital gains realized with respect to shares where the minimum holding or the subject-to-tax test are not met, are subject to tax at a rate of 29.58% for fiscal years 2018 and 2019 and at the general corporate income tax rate of 25% as from fiscal year 2020. In other words, as from fiscal year 2020, capital gains on shares are fully exempt when all conditions are met or are tax taxed at the statutory corporate income tax rate of 25% if one of the conditions is not met. Further to the introduction of the EU ATAD, Belgium has been required to introduce CFC rules. EU Member States may choose to apply CFC rules that target low-taxed subsidiaries, specific categories of income or income which has artificially been diverted to a subsidiary. Belgium has opted to implement the latter option to only target income derived by a CFC from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. The new CFC rules will enter into force for financial years starting as from 1 January 2019. A CFC is defined as a low-taxed foreign company, or foreign permanent establishment, in which a Belgian corporate taxpayer holds, directly or indirectly, more than 50% of the capital, voting rights or is entitled to receive more than 50% of the profits of that entity. A CFC will be deemed to be low-taxed if it is either not subject to income tax or is subject to income tax which is less than half of the corporate income tax that the CFC would be subject to computed according to Belgian rules. The non-genuine nature of the arrangement, and the related non-distributed income that is to be included at the level of the Belgian taxpayer is basically subject to a transfer pricing approach. To the extent that the CFC does not perform the significant people functions (SPF), does not (economically) own the business assets or does not assumes the related risks, to which the income recorded by the CFC in principle should have been allocated, an arrangement is considered as non-genuine. However, only to the extent that the income is generated through assets and/or risks which are connected to SPFs performed by the Belgian taxpayer, the income will effectively be included in the Belgian taxpayer's taxable income basis. To avoid double taxation, when the CFC distributes profits that have already been subject to tax at the level of the Belgian corporate shareholder, based on the Belgian CFC rules, these profits shall be fully deducted from the recipient's tax base. Withholding tax is not imposed on Belgian-sourced dividends distributed to a qualifying parent located in a treaty jurisdiction. This is a company that holds or commits itself to hold a shareholding of at least 10% in a Belgian company for an uninterrupted period of 12 months. In this respect, Belgium has a large treaty network with approximately 100 double tax treaties signed (including a double tax treaty with the United States). This allows profits to be distributed in an efficient manner without any leakage. In addition, to the extent no domestic exemption can be applied, the majority of double tax treaties entered into by Belgium provide reduced treaty rates. For minority shareholdings, i.e., shareholdings with an acquisition value of at least €2.5 million but representing less than 10% of the subsidiary's capital, a full exemption is also available for dividends paid or attributed as of 1 January 2018, subject to certain conditions. 1 See EY Global Tax Alert, Belgian Parliament adopts corporate tax reform, dated 2 January 2018.
Document ID: 2018-5440 |
