Belgium: Tax Candy Store of Europe
Belgium is perhaps not the most eye-catching country in Western Europe. Nevertheless, Belgium is home to the European capital of Brussels and despite it being a small country, it has been able to pride itself on a thriving economy for several decades already, a very high living standard, a strongly developed social security system and healthcare, a highly skilled population and high quality infrastructure. A much less known fact about this small country, ensconced between France, Germany and the Netherlands, is its hidden tax advantages.
Appearances Can Be Deceiving…
At first glance Belgium does not give the impression of being a tax-friendly country. The income tax rate easily rises to 50%, without even mentioning a whole gamut of local taxes. The basic corporate tax rate amounts to 34%. Dividends are subject to an advance tax levy on securities of 25 or 15%. Labour costs are also very high in Belgium. There are also miscellaneous real estate duties, environmental taxes, and so the list goes on… So you could not exactly call it a tax haven. The country does, however, offer an advantageous system for HQ of international corporations, the so-called coordination centres, but that story is close to extinction. So should this small and insignificant rainy country simply be left by the wayside? Well, that would not be a smart move at all because behind the scenes determined businesspeople are finding a store of lucrative fiscal candy… Belgium certainly offers – and now even more so than in the past – extremely attractive fiscal advantages but you have to know how to ferret them out. This is for the ‘tax connoisseurs’. A word of explanation…
No Capital Gains Tax on Shares…
If a Belgian resident sells his company shares, any capital gain does not incur any tax liability. So there is no tax payable at all. If you are a Belgian taxpayer and you own a multinational, wherever this may be located in the world, and if you happen to sell this company’s shares, then you do not have to pay any tax on the sale value. In most European countries you would be liable for 25% capital gains tax. Not so in Belgium. There has, however, been mention of doing something about this but at this present moment this still remains tax-free. Furthermore, it is also fairly easy to become a ‘Belgian’ tax-payer to be able to take advantage of this. Also, when a company owns shares and then sells them, any profit on these shares is not subject to capital gains tax but please note that any losses are non tax-deductible. The wealthy Dutch discovered Belgium as a tax haven years ago, because in Belgium there is no such thing as e.g. a wealth tax. As a result, the green belt north of Antwerp is bursting at the seams with rich Dutch people, which has even led to the coining of a new term of ‘Netherbelgians’. Well-to-do French people have also found their way to Belgium for that very reason.
Notional Interest Deduction (NID)…
In the tax competition battle between the European countries, Belgium decided not to jump on the bandwagon of lower corporate taxation but instead gave preference to notional interest deduction or NID. This is a highly successful creative system. So how does it work? With effect from 2006, companies are allowed to deduct a certain fictional amount from their income, i.e. the ‘risk capital deduction’, better known as ‘notional interest deduction’. This year, this deduction is equivalent to 4.281% of the ‘shareholders’ equity’, and in practice this means that the paid-up capital is often increased by the reserves (the ‘profits’ put aside). The important thing to bear in mind is that, every year, this notional interest deduction is applied again to the entire shareholders’ equity and therefore not to the growth achieved in relation to the previous year. The notional interest deduction provides an incentive to anyone who invests using their ‘own means’. That is also correct, but this is all too often interpreted too literally. What this means, in fact, is that a company that does not pay out a large proportion of its profits (high reserves, therefore) and therefore accrues significant capital (and ‘finances’ its investments via this method) benefits from a high notional interest deduction given the fact that it has significant shareholders’ equity. Investing? Whether or not your company effectively invest does therefore not have any (direct) impact at all on the notional interest deduction. Also the fact that your company takes out a loan for investment purposes or whether it uses the money in its bank account, has no bearing. After all, this does not (directly) alter the shareholders’ equity and your company will not benefit from a larger or smaller NID. In other words, it is simply ‘a gift’ to you.
Attractive to Foreign Holdings.
So what possible scenarios are there? Just imagine a foreign holding with stacks of money setting up a Belgian company and investing (capital) in it. Subsequently, this Belgian company in turn lends money to, e.g. the French, German, English or other companies of this same group. These ‘branches’ pay interest to the Belgian company, and perhaps also a management fee. These foreign branches incur costs in their home country but the Belgian company is not taxed on this because of its notional interest deduction. For example, if this Belgian holding has equity of 5 million euros, then this generates an annual tax deduction of more than 200,000 euros.
The Unlikely Story of Hong Kong
Besides China, Belgium is the only country in the world which has signed a double taxation treaty with Hong Kong. Since the start of this treaty, Hong Kong has become one of the most tax efficient locations for setting up investments in Belgium.
The treaty provides for lower income tax at source on any monies which the Hong Kong company earns in Belgium. In many cases, that same income is not taxed in Hong Kong, which can lead to considerable tax savings.
|Type of income of Belgian origin||Taxation at source||Taxed in HK|
|Dividends (< 25% shareholding)||15%||None|
|Dividends (>= 25% shareholding)||0%%||None|
|Interest of Belgian origin||10%||None|
|Royalties of Belgian origin||5%||None|
|Profits on Belgian assets||None||None|
Given the fact that Hong Kong does not impose a tax levy at source on dividends paid out to foreigners, investors can, through the intermediary of a Hong Kong holding, siphon away dividends, interest and royalties from Belgium with a total tax liability of respectively 0% (after paying corporate tax in Belgium); 10% (tax-deductible in Belgium) and 5% (tax-deductible in Belgium).
And in reverse !!!! dividends paid out by a Hong Kong subsidiary to its Belgian parent company in Belgium benefit from the DBI regime. Thus, Hong Kong becomes a particularly lucrative location for Belgian companies aiming to invest or to trade abroad. A Belgian company that exports to Asia or imports from Asia can, for example, trade through re-invoicing companies in Hong Kong. If those transactions occur ‘at arm's length’, part of the profits can thus be converted into tax-free profits in Hong Kong which can subsequently be paid out as dividends to the Belgian parent company where they are 95% exempt from corporate tax.
And there is even more good news.
Belgium has signed a dual taxation treaty with more than 80 countries. The exemption from tax at source on share dividends which the parent company-subsidiary directive provides for, is now being extended to dividend payments to non-EU member states with which Belgium has signed a dual taxation treaty, therefore also Hong Kong, for example. This offers good prospects given that if a US company sets up a subsidiary in Belgium which, in turn, sets up a company in Hong Kong… In this way profits made in Hong Kong (by trading in China) can virtually flow untaxed to the US Company. This offers a myriad of possibilities.
Inheritance Tax but Attractive Gift Tax…
In Belgium, inheritance tax differs depending on the region (Brussels, Wallonia and Flanders) (see below). In Flanders, any inheritance tax for direct descendants is no less than 27% from EUR 250,000. In Wallonia, inheritance tax for ‘third parties’ can at a given point even amount to 95% – and no, this is not a spelling error. However, on the other hand some beneficial gift taxes have been implemented in recent years which operate more or less the same in all the regions. In real terms, you are allowed to donate movable goods (e.g. shares, money, paintings) to your children or grandchildren before a notary, and this at a rate of 3%. If you pay this 3%, then the heir will no longer be liable to inheritance tax, even if the donator drops dead five minutes after having donated the gift. If you donate to ‘others’ (e.g. brother, nephew, but also a friend, for example), then you pay 7% and the matter is closed. Even foreigners can make use of this, even if they do not live in Belgium at all. They can therefore receive an official notary’s deed in Dutch, French or German (the three official languages of Belgium) due to the fact that a donation has taken place. Naturally, the implications of this in the home country of the donor is quite a different story. However, if someone can declare hard and fast that the beneficiary lives in Belgium…
The Lucrative Aspects of a Belgian Company The Car…
If you own a company in Belgium, then this does offer you quite a number of advantages. If you drive around in a car owned by your company, you are almost always taxed as a private individual on a benefit of 5,000 km multiplied by a certain CC factor. In most cases, this will come down to an amount of EUR 1,000 on which you are taxed as a private individual. This is regardless of which car you drive and how much private mileage you do.
With a Belgian company, you can always acquire as much real estate as you like. The registration duties and notary costs become immediately tax-deductible in the year of purchase, and you naturally write off the building itself. If you live in a building which is owned by the company, then you are taxed on a very small benefit as a private individual. Because this private benefit is calculated on the so-called ‘land registry or cadastral income’. If you then know that this ‘land registry or cadastral income’ is the fictional rent value from the year 1975 (yes… 1975), then this explains a lot. Buildings are often constructed where the company buys the usufruct or right of use for 20 years, for example, and the director the bare real estate. For these twenty years the company pays all the expenditure (interest, alterations, and so on). After 20 years, the premises disappear from the company and these ‘accrete’ to the bare property. Thus you acquire premises in your own name but which were largely paid for by the company. If you privately sell a building which is your home, you will not incur any capital gains tax in Belgium on any profit made. You will not be taxed on a second home if you sell this after 5 years. If you sell this second home within a period of 5 years, then you will pay capital gains tax at a rate of 16.5% but yet again you will benefit from numerous deductions, which means that the 16.5% will usually work out even less.
It is also possible to accrue a significant life insurance at the expense of a Belgian company with the director as the beneficiary. These premiums are tax-deductible for the company. And when the director is 60 or 65 years old (but there are opportunities to take it up earlier), he receives the full equity from his company and finally only pays 16.5% in tax.
What we are now writing is something that we should not be shouting from the roof tops but the Belgian tax authority is not so well organised. There are actually more than 30,000 tax officials, and this per capita is an absolute world record. Due to all manner of tax reforms which have never been fully implemented, contradictory directives, insufficient computerisation and too few motivated staff and one highly complex system… the tax authority is turning in circles. Companies – especially in large cities, such as Antwerp or Brussels, are hardly inspected at all. A company that does not get ‘noticed’, may not be inspected for 10 or 20 years, and these are no exceptions. There is always room for discussion with tax officials because the laws are complex, incomprehensible and ambiguous. For example, Belgium has a population of 10 million, therefore as many inhabitants as Paris or London, but Belgium operates three systems of inheritance tax. Brussels is a separate region and runs its own inheritance tax system, just like Flanders and Wallonia. So what happens if a Brussels resident owns a flat along the coast (Flanders) and dies? What if a Fleming owns a piece of land in the Ardennes and wishes to gift it to his son who lives in Brussels. The Belgians are the only people who, in their own country, can engage in tax planning by moving within their own country. So if you are also aware that you can drive from one side of the country to the other in barely 3 hours, you realise just how crazy the outcome can be. It is fascinating indeed…
Iven De Hoonwww.dehoon.be (also English version)Author of various publications and of the recent book ‘Tax Havens’.
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