Financial Services Industry: Belgian tax authorities acknowledge cost deduction for determination of Taxable income per share (Belgian TIS)
On 9 May 2018, Belgian tax authorities issued circular letter 2018/C/55 (‘Circular’), which is of particular relevance for investment funds.
Article 19bis Belgian Income Tax Code 1992 (BITC) provides that Belgian private individual investors holding shares or units of a Belgian or foreign investment fund that is invested fully or at least partly (>10%) in debt claims such as bonds will have to pay personal income tax upon redemption of their shares or units (tax typically imposed as a withholding tax). Pursuant to Article 19bis, §1, para. 4 BITC, the taxable amount consists of the interest and capital gains / capital losses on debt claims accrued during the investment period. The Circular addresses this taxable amount as ‘19bis income’. The daily figures necessary for the determination of 19bis income are usually referred to as Belgian Taxable Income per Share or ‘BTIS’.
NB: If the investment fund does not provide all necessary figures, default tax base rules kick in. If at least the percentage of assets invested in debt claims has been determined, the capital gain multiplied with this percentage will form the taxable base; otherwise the entire capital gain will be taxed.
The newly issued Circular provides for the first time an explicit acknowledgement as well as a set of rules for the deduction of actual direct and indirect costs in the determination of daily BTIS figures. The set of rules contains certain method choices.
The Circular distinguishes different types of cost and gives a few examples of direct and indirect costs. References to the profit and loss account framework for investment funds (published Royal Decree of 10 November 2006) are made to illustrate the cost types.
- Costs directly linked with the return on a debt claim investment, e.g. recorded write-downs, realized capital losses, currency exchange results
- Operational and tax costs, which may either be directly linked to 19bis income (e.g. transaction cost or broker commission in relation to a debt claim investment) or indirectly linked to 19bis income (e.g. management fee, legal or audit costs). Tax costs comprise inter alia Belgian annual tax on collective investment institutions.
Direct costs are fully deductible if they exclusively relate to investments in debt claims. A pro-rata deduction applies where direct costs relate to both 19bis investments and other investments. Finally, if direct costs relate to the acquisition of shares or units in a target fund, the percentage of deductibility will depend on features of the target fund, i.e. the investment policy as per target fund statutes, or the actual composition of target fund assets (Asset Test).
Indirect costs, i.e. costs that relate to the overall activity of the investment fund rather than a specific investment asset, may be deducted to the extent that the investment fund is invested in debt claims. The percentage of deductibility of indirect costs may be derived either from the investment fund policy as per fund statues, or based on the actual composition of the fund’s investments (Asset Test). A consistent approach over time is expected. If the Asset Test is chosen, another choice is offered, i.e. the investment fund can use as percentage of deductibility of indirect costs either in a more static or a more dynamic way:
(1) Use of percentage of debt claim investments as determined pursuant to the recent yearly and half-yearly reports is used (cf. marginal note 26 of the BTIS circular of 30 June 2009), i.e. the percentage remains the same for a year;
(2) Use of percentage of debt claim investments newly determined each time when the net asset value is recalculated (the Circular proposes here the term “Indirect Cost Asset Test” or ICAT).
The Circular continues with a straightforward calculation example and adds that the investment fund needs to be able to provide Belgian tax administration with evidence for the actual direct and indirect costs deducted.
- The guidance offered by Belgian tax authorities through the Circular of 9 May 2018 is very welcome, given that more and more investment funds are subject to the taxation pursuant to Article 19bis BITC. The relevant threshold of investments in debt claims is 10% for shares / units acquired as of 1 January 2018, whilst it had previously been 25% and before that even 40%.
- In view of the wording of Article 19bis BITC, there had been considerable legal uncertainty whether and to what extent a cost deduction was permitted, since a private individual investing directly in debt claims would generally not be entitled to a cost deduction, either.
- Although the Circular does not specify its first applicability or transition rules, it is clear that the Belgian tax administration acknowledges cost deduction also for the past (calculation example relates to January 2017).
- While certain elements of the Circular may resemble guidance by the Luxembourg Investment Fund Association (ALFI) on the EU Savings Directive (issued June 2005), there seem to be clear differences. ALFI proposed for instance the choice between several ratios, i.e. income ratio vs asset ratio (under 5.3.4 Deductible Expenses). The Circular in contrast always refers to asset ratios (be they determined in a static or dynamic way). Moreover, the deduction of debt interest is mentioned by ALFI, whilst this is not the case in the Circular, although the latter is much more detailed than the ALFI guidance.
- It seems clear that the implementation of mechanisms for the deduction of costs in the BTIS calculation mechanisms is not obligatory for the investment fund. However, Belgian fund investors are likely to appreciate and even request cost deduction in order to be taxed on net rather than gross income.
- Further guidance by Belgian tax authorities on BTIS in general would be much appreciated and in particular on the ever more important Asset Test – which has now been given additional functions in the context of cost deduction –, e.g. Asset Test rules for starting funds that have not issued a semi-annual and annual report yet, examples for relying on an investment fund’s investment policy. Moreover, guidance on the treatment of swaps and expenses related to swaps would be desirable.