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Following recent developments, we are pleased to provide more information on the Belgian tax shift formalised on 24 July. The top marginal tax rate in the individual income tax bracket reaches 50%, while the basic corporate tax rate amounts to 33.99%. Belgium also charges a social security rate of 13.07% for employees and approximately 35% for employers. In addition, there are municipal taxes of up to 9% to be increased by local surcharges. As a consequence the overall tax burden on labour reaches 53.5%. Therefore, the 2014-2019 Federal Coalition Agreement included a shift from tax on labour to a taxation of specific products and transactions. The Belgian government wants to improve the competitiveness of Belgian businesses by reducing the wage handicap compared to neighbouring countries.

Tackling the wage handicap

First and foremost, the aim is to raise the net income of the employees – lower- and middle-income families should benefit from a €100 monthly surplus – and to motivate employers to invest and hire new recruits. In order to tackle the existing wage handicap, the centre-right government decided to decrease the employers’ social security rate from 35% to 25% and to reduce the surcharges on both night and shift work. Due to the fact that Prime Minister Charles Michel’s government has now pushed through a €7.2 billion tax shift, it also announced the new tax measures to offset this decrease in labour costs.

Belgium introduces a health tax on unhealthy food or drinks such as soft drinks with high sugar levels. Excise duties on diesel, alcohol and tobacco will go up. In 2018, the increase for diesel will reach €0.106 per litre. The VAT on electricity will be increased from 6% (this rate was introduced by the previous Di Rupo government) to 21% which actually implies a rise in housing and living expenses of approximately €100 for the average household. The government announced further efficiency measures worth €700 million without releasing any details, in order to keep the deficit below 2.5% of GDP. Public spending on unemployment benefits and early retirement will be further cut and the mutual health fund will also have to make a rather minor effort of €100 million.

Increase of the general withholding tax rate and introduction of a speculation tax

Since 1 January 2013 a general rate of 25% applies to withholding tax on dividends, interests, liquidation surpluses, benefits paid during the first eight years under branch 21 life assurance contracts with a guaranteed return (but without a 130% death cover) etc. This tax rate will now be further increased from 25% to 27%. In case of branch 23 unit-linked life assurance contracts without any guaranteed return, on the other hand, once the 2% tax has been levied on payment of the premium (normally at the time of subscribing the contract or on a top-up), the policyholder/beneficiary enjoys a lifelong withholding tax exemption on the return realised, regardless of the moment of withdrawal, surrender or benefits received. Due to the further increase to 27%, this 2% premium tax is now more than ever before compensated by the lifelong exemption from the withholding tax. Indeed, the government did not consider an increase of the 2% premium tax; neither did it consider subjecting branch 23 proceeds to the 27% withholding tax.

Furthermore, Belgium will introduce a so-called speculation tax and this before the end of 2015. This tax on short-term share sales targets investors selling shares on the stock market and implies that the transferor of shares will be taxed on the capital gains resulting from the transfer, if any, but only if the holding period of the shares is less than 6 months. The realised capital gains will be subject to the increased withholding tax of 27%, but losses, on the other hand, will be deductible.

Entry into force of the look-through taxation of private wealth structures in Belgium

SchatztruheThe government has been working for several months on the introduction of a tax transparent taxation of private wealth structures in Belgium and this so-called “Cayman tax” will now enter into force. Taxation will be achieved by considering the foreign private wealth structures as tax transparent, so that the income will be taxable directly in the hands of the resident individual who is the founder or third party beneficiary of the construction. This tax transparency regime will allow the Belgian fiscal administration to levy tax in those cases where the interposition of a legal construction frustrates a normal taxation.

The following 2 categories of Belgian individual resident tax payers will fall within the scope:
  1. those that are founders, settlors or beneficiaries of trusts & fiduciary structures, wherever located, and
  2. those who hold the legal rights to the shares or those that are the beneficiary of the economic rights to the capital and goods of any of the targeted foreign legal entities [i.e. foundations and companies that are included on a limitative (irrefutable) E.E.A.-list and a non-limitative (refutable) non-E.E.A.-list] which are not subject to income tax under the provisions of the jurisdiction of residence, or subject to a significantly more favourable income tax regime on their capital and movable goods in the jurisdiction of residence, than in Belgium.

Persons liable to Belgian individual income tax or entities liable to Belgian tax on legal entities will be deemed to be the owners of the goods, the rights and the capital owned by the private wealth structure of which they are “founders”, and they are deemed to receive the income derived from those goods, rights and capital directly. The tax transparency measures do not apply for foreign legal entities targeted under the second category if those structures are subjected to an actual 15% income tax rate. Furthermore, as long as the private wealth structure invests in assets with tax deferral in Belgium, the tax transparency won’t result in any taxation for the founder or third party beneficiary. Perfect examples of these are Branch 23 unit-linked life assurance contracts without any guaranteed return.

The Belgian government introduces a “final” fiscal amnesty

The Belgian legislator consecutively introduced a reporting duty in the individual income tax return of foreign bank accounts in 1997, of foreign life assurance contracts in 2012 and of foreign legal constructions in 2013. In the meantime the Common Reporting Standard was issued by the Organisation for Economic Co-operation and Development (OECD) in July 2014, i.e. a technical standard for the automatic exchange of (financial) information, including non-domestic bank accounts and life assurance contracts. The Belgian government has been taking into account this international evolution in cross-border information exchange and assumes that those hiding assets abroad will run out of options to do so. As a result, those concealing undeclared foreign assets will be finally obliged to return their assets to Belgium or to report them to the Belgian Tax Authorities. The federal coalition sees its own opportunities in the new world order of automatic exchange of information to finance its budget deficit. The intention is to set up a new tax amnesty in a multi-year framework which should generate €250 million annually as from 2017. The applicable fines still have to be determined.

Meanwhile, it will remain possible to avoid persecution by the Public Prosecutor by submitting your dossier to the Belgian Special Taxation Inspectorate (ISI/BBI). The fiscal authorities apply a limitation period of 7 years with regard to undeclared assets and/or revenues, meaning that they go back until the 31st of December 2007. The reported capital and revenues will be taxed at 33% and at the regular rates, respectively, while being submitted to a tax surcharge of minimum 10% up to 50% depending on the kind of assets/revenues, to be increased by default interests.

Conclusion

Belgium has opted for a sizable public sector and extensive social security system. Consequently, the tax burden in Belgium will remain high, but this does not mean that no improvements can be made to decrease the tax burden on labour. It has to be seen if this tax shift will reduce the labour costs in a way that will result in any effect on the Belgian wage handicap. Many basic elements and details of the newly announced tax shift are still unclear and will have to be subject to further negotiations and debate, so we will communicate more as the regulations become clearer. However, the positive effects of the increase of the withholding tax on branch 23 unit-linked life assurance contracts without any guaranteed vs. directly held investments is undeniable, especially since the tax shift did not mention an increase of the 2% premium tax or a subjection of branch 23 proceeds to the increased withholding tax.

Should you have further queries on this development, please contact Tim Goethals or your usual Lombard International Assurance representative.