30 October 2017 / article

Belgian tax reform: what do I need to know as a real estate investor?

The Belgian tax reform impacts the tax rules on property. A number of modifications will impact your real estate tax forecast and business plan substantially. These are the main changes to consider for you as a real estate investor.

Corporate income tax rate

For Belgian companies, BE-REIT  and SREIF, the main measure to focus on is the decrease of the tax rate and the crisis contribution:

 Tax year

2018

(taxable periods starting on or after 1/1/2017)

2019-2020
(taxable periods starting on or after 1/1/2018)
2021
(taxable periods starting on or after 1/1/2020)
Old all-in rate 33.99%    
New all-in rate   29.58% 25%
Old all-in exit tax rate 16.995%    
New all-in exit tax rate   12.75% 15%

Important to note, the exit tax rate is lower than the half of the statutory tax rate for the tax years 2019 and 2020, but shall afterwards increase to 15% (instead of 12.50%) as from the tax year 2021, which should encourage conversion and corporate restructuring involving BE-REIT and SREIF in the coming two years. 

Composition of the taxable base

Compensatory measures will however apply, impacting the taxable base of a Belgian company. 

Notional interest deduction

NID will no longer apply to the total equity but only to the increase of equity measured over a rolling 5-year period as from the tax year 2019 (taxable periods starting on or after 1/1/2018). The equity base to calculate the NID shall be equal to 1/5th of the positive difference between (i) the corrected equity at the end of the taxable period and (ii) the corrected equity at the end of 5th preceding taxable period. Let’s take a few examples.

      • Existing company with increase of equity
Tax year Equity for NID purposes
2014 100
2015 105
2016 110
2017 115
2018 120
2019 125

- Equity for NID purposes at the end of tax year 2019 = 125
- Equity for NID purposes at the end of the 5th preceding tax year = 100
- Positive difference = 25
- NID base = 5

  • Existing company with decrease of equity, which shall be the case for a large majority of real estate companies that upstream excess cash through capital decreases
Tax year Equity for NID purposes
2014 100
2015 95
2016 90
2017 85
2018 80
2019 75

- Equity for NID purposes at the end of tax year 2019 = 75
- Equity for NID purposes at the end of the 5th preceding tax year = 100
- Positive difference = 0
- NID base = 0

  • Newly incorporated companies
Tax year Equity for NID purposes
2014 0
2015 0
2016 0
2017 0
2018 0
2019 100

- Equity for NID purposes at the end of tax year 2019 = 100
- Equity for NID purposes at the end of the 5th preceding tax year = 0
- Positive difference = 100
- NID base = 20

Minimum taxable base

The principle of a minimum taxable base will be introduced by limiting the yearly use of certain tax deductions.

  • Tax deductions not subject to limitations (other than enough taxable income): authorised gifts, dividend received deduction of the year, innovation deduction and investment deduction (first deduction)
  • Tax deductions subject to limitations: notional interest deduction, carried-forward dividend received deduction, carried-forward innovation deduction, carried-forward tax losses, carried-forward notional interest deduction (second deduction)
    o No limitation up to 1,000,000 EUR
    o Above 1,000,000 EUR, the applicable deduction is limited to 70% of the remaining taxable profit after the first deduction

This minimum taxable base shall apply as from tax year 2019 (taxable periods starting on or after 1/1/2018) and shall be further adjusted, with respect to the second deduction, with the introduction of a form of tax consolidation as from tax year 2021 (taxable periods starting on or after 1/1/2020). The unused tax deductions (because of this limitation) shall be carried forward.

This limitation shall have particular impact:

  • for property companies that have built-up carried-forward tax losses because of depreciation taken on the asset (and other deductible costs), especially in a period of (high) vacancy;
  • in the commercial negotiations with respect to a discount for tax latency on the share price;
  • in case of corporate restructuring implying a BE-REIT or a SREIF since this limitation shall also apply in case of tax liquidation of a company.

Below an example on how this should work for a mixed holding, owning real estate and qualifying participation, having 5,000,000 EUR carried-forward tax losses:

Accounting result

5,000,000

Dividend Received Deduction (participation exemption)

<1,000,000>

Taxable base after first deduction

4,000,000

Maximum allowed utilisation

((4,000,000-1,000,000)*70%)+1,000,000

3,100,000

Notional Interest Deduction

<80,000>

Losses carried forward

3,020,000

Taxable base after second deduction

900,000

Tax losses to carry-forward

(5,000,000-3,020,000)

1,980,000

Interest deduction limitation

As from tax year 2021 (taxable periods starting on or after 1/1/2020), the tax deductibility of interest shall be limited to 30% of the company’s EBITDA, as adjusted to exclude exempt income. This measure may have a particular impact on the BE-REIT. Indeed, the excessive interest is considered a disallowed expense and will be subject to corporate income tax (at a rate of 25%) while this interest has not decreased the taxable base but the dividend to be distributed (subject to withholding tax).

This limitation is further detailed in our article on the Anti Tax Avoidance Directive.

Matching principle

As from tax year 2019 (taxable period starting on or after 1/1/2018), the tax deductibility of professional expenses shall follow the accounting matching principle, meaning that the deductibility costs paid in a given tax year but related to income or operations of following tax years will have to be spread over all tax years concerned.

Transfer pricing rule for intragroup interest

Transfer pricing is a source of concern – and reporting – for all groups, and the Belgian TP cell is quite active in auditing intragroup (financing) transactions, incl. in the real estate sector. The current concept against which the administration performs an audit in intragroup financing is the “market interest”.

For interest related to a period starting after 31 December 2019, the tax reform provides for the following limitations:

  • for not mortgage-backed loan without fixed maturity date (in other words, a current account outside of an organised cash-pooling as defined by the tax law): the maximum interest rate shall be equal to the MIF interest rate applied to loan granted to non-financial institutions, of a principal amount of less than 1,000,000 EUR and with a maturity of less than 1 year, increased by 2.5%; the reference rate for a given year shall be the rate of the month November of the preceding year (i.e. for the year 2020, the reference rate shall be the rate of November 2019) as published by the National Bank of Belgium (for example, the rate of the month September 2017 is 1.67%);
  • for other loan: the market interest taking into account the specificities of the transaction, especially the financial situation of the debtor and the maturity of the loan for assessing the risk of the transaction.

Accruals for risks and charges

Accruals for risk and charges are tax exempt subject to a series of conditions, one of them being that the charges that these accruals are covering are deductible as professional expenses for the year concerned; this item includes the charges that correspond to heavy repairs which are performed periodically during regular periods not exceeding 10 years.

As from tax year 2019 (taxable periods starting on or after 1/1/2018), only those accruals corresponding to either a contractual obligation (agreed upon during the taxable period or a preceding period) or a legal or regulatory obligation (other than deriving from accounting law) shall remain deductible. The parliamentary works especially specify that the purpose of this measure is to deny the possibility to exempt future provisions for heavy repairs.

Exempt gains subject to reinvestment and other tax-exempt provisions

Certain capital gains benefit from a roll-over regime subject to reinvestment in defined assets and within a given period of time.

As from tax year 2019 (taxable periods starting on or after 1/1/2018), the absence of compliance with the roll-over conditions, or with the other conditions applicable to exempt such provisions, shall lead to a taxation of the underlying capital gain, or the related provision, at the corporate income tax rate applicable at the time the gain has been realised and subject to interest for late payment. In other words, the taxpayer concerned shall not benefit from the decrease of the corporate income tax rate.

Equity movements

In addition to the notional interest deduction, equity movements shall in the future have a tax impact.

Capital decrease

The up-stream of proceeds and cash through capital decrease is frequent in the real estate sector, most of the time because of absence of distributable profits due to depreciation taken on the asset. Capital decreases may also be performed even if the company has distributable profits.

Capital decreases decided as from 1 January 2018 shall be re-characterised into dividend distributions pro rata certain taxed and untaxed reserves of the company. Untaxed and unavailable reserves not incorporated to the share capital (e.g. revaluation surplus), the legal reserve and the negative taxed reserve recorded further to a corporate restructuring are not considered by this new measure. The same rule applies to reimbursement of share premium and of profit participating shares.

For tax purposes, the capital decrease is deemed to be allocated pro rata between the share paid-up capital and the reserves, and within the reserves, exclusively and in the following order:

  • on the taxed reserves incorporated in the share capital; in such a case the dividend is subject to withholding tax (incl. the reductions and exemptions provided by law or tax treaty) and may benefit from the participation exemption in the hands of the recipient;
  • on the taxed reserves not incorporated in the share capital; in such a capital the tax treatment is the same as above; and finally
  • on the untaxed reserves incorporated in the share capital; in such a case the amount qualified as dividend shall first be subject to corporate income tax in the hands of the company and then subject to the tax treatment applicable to taxed reserves.

The paid-up capital of the company shall be deemed to decrease only to the extent of the amount of the capital decrease imputed on this paid-on capital.

Let’s take the example of a company deciding to reduce its capital for an amount of 500.

Share capital

 

2,000

including profit brought forward incorporated in share capital

 

1,000

including an unavailable reserve incorporated in share capital

 

500

Legal reserve (unavailable)

 

150

Revaluation surplus

 

100

Profit brought forward

 

200

Pro rata or percentage

 

500/2,200

Numerator

Share paid-up capital increased by share premium and profit participating shares assimilated to paid-up capital

500

(2,000-1,000-500)

Denominator

Total of the taxed reserves (excluding the legal reserve) and the untaxed reserves incorporated in the share capital, and the numerator

2,200

(1,000+200+500+500)

Capital decrease

 

500

From share paid-up capital

500 * (500/2,200)

113.64

From reserves

500 – 113.64

= 386.36

 

From taxed reserves incorporated in the share capital

386.36

Conversion of tax-exempt reserves

As from tax year 2021 (taxable periods starting on or after 1/1/2020), the possibility shall be offered to companies to convert their tax-exempt reserves (e.g. reserves corresponding to revaluation surpluses) existing prior to 1 January 2017 into (available) taxed reserves. Such conversion shall be subject to 15% corporate income tax.

Belgium as investment platform

Holding companies owning shares in Belgian or foreign companies shall also benefit from the tax reform as from tax year 2019 (taxable periods starting on or after 1/1/2018).

Participation exemption for capital gains

The taxation of capital gain at 0.412% (subject to 1-year holding period) shall be abolished. The conditions to benefit from an exemption on realised capital gains shall be aligned on those applicable to dividends, i.e. a minimum participation of 10% in the subsidiary’s share capital or an investment value of at least 2,500,000 EUR. Except for ancillary investments, this measure should not have an important impact for the sector.

Participation exemption for dividends

The participation exemption for dividends received, which is now of 95%, shall be increased to 100%.

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