The fairness tax: an eyesore for international tax planning
As of tax year 2014 (i.e. financial years ending as of 31/12/2013) a new Belgian tax measure has been implemented, i.e. the fairness tax on distributed dividends. This new tax can have an impact on (inter)national tax planning of Belgian companies distributing dividends.
The fairness tax is applicable to all Belgian companies that do not qualify as a ‘small company’ under the Belgian company code.
In short, a separate assessment of 5,15% will potentially be due in case of a dividend distribution when (part of the) distributed profits have not been effectively taxed at the general Belgian corporate income tax rate.
If this is the case and the taxable basis is reduced due to the usage of notional interest deduction or tax losses carried forward, the fairness tax will be due.
Hence there are three conditions in order to assess a possible fairness tax exposure:
1) Is the Belgian company distributing the dividend a large company (specific criteria)?
2) Does the distributed dividend exceed the taxable basis of the Belgian company?
3) Does the Belgian company make use of the notional interest deduction or tax losses carried forward in order to lower its effective tax rate?
If the answer on all three questions is positive, than the complexities of the new tax measure kick in.
The way to calculate the actual fairness tax is rather complex and consists out of four steps. We will briefly elaborate on the mechanism.
First we calculate the “untaxed” part of the dividend distribution by determining the positive difference between the dividends distributed and the taxable result that is effectively subject to the general corporate tax rate. If the actual taxable basis equals 0, the entire dividend has to be taken into account. However if the dividend includes retained earnings for past years, these can be deducted (exceptions to be taken into account).
The “untaxed” part will then be limited by a percentage. On the outcome a separate tax of 5,15% will be levied.
Example:
BelCo distributes a dividend of 4.000 kEUR. The dividend exceeds the taxable basis of the company due to the use of notional interest deduction. Hence, the fairness tax can be due.
Calculation: |
in kEUR |
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|
Taxable result (excl. disallowed expenses and dividend distribution) |
1.000 |
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|
Disallowed expenses |
200 |
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Distributed dividend [A] |
4.000 |
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|
Taxable result (incl. disallowed expenses and dividend distribution) [F] |
5.200 |
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|
Minus: |
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|
Notional interest deduction [D] |
-2.000 |
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|
Carried forward tax losses [E] |
0 |
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|
Taxable result subject to general corporate income tax rate [B] |
3.200 |
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Fairness tax: calculation |
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Step 1: |
[A] - [B] |
800 |
(i) |
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|
Step 2: |
No formerly taxed reserves included in dividend |
- |
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Step 3: |
Application of percentage |
38,46% |
(ii) |
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= ([D] + [E]) / [F] |
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Step 4: |
Calculate the fairness tax basis |
308 |
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= 800 x 38,46% |
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Fairness tax due equals应缴公平税数额等于 ( = 308 x 5,15%) |
|
16 |
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Conclusion:
This new “fairness tax” can have an impact the international tax planning of large company structures. International tax structures involving Belgian companies should be re-examined in other to assess a possible tax exposure. Most likely the fairness tax is the result of the increasing awareness of base erosion and profits shifting (BEPS).
However, is it “fair” that a company is “taxed” for making use of a “tax deduction” that is been implemented in the Belgian tax code for years.
For more information, feel free to contact us.
Author: Anthony Meul, Tax Team, office Dendermonde, +32 (0)52 40 97 20
The fairness tax: an eyesore for international tax planning (499.44Kb)
