EU constraints on recent and expected
tax changes in Belgium
D. Garabedian
Madrid, 31 May 2014
Brussels • London - www.liedekerke.com
Overview
Notional interest deduction (NID)
Fairness tax
Hybrid loans
Exit taxes upon transfer of seat
Withholding tax
Fiscal autonomy & EU law
2
NID – Principle
Belgian companies and PEs can deduct a
notional interest charge based on their total
equity (share capital + retained earnings)
Risk capital is multiplied by a rate based on
ten-year Belgian government bonds
For 2014: 2.63% standard rate, 3.13% for
SMEs
3
NID – ECJ, 4 July 2013, C-350/11
Argenta Spaarbank (I)
Equity invested in PEs in countries with which
Belgium has an income tax treaty was
excluded from the NID calculation basis
Same rule for equity invested in immovable
property in a treaty country
4
NID – C-350/11 Argenta Spaarbank(II)
Argenta
BelCo
No Belgian NID for “Dutch net
asset”
No Dutch NID for “Dutch net
asset”
DutchPE
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NID – C-350/11 Argenta Spaarbank (III)
ECJ Decision:
Exclusion of “foreign” net assets from
calculation basis is a restriction on freedom of
establishment
Not justified by “balanced allocation of taxing
power” or “coherence of the national tax
system”
6
NID – C-350/11 Argenta Spaarbank (IV)
Remarks:
In Belgium, net operating loss of foreign PE is
deductible from domestic profit
“net assets” or “net asset”
Computation of exempt income under double
tax treaty
7
NID – Impact Argenta
Reaction by Belgian legislature:
Abolition of exclusion from NID calculation
basis of the equity invested in foreign exempt
PEs
But correction occurs at a later stage: the NID
calculated on the higher calculation basis has
to be reduced by
• NID relating to PEs or real estate outside EEA; and
• NID relating to PEs or real estate inside EEA,
except if and to the extent that that part of the NID
exceeds the profits attributable to the permanent
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establishments or immovable property
Fairness tax (I)
Fairness tax
imposed on ‘non-SME’ companies that, for a
taxable period, distribute dividends in excess
of their taxable result
to the extent that the difference stems from
notional interest deduction or carried-forward
losses applied during that year
9
Fairness tax (II)
Hence, fairness tax will never apply if no
dividends are declared in a taxable period
Separate tax: in addition to other taxes
Minimum tax: no offset against tax attributes
Net cost: fairness tax is not deductible
Tax rate: 5.15%
Consistent with Parent-Sub Directive? Compare
ECJ 4 October 2001, Athinaiki Zythopoiia with ECJ 26
June 2008, Burda
10
Hybrid financial instruments – Principle (1)
Treated as debt in Belgium – the interest paid
on the loan is tax-deductible in Belgium
Treated as equity in Luxembourg – the
interest is not taxed in Luxembourg, under
the participation exemption
As a result: deduction in Belgium and no
taxation in Luxembourg
11
Hybrid financial instruments – Principle (II)
Characteristics of a hybrid financial
instrument to qualify as debt in Belgium and
equity in Luxembourg: a profit participating
loan (“PPL”) which
is convertible into shares,
has a maturity of at least 10 years, renewable,
is subordinated,
bears profit-linked interest and
is stapled to shares of the issuing company.
12
Hybrid financial instruments – Example (1)
Used by Belgian intra-group finance
companies
Belgian intra-group bank is funded partly by
equity and partly by the PPL and lends
money to the operational companies
Typically 1/5 ratio because of Belgian thin-cap
rule
13
Hybrid financial instruments – Example (1I)
The intra-group bank:
benefits from the NID on that part of the loans
that is funded by equity, and
is only taxable on a limited spread on the
portion of the loans funded by the PPL
14
Hybrid financial instruments – Example (III)
OpCo
OpCo
OpCo
BelCo
loan
interest Intra-group bank
Limited spread
taxable in
Belgium
PPL
interest
LuxCo
Interest treated as
dividend – participation
exemption
15
Proposed changes to Parent-Subsidiary
Directive
Proposed amendment
Tax exemption of ‘parent’ company (LuxCo) if
the subsidiary (BelCo) was able to deduct the
distributions/interest payments
Will the PPL structure still work?
Will Luxembourg be obliged to deny
participation exemption under the new rules?
16
Exit Tax – Introduction
Taxation on capital gains is typically deferred
until the time they are realized
A cross-border relocation of corporate seat
triggers a shift of tax residence
Consequence: Home State loses taxing
power over capital gains
Exception: Home State retains power to tax
capital gains on assets linked to a PE that
remains on its territory
17
Exit Tax – C-371/10 National Grid Indus
(NGI)
NGI BV
Dutch tax res.
Transfer of seat
NGI BV
UK tax res.
18
Exit Tax – NGI case – Conditions
Immediate exit tax contrary to freedom of
establishment (not proportionate)
Proportionate exit tax
Deferral of payment until actual realization
Crystallization of tax base at the time of
transfer
Arguably, Home State may demand interest
payment
Home State may demand bank guarantee
Home State may impose administrative
formalities
Deferral has to be optional
19
Exit Tax – C-164/12 DMC
Beteiligungsgesellschaft (I)
Facts:
Two Austrian corporate partners in a German
limited partnership exchanged their
partnership interests in return for shares in a
German company
Germany taxed capital gains, but provided
option of deferral of taxation over 5 years
subject to provision of guarantee
20
Exit Tax – C-164/12 DMC
Beteiligungsgesellschaft (II)
Main points to note:
Recovery spread over 5 years is
proportionate because the risk of nonrecovery increases over time
An assessment of the risk of non-recovery is
necessary in order to require a guarantee
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Exit Tax – Belgian law
Limited neutrality in case of transfer of seat
No exit tax if Belgian-resident company
relocates to EU Member State if and to the
extent assets are used in a PE that remains in
Belgium and contribute to the taxable profits
of the Belgian PE
PE condition also applies in case of crossborder mergers (in accordance with Tax
Merger Directive)
Consistent with EU law?
22
Withholding tax (I)
CJEU, C-384/11, Tate & Lyle
Background
Withholding tax exemption – threshold: 10%
Dividends-received deduction – threshold 10% or
EUR 2.5 million
23
Withholding tax (II)
CJEU
If holding under 10%, but at least EUR 2.5 million:
Belgian parent: + withholding tax creditable and very
little taxation because 95% dividend received deduction
Non-Belgian parent: withholding tax = final tax
Indirect discrimination, contrary to freedom of
movement of capital
Double taxation treaty only sufficient if “full tax credit”
Source state has obligation to remedy
discrimination
24
Withholding tax (III)
CJEU, C-384/11, Tate & Lyle
Expected reaction by Belgian legislature:
Withholding tax on dividends to non-Belgian parent
company with holding of at least EUR 2.5 million
but less than 10% limited to 1.7%
Cf. Belgian dividends-received deduction: 33.99% *
5%
Retroactive effect of decision
25
Withholding tax (IV)
CJEU, C-387/11, Commission v. Belgium
Background: semi-transparency of investment
companies
Subject to Belgian corporate income tax, but
income tax base limited to non-deductible business
expenses & received abnormal or gratuitous
benefits
Withholding tax on Belgian income creditable and
refundable
Result: no taxation of Belgian income if investment
company
26
Withholding tax (V)
CJEU
Discrimination of non-resident investment
companies (without Belgian PE), for which Belgian
withholding tax is not offset by limited tax base.
Contrary to freedom of establishment & freedom of
movement of capital
Double taxation treaty only sufficient if “full tax credit”
Source state has obligation to remedy
discrimination
27
Withholding tax (VI)
CJEU, C-387/11, Commission v. Belgium
Reaction by Belgian legislature
Dividend withholding tax no longer creditable for
Belgian investment companies as from assessment
year 2014
Significant derogation from semi-transparent
treatment
Limited to dividend withholding tax
Limited to investment companies
Retroactive effect of judgment
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Withholding tax (VII)
Restrictions on free movement of capital
Effect on investment funds established outside
the EEA
Confirmed in CJEU, C-190/12 Emerging
Markets Series of DFA Investment Trust
Company (10 April 2014)
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Fiscal autonomy & EU law (I)
Fiscal autonomy
Fiscal autonomy for the Regions in the area of
personal income taxation
Regions have the power to decide on certain
tax incentives (e.g., tax break for financing
own home)
Non-resident taxation remains a federal
competence
EU law
Requires the grant of equal tax incentives to
non-residents in a situation comparable to
that of a resident
30
Fiscal autonomy & EU law (II)
Federal tax regime with regional nuances
Need to assign non-residents to a region
75% threshold
But O “tax residence” by definition outside Belgium
Criteria
Origin of earned income
If earned income derived from multiple regions:
Level of earned income
Actual working days
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Fiscal autonomy & EU law (III)
Compare to Flemish “jobkorting”
Introduced in 2009: flat-rate tax reduction for
residents of the Flemish Region who work in
the Flemish Region.
Critique by European Commission:
Inconsistent with free movement of workers and
freedom of establishment
Discrimination against non-residents as the tax
benefit was not available to persons living outside
the Flemish Region, even if they earned all or
virtually all of their income there
Abolished in 2011
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