30 October 2017 / article

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

The Belgian federal government has announced a major reform of the corporate income tax. A number of modifications will impact your real estate tax forecast and business plan substantially.

Despite that draft bills and all details of the reform are not available yet, a lot is already known. 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 contemplated decrease of the tax rate:

  2017 2018/2019 2020
Old all-in rate 33.99%    
New all-in rate   29.435% 25%
Old all-in exit tax rate 16.995%    
New all-in exit tax rate   12.6875% 12.5%

Important to note, the exit tax rate decreases quicker than the statutory tax rate, which should encourages conversion and corporate restructuring involving BE-REIT and SREIF.

Composition of the taxable base

The taxable base of a Belgian company, a BE-REIT or a SREIF shall however be impacted as follows.

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. Transitional rules will apply. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

Minimum taxable base

Through a yearly limitation to the use of carried-forward tax deduction and NID, the tax law shall provide for a minimum taxable base, equal to 30% of profits above 1,000,000 EUR. Specific rules are announced for “investment” but no details are known yet. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

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;
  • in case of corporate restructuring implying a BE-REIT or a SREIF since it is not known yet whether this limitation shall also apply in case of tax liquidation of a company.

Here is an example of how this should work:

Accounting result

2,700,000

Notional Interest Deduction

<80,000>

Taxable base after NID

2,620,000

Carried-forward tax losses available

3,000,000

Allowed utilisation (1)
(1,000,000-80,000 NID)

<920,000>

Taxable based after allowed utilisation (1)

1,700,000

Allowed utilisation (2)
((2,700,000-1,000,000)*70%)

<1,190,000>

Taxable base

510,000

Tax losses to carry-forward

890,000

Interest deduction limitation

The tax deductibility of interest shall be limited to 30% of the company’s EBITDA, as adjusted to exclude exempt income. Belgium should apply the de minimis rule of 3,000,000 EUR on a stand-alone basis but no further details are known yet. Expected entry-into-force: 1 January 2020 (for financial years corresponding to calendar years).

Depending on how it will be implemented, this measure may have a particular impact on the BE-REIT and SREIF. Indeed, if the excessive interest is considered a disallowed expense, it will be subject to corporate income tax (at a rate of 25%) while this interest has not decrease the taxable base but the dividend to be distributed (subject to withholding tax).

Accruals for risks and charges
Accruals for risk and charges are tax exempt provided that (i) the charges are precisely specified and probable, (ii) 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, (iii) these accruals are recorded in a separate account at the end of the financial year and (iv) these provisions are detailed in an enclosure to the corporate income tax return. In the framework of the tax reform, only those accruals corresponding to an existing obligation at the end of the financial year shall remain deductible. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

Exempt gains subject to reinvestment
Certain capital gains benefit from a roll-over regime subject to reinvestment in defined assets and within a given period of time. The absence of compliance with the roll-over conditions shall lead to a taxation of the underlying capital gain at the corporate income tax rate applicable at the time the gain has been realised and subject to interest for late payment. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

Composition of the equity

In addition to the notional interest deduction, equity movements may 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.

The Belgian tax reform provides that capital decrease shall also be subject to withholding tax in case the company concerned has distributable profits (even if not incorporated to its share capital). In absence of further details, it might be expected that only the portion of the capital decrease that corresponds, in amount, to distributable reserves, shall be subject to withholding tax, and that the parent company, if it qualifies, shall benefit from the withholding tax exemption and reduction as provided for by tax law. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

Conversion of tax-exempt reserves

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 should be subject to the exit tax. Expected entry-into-force: 1 January 2020 (for financial years corresponding to calendar years).

Holding companies

Holding companies owning shares in Belgian companies or foreign companies shall also benefit from the Belgian tax reform.

Participation exemption for capital gains

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. In addition, the taxation of capital gain at 0.412% (subject to 1-year holding period) shall be abolished. Expected entry-into-force: 1 January 2018 (for financial years corresponding to calendar years).

Tax consolidation

Tax consolidation – meaning also a more straight-forward acquisition structuring – shall finally be implemented in Belgium, but nearly no details of this measure are available yet. Expected entry-into-force: 1 January 2020 (for financial years corresponding to calendar years).

Transfer pricing

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 on against which the administration executes its audit in intragroup financing is the “market interest” shall be replaced by a clear definition. Expected entry-into-force: 1 January 2020 (for financial years corresponding to calendar years).

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