Minister of Finance released proposal for first phase of tax reform
The Minister of Finance released a proposal for the first phase of the envisaged large tax reform. If adopted, the proposed measures will generally apply as from 1 January 2024. The second phase is to be decided by the next government after the general election in 2024.
The proposal aims to shift the tax burden away from labor toward consumption and capital. Additionally, it aims to strengthen the competitiveness of businesses by revamping tax incentives. The proposed measures seem to take into account the observations and recommendations of international institutions, such as the European Commission, OECD and IMF. While the reduction of the tax burden on labor is important because the tax wedge is the highest in the EU for those who earn an average wage, the measures come at a cost for the Belgian budget which needs to be financed. When evaluating this proposal, the Government should be mindful that the compensating measures to finance the budgetary expenditures do not adversely impact the investment climate in Belgium.
The most important measures can be summarized as follows:
Personal Income Tax
- The tax exempt amount will be increased in steps from EUR 10.160 to EUR 13.500;
- The threshold for the highest income tax bracket of 50% will be increased in steps from EUR 46.440 to EUR 60.000;
- The tax treatment of certain benefits in kind will be aligned with their social security treatment. Hereby, the lump-sum taxation of free housing, heating, electricity and house personnel will be replaced by taxation based on real value. No changes will be made to the taxation of benefit in kind from a company car;
- Stock options will be taxed at exercise, the taxable income is the difference between the value of the shares at exercise and the exercise price. However, taxation at grant remains possible but will be limited to options on shares of the employer or its related company.
- A new regime is proposed for the grant of stock of the employer or a related company to employees and company directors. The benefit in kind resulting from such grant will not immediately be subject to taxation, but only upon the disposal of the stock. The taxable benefit will be lower of the value of the stock at the time of grant effectively granted (with some thresholds for the minimum value) or the value of the shares at disposal. The benefit in kind will be taxed as professional income at the marginal rate. The increase in value between the date of grant and the date of disposal will be taxed at a flat rate of 15%. The proposal includes different elements (such as a reference period of 18 months before and after the grant for the valuation, and the prohibition to use a call/put option for the employer/employee as this would be potentially abusive) that could make the new regime less attractive for non-quoted companies;
- In the context of carried interest and management incentive schemes, any excessive / disproportionate returns for management will be taxed as professional income at a flat rate of 35%;
- The tax implications of marital status and family circumstances will be revised in order to enhance the neutrality and fairness of the tax system. E.g. the marital quotient will be phased out over a period of 20 years;
Wage withholding tax
- To strengthen R&D incentives from the federal government and to ensure legal certainty, the wage withholding tax exemption for research and development will be modified as follows:
- For all eligible companies there will be a budgetary impact (contrary to the goal of the modifications which are supposed to be non-budgetary). This will occur through excluding the wage withholding taxes applicable on double vacation pay, year-end premium and outstanding remuneration from the calculation basis.
- For universities, community colleges, university hospitals, funds for scientific research and recognized scientific research institutions a minimum threshold of time spent on R&D by the employee will be included to qualify for the incentive. There will also be a stricter degree condition for these types of organizations.
- Companies performing R&D activities will continue to be obliged to notify their research projects and/or – programs beforehand but will now also have to include the “goal” of the project or program. Some more details are included in the law regarding the definition of a project and a program. This will be combined with an extended reporting obligation after the calendar year where companies will have to provide project and program information, the type of research, a description of the research and development “tasks”, etc.
- The aforementioned project and/or program notification will not be applicable for companies or parts of companies that will be recognized as a research center. Companies having at least 50 researchers with a specific degree (or at least 5 researchers representing at least 10% of the workforce) engaged in a recognized research center, will be able to fully qualify for the exemption provided that the researchers spend at least 80% of their time on R&D;
- The definitions of fundamental research, industrial research and experimental development are slightly amended;
- The incentive for “young innovative companies” will be substantially changed taking into account state aid limitations;
- For foreign degrees, at least one of the Belgian communities will have to confirm equality to a Belgian degree in order to qualify for the incentive. A public list will be established in this respect.
- A lot of work is still to be done by Royal Decree. A lot of the recognition procedures, conditions, etc. are not yet detailed in the law, but must be determined by Royal Decree.
Corporate Income Tax
- The dividends received deduction (DRD) will become a participation exemption. Hereby, the (alternative) minimum participation requirement of EUR 2,5 M will remain, but the condition that the participation must constitute a financial fixed asset will be (re)introduced. Furthermore, the exceptions to the participation requirement for certain investments will be abolished. Consequently, the quantitative conditions will also apply with respect to investment companies and collective investment funds, the consequences go beyond the impact on investment structures in the form of a DBI bevek/sicav RDT;
- For the purposes of the innovation income deduction, the definition of a qualifying patent is specified to limit its scope to patents with a novelty character. Accordingly, for large companies, only EU or international patents qualify, while for SMEs, a Belgian patent is generally sufficient;
- The investment deduction allowance will be transformed into a system of 3 rates:
- basic investment deduction of 10% (not available to large companies);
- thematic investment deduction of 30% (40% for small companies) for sustainable investments (e., investments in efficient energy use and renewable energy, emission-free transportation, environment-friendly investments and digital investments). This incentive will also be available as a tax credit. In addition to the investment deduction, the investments will be eligible for a double linear depreciation; and
- technology deduction of 13,5% for investments in patents and R&D. This incentive will also be available as a tax credit;
- The scope of the R&D tax credit will be extended, and the credit will be renamed as investment tax credit.
- The 80% rule applicable to second pillar pensions will be replaced by a 12/32 rule. Under this rule, the maximum deductibility of contributions will be determined as a percentage of the annual gross salary: 12% of a salary up to approximately 71.000 EUR and 32% above that threshold. The regime for back service payments is tightly circumscribed. Plans with a guaranteed return could fall foul of the new limitation in case of low investment results. A transitional regime is provided for defined benefit plans.
Value Added Tax
- As regards to VAT, the proposal of the Minister of Finance focuses on a major reform of VAT rates. The reform aims to meet certain socially desirable principles by introducing a 0% VAT rate for basic products such as vegetables and fruit, medicines, diapers and other hygiene products, as well as public transport. The underlying idea is that tax legislation, and more specifically the applicable VAT rates, should not be a barrier for easy access to these kind of basic products;
- Furthermore, another element of the reform is the adjustment of the tariff structure in the sense that the existing reduced VAT rates of 6% and 12% will be harmonized into a new reduced VAT rate of 9%. The standard VAT rate is kept at 21%. The reduced VAT rate of 6% would, however, remain in place for domestic utilities such as electricity, natural gas and heating via heating networks, as well as tap water;
- In contrast to the above, the VAT rate on coal would be increased from 12% to 21% given the fact that this is a highly polluting energy source;
- According to the Minister of Finance, a major renovation wave is needed in order to become climate neutral by 2050. Therefore, in order to stimulate the replacement of old houses with new and sustainable ones, the current temporary reduced VAT rate for demolition and reconstruction would become permanent - although the new reduced VAT rate of 9% would apply instead of the existing 6% VAT rate;
- Finally, the proposal of the Minister of Finance also focuses on a further reduction of the VAT gap and on administrative simplification through digital and automated solutions such as e-invoicing and e-reporting. The latter will also result in an abolishment of the obligation to submit an annual VAT client listing;
- The rules regarding the mandatory use of e-invoices will be introduced gradually, with a first phase entering into force as from the 1st of July 2024 for taxpayers established in Belgium whose turnover, excluding VAT, exceeded 9 million Euro during calendar year 2023. Mid-sized Belgian taxpayers will follow as from the 1st of January 2025 (e., turnover between 700.000 Euro and 9 million Euro during calendar year 2023 or turnover of more than 700.000 Euro during calendar year 2024) and the other taxpayers as from the 1st of July 2025. For taxpayers who are subject to the VAT exemption scheme for small businesses or to the special VAT regime for agricultural entrepreneurs, the entry into force is set at the 1st of January 2028.
- In line with the VAT rate increase for coal, the reduced excise duties for fossil fuels will be phased out and the various exemptions for the specific use of fossil fuels (e.g., kerosene, heavy fuel oil, gas oil coal, coke and lignite) will be reformed;
- Finally, in the framework of the anti-smoking policy, the excise duties on tobacco as well as on new and alternative tobacco products will be further increased.
Other tax and administrative measures
- The rate of the tax on securities accounts will be doubled from 0.15% to 0.30%;
- The ruling and conciliation services will be integrated into a separate administration. At the same time, a governance framework for the cooperation between the ruling service and the other tax authorities will be incorporated into law. This latter may lengthen the duration of a ruling process in the future.
How can KPMG help you?
The proposed measures have an impact on most taxpayers and across different taxes. Whether you are an individual or a business, your tax position is likely to change, including aspects of compliance. If you have any questions on the proposed measures and further plans, or you would like to know how these will impact you, feel free to reach out to us.