Which budgetary measure are we talking about?
In the context of the latest budgetary measures of the federal government, there were no particular tax measures affecting investment products. Only a change in the annual tax on credit institutions (the so-called bank tax- rate of 0,13231 %) was discussed. However, it appears that there is also a change in the annual tax on collective investment undertakings (the so-called subscription tax – standard rate of 0,0925 %) and the annual tax on insurance companies (rate of 0,0925 %).
The changes are therefore aimed at the financial sector as a whole and not just at one particular sector. The decision has been taken to limit the tax deductibility of the three taxes mentioned above. No changes will be made to the actual tax rates themselves. The deduction of these taxes will be limited to 20%. This means that these taxes will be included in the disallowed expenses up to 80%. Presumably, this is to achieve an effective tax burden of 20% rather than an actual tax burden corresponding to the higher default corporate tax rate of 25 (after all, 80% of 25% is 20%).
This measure obviously only concerns companies subject to Belgian corporate income tax. Belgian branches of foreign companies may also be confronted with this additional taxation.
Indirectly, it also affects investors insofar as Belgian corporate income tax is paid with funds held for the investor collectivity.
Snowball effect for Belgian regulated investment companies (tax on tax)
Although there is thus an additional tax burden for almost all companies in the Belgian financial sector in the broad sense, a particular problem arises for Belgian regulated investment companies which are liable for the subscription tax and which are also subject to the special corporate tax regime under section 185bis of the Income Tax Code 1992 (the so-called limited tax base).
For the above-mentioned regulated investment companies, the actual tax burden does not only increase by 20% calculated on the initial tax of 9.25 bp, but it increases even more because the percentage of disallowed expenses will give rise to a corporate tax liability and this corporate tax liability will in turn give rise to a disallowed expense. This is because corporate tax is also a disallowed expense at 100% and then taxed at the applicable corporate tax rate (25%).
By treating the corporate tax as a disallowed expense, this means that from the year in which corporate tax becomes payable as a result of this measure, the regulated investment companies concerned will continue to pay additional corporate tax year after year.
Therefore, this measure gives rise to a so-called "tax on tax" situation, sometimes also referred to as an (unintended?) "snowball effect". This problem is already known but its effects are now increased by the here discussed measure. The number of years that the snowball effect lasts depends on the size of the taxable base and when the corporate tax is included in the annual accounts.
This therefore increases the actual tax burden of these Belgian regulated investment companies more than the 80% addition to disallowed expenses. The question is whether the legislator really intended this indirect additional tax.
Although this tax-on-tax situation has already been challenged before in Belgian courts, no satisfactory result has been achieved for the taxpayer. However, sufficient arguments can be found today to challenge this unequal treatment.
If this tax-on-tax issue were resolved, not only would there be equal treatment, but it would also be possible to return to the original idea of the limited tax base for Belgian regulated investment companies: a quasi-transparent tax treatment and the creation of a competitive framework for Belgian investment companies.
Current developments show that we are moving further and further away from these initial objectives. To be continued, without any doubt.
When is this new measure expected to be implemented?
The measure would apply to taxes due as from 1 January 2023.
How to find out more about this measure?
We remain at your disposal for any questions you may have on this subject.
Dirk Coveliers - Counsel (dirk.coveliers@tiberghien.com)
Yannick Cools - Associate (yannick.cools@tiberghien.com)