On 26 July, the Belgian government released plans to significantly reform the Belgian corporate tax regime. While all the details are yet to be released, we can expect some profound changes.
Current tax landscape
Belgium has one of the highest tax pressures in Europe. With a corporate tax rate ranging from 24.25% to 34.5% for SMEs, and 33% for large companies (both rates increased by a crisis surtax of 3%), Belgium has been trailing neighbouring countries’ recent efforts to decrease the tax pressure on companies and attract investments.
While some countries have long chosen the route of a very low tax rate (such as Ireland, with 12.5%), many others have seen – or are in the process of – decreasing corporate tax burden. The Netherlands and the UK are examples of the latter.
The announced plans show that Belgium is now following suit to remain an attractive investment location.
The corporate tax reform
In the middle of summer the Belgian Government released plans for “ambitious reforms to boost employment, purchasing power and social cohesion”; the next steps of the so-called Tax-Shift which began a few years back.
Said Tax-Shift ‘s objective was to support low and middle income people by reducing tax and social security charges on labour. Those reductions would be financed by increasing taxes on capital. Shifting, thus, the tax burden from taxation on work, to taxation on capital.
The Government’s plan released this summer will significantly reform the Belgian corporate tax landscape but as the measures are meant to be budget neutral, the plan also sets out a series of measures to compensate the shortfall of tax revenue.
We have highlighted below a few key measures that could be of interest to start-up companies.
Reduction of the corporate tax rate
The measure that attracted the most attention is the gradual decrease of the corporate tax rate.
The tax rate for large companies currently sits at 33%, increased by a 3% crisis surtax, resulting in a total statutory tax rate of 33.99%. This rate is planned to decrease as follows:
|
Current |
2018 |
2020 |
|
|
Statutory tax rate
|
33% |
29% |
25% |
|
Surtax
|
3% |
2% |
0% |
|
Total statutory tax rate
|
33.99% |
29.58% |
25% |
The current tax rate for Small and Midsized enterprises (SMEs), ie. companies with taxable revenues up to EUR 322,500 that meet a series of criteria is progressive:
|
Taxable income |
Current |
|
EUR 0 to EUR 25,000 |
24.25% |
|
EUR 25,000 to EUR 90,000 |
31 % |
|
EUR 90,000 to EUR 322,500 |
34.5% |
These tax rates are also increased by the crisis surtax of 3%.
SMEs will see their tax rate decrease to 20% for income up to EUR 100,000 as from 2018. The crisis surtax is also expected to decrease, then disappear, by 2020.
It is important to note that one of the conditions to benefit from the SME tax rate will be altered, namely the minimal salary to be paid to one director. The minimal salary to be paid is currently EUR 36,000 (or at least equal to the taxable profit where it is of EUR 36,000 or less). This amount will increase to EUR 45,000 in 2018. For start-up companies that are less than 4 years old this minimum salary requirement will, however, not apply.
Broadened R&D exemption and investment deduction
The new innovation regime that was introduced earlier this year already allows for a deduction from the taxable basis of 85% of the qualifying innovation income. In addition, the scope of the labour withholding tax exemption will also be further gradually extended over the years 2018 to 2020 and include certain bachelor degrees. Certain companies can benefit from an exemption to pay the tax authorities 80% of the wage taxes on researchers salaries, but until now, these researches were required to hold at least a Master degree (or equivalent) in certain scientific domains. The Government is now looking to extend this incentive and include certain Bachelor degrees, further indicating its desire to attract and encourage R&D investments in Belgium.
The (ordinary) investment deduction which is the tax deduction on top of the regular depreciation of the qualifying assets will temporarily be increased from 8% to 20% until 2020.
Financing the reform
One of the goals of the Government was that this corporate tax reform would be budget neutral. As a result, a series of compensating measures will also be introduced in order to finance the above measures.
- As from 2018 onwards, the notional interest deduction – allowing companies to take a deduction on the amount of their (adjusted) equity – will only apply on the incremental adjusted equity, in excess of the average equity of the preceding five years. Increased rate for SME’s remains applicable.
- Interest deduction will be limited to 30% of the company’s earnings before interest, tax, depreciation and amortisation (EBITDA). This new interest deduction limitation rule should enter into force as from 2019, but only for interest expenses above EUR 3,000,000 (the first EUR 3,000,000 remains fully tax-deductible, subject to other anti-abuse measures already applicable). This limitation is not applicable to standalone entities that are not part of a group of companies.
- The use of certain tax deductions will be limited as from 2018. Carried forward tax losses, innovation deduction, participation exemption and notional interest deduction will only be offsetable against taxable profit up to EUR 1,000,000 and 70% of taxable profit above that amount. As a result, companies making more than EUR 1,000,000 of taxable profit will have a minimal taxable basis (of 30% of the taxable income in excess of EUR 1,000,000), regardless of the amount of deductions or losses carried forward. For start-ups (the first four accounting periods), this limitation will not apply.
- From 2018, provisions are only deductible insofar they are recorded for costs which derive from commitments (legal, regulatory or contractual commitments) existing at balance date.
- To avoid advance recording of provisions (seen the reduction in the corporate tax rate), the reversal of provisions will be taxed at the same rate at which they were recorded.
- Expenses paid in advance – the deduction of costs in the current year where these belong in reality, and based on the accounting matching principle, to the following year – will be restricted as from 2018. Indeed, the matching principle will be introduced in tax law, and expenses relating to income of a following tax year will only be deductible in that following tax year.
- The declining balance depreciation method is repealed. The “pro-rata temporis” depreciation – starting the depreciation in the year where the investment is made – is to apply to all companies. The reform of the depreciation rules is to apply as from 2020.
- In order to further incentivise companies to make prepayments on the amount of taxes due, the rate of the increase for lack or insufficient prepayment will be higher as from 2018. For start-ups – companies in their first three accounting periods – this increase will not apply.
- Penalty for non-filing one’s corporate income tax return will increase as from 2018.
- To incentivise companies to improve their tax compliance and file their tax returns correctly, if during a tax audit the tax authorities uncover additional taxable profit, the company will not be able to claim any tax deduction that would have generally been available to it (with the sole exception of participation exemption – the 95% deduction from the taxable basis for qualifying dividends). As a result, any rectification made during a tax audit could lead to cash tax payment, even if the company is loss-making.
Closing notes
The corporate tax reform is a significant step towards modernising the Belgian corporate tax regime, and will, as we expect, reduce the overall tax burden of Belgian entrepreneurs by enacting series of measures that are favourable to small innovative companies.
In addition to modifications to the tax regime, the Government also proposes to enact a series of measures to further facilitate growth of small companies, allowing more work flexibility in certain circumstances (weekend work, interim work, more progressive trial period for new employees, …), but also measures to further attract talent at lower cost (the above wage withholding tax exemption, but also new rules allowing further participation of employees in the profit of their company).
The Government also envisages new measure to make it easier to invest in start-ups (such as the planned simplification of the private PRICAFs investment regimes).
Finally, it is worthwhile to draw attention to the Government’s intention to make investing in so-called growth companies more tax advantageous. This will be done via a relaxation of the rules applicable to investment funds and by allowing individuals investing in said growth companies to benefit from the tax shelter deduction for start-up companies. Indeed, this deduction – of 30% or 45% of the amount of the investment – will also become available for investments in growth companies following the same rules (equity increase, contribution in cash, issuance of new shares, holding period of 4 years, etc.).
While the proof is in the pudding – and final legal texts are yet to be seen – we can only applaud these steps that encourage investment in Belgium and reduce the overall tax burden on SMEs.