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Belgium proposed tax changes including new CGT on Shares & changes to the Thin Capitalisation regime
From 28 December 2011 the new Belgian government started implementing new tax legislation. The Belgian government believes it is necessary to create additional taxes to balance its budget. In this aspect a capital gains tax on shares will be implemented in the near future, as well as stricter regulation on interest deductions for loans between group companies. Taxand Belgium discusses the proposed measures and how they are likely to affect Belgian companies should the new government elect to implement the changes.
Capital Gains Tax
In the past Belgium had no capital gains tax on shares when certain conditions were met without that a minimal holding period was required, thus in most cases effectively leading to the tax exemption.
In the future, this is likely to significantly change. When shares are sold within one year after they were acquired, the capital gains on shares would be subject to a separate flat tax rate of 25%. Two general regulations will be implemented:
- The new legislation would be applicable for companies who are not part of the financial sector. This would imply that banks, insurance companies, etc would be excluded. While the capital gains will be taxable at the flat rate of 25%, the capital losses will not be deductible.
- For players in the financial markets (banks, etc), shares would be treated as stock. This implies that capital gains on shares will be seen as general profit and will be taxed at the regular income tax rates; however, capital losses will be deductible in this case.
Thin Capitalisation Regulation
This new regulation implies the limitation of the deductibility of interest for a loan granted b group company.
In the past, general regulations existed to create this limitation such as, for example, interest payments to tax havens and a limitation in the deductibility for interest which was not at fair market rates.
In the future, a ratio of debt to equity of 5 to 1 will be applied for financing from group companies. An exception would be granted for companies in the financial sector.
For example if a company with equity of EUR 250.000 grants a loan to a group company of EUR 1.500.000 with an interest of 5% the ratio will be computed as follows:
- EUR 250.000 equity x 5 = EUR 1.250.000
- Interest of 5% = EUR 1.500.000 x 5% = EUR 75.000
- Debt / equity x interest = EUR 1.250.000 / EUR 1.500.000 x EUR 75.000 = EUR 62.500 maximum interest deduction
- EUR 75.000 paid interest - EUR 62.500 maximum deduction = EUR 12.500 non deductible interest
The amount of non deductible interest will be added to the taxable base of that specific book year.
Besides reducing the intra group loans, a solution might be to increase the equity of the Belgian lending company, as such making use of the notional interest deduction (the rates of the NID have also been reduced by the government to 3% or 3.5% for SMEs).
It is worth noting that the law has not yet been approved in parliament and published, although it will only be a matter of time before it will appear in the Belgian Official State Gazette. Both regulations will most likely enter into force as of 1 January 2012.
Both decisions made by the new Belgian government could present a significant change in tax planning of Belgian companies. Belgian investment companies will in some cases need to carefully analyse whether a sale of shares on short notice is beneficial. Also, it seems clear that companies will have to verify whether intercompany loans are still efficient. Due to the thin capitalisation regulation, the deductibility of the interest paid will be reduced. Belgian companies should think twice before making any intercompany loans exceeding the 5 to 1 ratio.
It must be noted that the proposed measures for the moment still only concern a draft law and are not implemented yet.
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