Netherlands: The Belgian Fairness Tax - To Obey Or Not To Obey?

The Law of 30 July 2013 has introduced the so-called "fairness tax". The fairness tax is a separate assessment aiming at taxing distributed profits (dividends) that were not effectively subject to the normal Belgian corporate tax regime due to the notional interest deduction regime and/or the carried forward tax losses deduction. The fairness tax applies as from assessment year 2014 (financial years ending between 31 December 2013 and 30 December 2014, both dates inclusive) onwards.

1.   Who is subject to the tax?

The fairness tax applies to both Belgian companies and Belgian permanent establishments of foreign companies that do not qualify as SMEs within the meaning of Article 15 of the Belgian Companies Code. However, SMEs may still come within the ambit of the fairness tax if they form part of a group of affiliated companies as, in that case, the applicable thresholds (number of employees, annual turnover, total balance sheet) must be assessed on a consolidated basis.

The fairness tax applies to "dividends", i.e. distributions of profit. Liquidation surpluses, while deemed to be dividends for income tax purposes, are not aimed at. Despite declarations by the Minister of Finance to the contrary, the same should hold true for share redemption surpluses.

2.   What is the tax base?

The determination of the tax base for purposes of the fairness tax involves a three-step approach.

The first step requires a computation of the difference between, on the one hand, the gross dividend distributed during the taxable period and, on the other hand, the taxable income for that period that has been effectively subject to the normal corporate income tax regime.

If the difference is positive, then in a second step, the tax base resulting from the first step is reduced by that part of the distributed dividend that stems from previously taxed reserves built up at the latest during assessment year 2014. This elimination is intended to avoid that future distributions of "old" (retained) profits would become subject to the fairness tax. For purposes of the elimination, a "last in first out" method is applied, implying that the most recent built up taxed reserves are deemed to be distributed first.

In a third step, the (positive) outcome of steps 1 and 2 is multiplied by a fraction where (i) the numerator consists of the notional interest and/or carried forward losses deduction(s) effectively taken in the relevant assessment year, and (ii) the denominator is the taxable result excluding tax exempt reductions in value, provisions and capital gains of that same assessment year.

3.   Example

Assume a Belgian company in a given taxable period with the following features:

Tax base effectively subject to ordinary corporate income tax: 450 (1600 - 300 - 800 - 50).

Computation of tax base for fairness tax:

Step 1:  distributed dividends (600) less tax base effectively subject to corporate income tax (450): 150

Step 2:  elimination of (qualifying) previously taxed reserves (50) from outcome of step 1 (150): 100

Step 3:  numerator (notional interest deduction and carried forward losses used) (850) / denominator (taxable result) (1600): 53.12%

Hence, tax base for fairness tax: outcome of step 2 (100) multiplied by 53.12% = 53.12.
Fairness tax due: outcome of step 3 (53.12) multiplied by 5% = 2.66 (plus 3% crisis surcharge: 2.74).

4.   Particular point of attention for holding companies: the fairness tax and capital gains

While the fairness tax has been presented as a measure aimed at taxing companies that erode their tax base by way of the notional interest deduction and/or the use of carried forward losses, the fairness tax can also apply to (exempt) capital gains on shares distributed as dividends (which, reportedly, was not intended by the tax legislature). The reason is the exclusion of capital gains from the denominator of the fraction in step 3 potentially affecting holding companies that, in addition to (exempt) capital gains on shares, also make an operational profit that is fully or partly offset by the notional interest deduction and/or the use of carried forward losses. This is illustrated by the following example:

Assume a Belgian (holding) company in a given taxable period with the following features:

Tax base effectively subject to corporate income tax: taxable result (200) - notional interest deduction (200) = nil.

Computation of tax base for fairness tax:

Step 1:  distributed dividends (1,700) less tax base effectively subject to corporate income tax (nil) = 1,700

Step 2:  n/a

Step 3:  numerator (notional interest deduction) (200)/denominator (taxable result) (200): 100%

Hence, tax base for fairness tax: outcome of step 1 (1,700) multiplied by 100% = 1,700.
Fairness tax due: outcome of step 3 (1,700) multiplied by 5% = 85 (plus 3% crisis surcharge: 87.55).

5.   The Belgian Fairness Tax - To Obey or Not To Obey?

In its advice on the fairness tax, the Council of State has queried why SMEs are, in principle, excluded from the scope of application of the fairness tax. While the Council of State has in the past accepted a different treatment between SMEs and non-SMEs provided that there is a relevant reason and purpose for such different treatment, it would seem to suggest that the difference in treatment as regards the fairness tax is not sufficiently motivated. It follows that the fairness tax could well be open to challenge under the constitutional principle of equality in tax matters. In addition, to the extent that the fairness tax could be assimilated with a withholding tax (which according to the Government it is not), it is questionable whether it is compatible with the Parent/Subsidiary Directive. Finally, there are doubts as to whether the fairness tax is reconcilable with Belgium's tax treaty obligations. In sum, it is more likely than not that the fairness tax will be challenged before the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.