The Belgian government has enacted several new tax measures that are relevant for companies operating in Belgium and, on 2 March, the Minister of Finance published a proposal for the first phase of a broader tax reform.
The enacted measures include changes to the “basket limitation” rule, additional limitations on the foreign tax credit for royalty income and the R&D tax credit, and abolition of the notional interest deduction (NID). This article summarises the changes, which (aside from the proposed tax reform) generally became effective on 1 January 2023.
These measures are in addition to the two laws enacted near the end of 2022 (for prior coverage, see the article in the February 2023 issue of Corporate Tax News).
Temporary adjustment of the basket limitation (enacted)
A rule that limits the use of certain tax deductions/attributes (“basket limitation”), and which includes the deduction of carried forward tax losses, has been made more restrictive for one year.
Since the limitation became effective in 2018, the basket was limited to EUR 1 million per taxable period, increased by 70% of the balance of the taxable profit remaining after applying the group contribution. As a result, 30% of the taxable profit exceeding EUR 1 million constituted a minimum taxable base on which Belgian companies and permanent establishments of foreign companies effectively paid tax despite the availability of certain tax attributes.
As from assessment year 2024 (i.e., financial years starting on or after 1 January 2023), the 70% is temporarily reduced to 40%, which means that 60% rather than 30% of the taxable profit exceeding EUR 1 million can no longer be offset by tax deductions. This amounts to a de facto minimum taxation of 15% instead of the previous 7.5%. The percentage will revert to 70% as from assessment year 2025 (i.e., financial years starting on or after 1 January 2024), provided the EU directive introducing a 15% global minimum tax for multinational groups in the EU has been transposed into Belgian law by that date.
Abolition of the notional interest deduction (enacted)
The NID regime is abolished as from assessment year 2024 (i.e., financial years ending on or after 31 December 2023), although companies that have carried forward NID can still deduct this from their (future) taxable profits. The impact of the abolition of the NID is limited, taking into account that the rate of the deduction has been negative for large companies for several years, which meant that the deduction was only applicable for small and medium-sized enterprises.
Change in calculation of foreign tax credit for royalties (enacted)
To avoid the double taxation of foreign-source royalty income, Belgian corporate income tax law grants a tax credit for foreign withholding tax paid on specific royalties received from abroad. These rules have been revised. A lump-sum portion of the foreign tax may be credited, but previously the method of calculating the tax credit could differ depending on the type of royalty: for some royalties, the credit was calculated based on the actual foreign withholding tax paid, while for other royalties, a fixed fraction was considered regardless of the tax actually paid abroad. The latter method sometimes resulted in a substantially higher tax credit than the actual foreign withholding tax paid.
These rules have been amended to eliminate the distinction between different types of royalties for financial years ending from 31 December 2023 (assessment year 2024). The foreign tax credit for all royalties is now determined based on the actual foreign tax withheld.
New limitation on the R&D tax credit (enacted)
New limits are imposed on the R&D tax credit.
Belgian corporate taxpayers that carry out R&D activities in Belgium are entitled to various tax incentives, including an R&D investment deduction or tax credit for qualifying investments and a wage withholding tax exemption for qualifying researchers.
- R&D investment deduction or tax credit: The R&D investment deduction entails a tax deduction (20.5% of the investment value or 27.5% of the annual amortisation amount of qualifying tangible or intangible assets (the rates for income year 2023). The R&D tax credit is based on the same principles, but, instead of a deduction against taxable income, the relevant amount is multiplied by the nominal corporate income tax rate (25%) and credited against the corporate income tax due. Where the tax credit amount exceeds the taxpayer’s corporate income tax liability, the excess may be carried forward to subsequent taxable periods. After four years, the unutilised tax credit amount is refundable (which is not the case for the R&D investment deduction).
- Wage withholding tax exemption: The exemption for qualifying researchers entails an 80% exemption of wage withholding tax on wages of specific R&D employees, i.e., those with a science-related master’s or bachelor’s degree and provided the employees are involved in R&D projects.
Taxpayers often (rightfully) combine the R&D tax credit and the 80% wage withholding tax exemption because together both measures can provide significant cash benefits for R&D companies. Although the combination as such will not be prohibited, it is no longer possible to claim the R&D tax credit on the capitalised gross salary expenses of R&D staff. Where the taxpayer benefits from the 80% wage withholding tax exemption, the capitalised gross salary expenses included in the R&D tax credit base must be reduced by the exempted payroll withholding tax.
The limitation applies for financial years ending as from 1 April 2022 and only for the R&D tax credit—the R&D investment deduction is not affected.
Tax reform (proposal)
The proposed tax reform is designed to encourage work and entrepreneurship, and to simplify the tax system and make it greener and more modern. To compensate for the government's loss of revenue from the proposals, wealth, unhealthy consumption and pollution would be discouraged by the imposition of a heavier tax burden.
The reform includes a combination of measures that could impact both companies and individuals. For companies, the following measures could be relevant:
- Reform of the stock option plan regime by limiting their use to shares of the employer or of an affiliated company (the Dutch version of the proposal) / a parent company (the French version of the proposal);
- Conversion of the dividends received deduction from a 100% tax deduction to a 100% participation exemption, combined with stricter conditions for investments held by companies to qualify for the revised regime;
- A substantially increased investment deduction and system of accelerated (double) depreciation for sustainable investments;
- Requirement of a patent to benefit from the innovation income deduction;
- A minimum tax based on the EU directive that would introduce a 15% global minimum tax for multinational groups in the EU;
- Harmonisation of the VAT rates to a new, reduced 9% rate (rather than 6% and 12%), while retaining the 21% standard rate and introducing a 0% rate for certain healthy and basic products; and
- Phasing out of existing subsidies and benefits for fossil fuels (important for the transport sector, among others).
Some of the proposed measures are being heavily debated in the media (e.g., stricter conditions for investments held by companies to qualify for the participation exemption), so it remains to be seen which proposed measures ultimately will be adopted. The Minister of Finance expects to be able to submit a draft bill by the summer so the measures can take effect on 1 January 2024.
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