In July 2013, the federal government introduced yet another element to the corporate income tax regime for large companies in Belgium: the Fairness Tax. Under pressure from the European Union to meet their deficit targets, the tax was devised in late night negotiations to trim billions off the country’s budget. It is estimated that the new tax will raise €140 million in 2013 and €165 million in 2014 and has an appealing ring of justice to it – for some. “The fairness tax is a matter of equality,” said Prime Minister, Elio Di Rupo, upon revealing the news. “We ask that companies which pay out dividends, but don’t pay taxes, pay a minimum contribution toward the good functioning of our society.” Sound fair? No, as the new tax is independent of, and comes, where applicable, on top of other taxes, in a country which already has one of the highest nominal corporate tax rates in Europe, the Fairness Tax does not live up to its name.
From January 1, 2014, companies that meet the following conditions will be liable for an additional tax equal to 5.15% of the difference between the dividend paid out and the pre-tax profits.
- The company must not be an SME as defined by Belgian law
- The company must pay more in dividends than their reported corporate tax base
- The company reduces its corporate tax base through the application of the Notional Interest Deduction (NID) regime or tax losses carried forward.
The use of other tax regimes, such as dividend participation exemption, patent income deductions, or investment deductions, do not trigger the application of the Fairness Tax.
In the months following the Fairness Tax’s introduction into law, companies have been desperately trying to figure out the additional costs the new levy will incur. Unfortunately, due to the lack of legal clarity, this is no easy task. Owing to the numerous ambiguities in the Fairness Tax legislation, the actual impact of the new levy requires a case-by-case analysis.
Theoretically, the taxable base for the Fairness Tax consists of the ‘untaxed’ part of distributed profits multiplied by a proportionality factor, which can be summarized in the formula below:
‘untaxed’ part of the distributed profits (excluding previously taxed reserves existing per 2013) x NID + loss carry-forwards applied ‘gross taxable basis’ x 5.15% = the Fairness Tax
Although the Minister of Finance, Koen Geens, has stated that the application of the Fairness Tax is rather straightforward, this does not appear to be the case in practice. Many questions have been raised surrounding existing reserves and retained earnings for the financial year 2013. This is hardly surprising as the French and Dutch versions of the legal texts vary slightly, leaving it open to different interpretations. There is also uncertainty as to whether the wording used to define the proportionality factor may lead to exempt capital gains on shares also becoming subject to the Fairness Tax. As for most companies the new levy comes into effect with respect to distributed profits of 2013 for reporting year 2014, this is a matter that requires urgent clarification. It is expected that questions relating to the transitory measures will be explained in more detail by an administrative circular.
Belgian Permanent Establishments of Foreign Companies
Questions also arise on the application of the Fairness Tax to Belgian Permanent Establishments (PE) of foreign companies. In order to determine the equivalent amount of ‘dividends distributed’ for a Belgian PE, the Fairness Tax requires that the overall accounting result of the non-resident company be compared to the accounting result of the Belgian PE. As it has not been clarified whether this should be assessed under Belgian Generally Accepted Accounting Principles (GAAP), which in any case may prove impracticable, Belgian PEs are left in a considerable amount of uncertainty. Additionally, the Fairness Tax is applicable to Belgian PEs which do not actually transfer earnings to their head office beyond Belgium’s borders. It appears that, even if the earnings of a Belgian PE are re-invested in its Belgian operations as retained earnings, a dividend distribution by the non-resident company, regardless of the source of the distributed profits, could prompt the application of the Fairness Tax in Belgium.
The uncertainty surrounding permanent establishments, demonstrates that the Fairness Tax has some unexpected and ill-thought out consequences. As Belgium is a popular location for permanent establishments of foreign companies, the Fairness Tax could prove detrimental for Belgium’s overall attractiveness and cause companies to relocate their activities.
Is the Fairness Tax Legally Viable?
Legally speaking, the new tax is on unstable footing and may in fact be counter to several parts of EU law, as well as treaty law and Belgian constitutional law.
EU Parent-Subsidiary Directive
Based on the EU Parent-Subsidiary Directive, dividends distributed by a Belgian subsidiary to its EU parent should be exempt from dividend withholding tax. Since the declaration of dividends is one of the facts triggering the Fairness Tax, one may wonder whether it should not be qualified as a form of source/withholding tax on dividends. If so it would be a violation of article 5 of the EU Parent-Subsidiary Directive.
The Belgian Government, however, is confident that the Fairness Tax is not in breach of EU law, due to the European Court of Justice’s verdict in the Burda case (C-284/06) in 2008.
There is, however, an additional potential problem. The formula of the Fairness Tax may trigger its application to a portion of dividends received. In certain situations this portion may be higher than 5% of the dividends concerned. Where such dividends qualify for Belgium’s 95% dividend exemption in accordance with the EU Parent-Subsidiary Directive, this may constitute a violation of article 4 of the directive which prohibits Belgium to levy (corporate) tax on more than 5% of qualifying dividends.
EU Freedom of Establishment
Treaties of the European Union state that taxpayers have the right of freedom of establishment, and consequently tax rules should not be:
- an impediment for Belgian companies to work through foreign establishments
- an incentive for Belgian companies to centralize all activities in Belgium
If the financial impact of the Fairness Tax is larger when operating through a foreign permanent establishment, the EU’s right to freedom of establishment will be violated.
The distinction between a Belgian subsidiary, which can avoid the Fairness Tax by abstaining from distributing dividends out of Belgian profits, and a Belgian branch, which may be hit by the tax merely as a result of dividend distributions made by its foreign head office out of non-Belgian profits, may also be questionable.
Based on Articles 7 and 23 of the OECD Model Treaty and most double tax treaties, Belgium must exempt the profit attributable to a foreign permanent establishment if such profit is depending on the treaty:
- taxable in the other country;
- taxed in the other country; or
- effectively taxed in the other country.
If the Fairness Tax includes part of the income of foreign permanent establishments, the Fairness Tax may be in violation of these articles.
Belgian Constitutional Law
Following a review by the Council of State, it appears that the Fairness Tax may also be in violation of Belgian constitutional law. Due to the fact that it only applies to large companies, it does not appear to be in line with the principle of tax equality set out in the Belgian Constitution. Differential treatment of taxpayers is only justified if it is based on an objective criterion and can be reasonably justified.
The justification provided by the government is as follows: “The wish of the government is not to increase the tax burden on small companies while it seems perfectly justified to install this specific taxation for other companies.” The Council of State is of the opinion that “other companies” is too vague and that the action cannot be reasonably justified.
Ultimately, the potential violations are likely to lead to legal action against the new tax, which will result in further uncertainty for businesses in Belgium for months or even years to come.
“The Belgian Government has a duty to remedy the persisting uncertainties without delay”
-Thierry Denayer, Chair of AmCham Belgium's Fairness Tax Taskforce and Partner at Stibbe
Due to the fact that the new tax is aimed solely at large companies, one can assume that it was put in place to put an end to foreign multinationals taking advantage of Belgium’s fiscal favorite: the NID. This follows numerous media exposés which questioned the amount of tax paid by multinationals. Unjustified hostility towards large multinationals has heightened since the financial crisis, as people expect large corporations and banking institutions to help foot the bill. Critics seem to forget the significant contribution international companies make to Belgium’s economy and prosperity.
The Fairness Tax also makes the inherent assumption that a company distributing dividends is prospering and can therefore afford the tax. Yet, it is possible that companies which choose to distribute dividends are doing so to retain shareholders through difficult economic times. The Fairness Tax, therefore, does not discriminate between companies that are prospering and companies that are struggling.
According to Thierry Denayer, Chair of AmCham Belgium’s Fairness Tax Task Force and Partner at Stibbe, “the Fairness Tax is yet another example of a suddenly-introduced, ill-designed, and uncarefully-drafted new tax on large companies. It enters into effect immediately while leaving numerous issues unresolved. The Belgian Government has a duty to remedy the persisting uncertainties without delay.”
AmCham Belgium has long advocated to maintain the NID regime, in its current form, as it counteracts the country’s high nominal corporate tax rate and is one of the few key differentiators for Belgium. The very idea of maintaining the high nominal corporate tax rate, yet introducing a beneficial regime to maintain attractiveness, only to eventually introduce an additional minimum tax sends mixed signals to companies in Belgium. The constant uncertainty of Belgium’s regulatory environment, combined with a hostile attitude towards multinationals, has already prompted some companies to move their business beyond Belgium’s borders.
By calling the new minimum charge the Fairness Tax, the government set the stage for public opinion to quickly fall in line behind it. However, AmCham Belgium fears that the Fairness Tax may well be the final straw for those companies which have remained loyal to Belgium. As a result, Belgium will lose out on value-added jobs, wage withholding tax and social security contributions. Belgium must create a stable and predictable fiscal and regulatory environment in order to remain an attractive location for business.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.