Belgium - Taxation of cross-border mergers and acquisitions

After implementing various European directives on corporate reorganizations, Belgium has developed a legal and tax framework for both cross-border and domestic mergers and acquisitions (M&A).

In a qualifying reorganization (merger, demerger and partial demerger, contribution of a universality of goods or a line of business), assets, liabilities and all related rights and obligations are in principle transferred automatically by law from the transferring company to the receiving company by the mere execution of the transaction in accordance with company law provisions. If the transaction qualifies for the tax-neutral regime, the transferor does not suffer any capital gains tax, while the receiving company gets no step-up in tax basis.

Both purely Belgian as well as cross-border reorganizations are eligible for tax neutrality. No tax-neutral treatment is available where the main or one of the main objectives of the transaction is tax evasion or tax avoidance. The concept of continuity, which applies from both legal and tax perspectives, also applies to the accounting treatment of the reorganization transactions.

When looking at acquisitions, an important issue is the absence of fiscal unity in the Belgian income tax regime. However, as of 2019 (assessment year 2020), a regime of (partial) tax consolidation was introduced, whereby profits can be shifted between group companies through a system of group contribution. This new regime is subject to strict conditions and limitations. A similar effect can often be obtained through a post-acquisition integration plan, which could include a merger of the target entity with the buying entity.

Following an update on recent changes relevant to mergers and acquisitions, this report addresses the following fundamental decisions of a buyer from a Belgian tax perspective:

• acquisition through assets or shares
• choice of the acquisition vehicle
• funding of the acquisition vehicle.

This report focuses on the Belgian tax rules applicable to acquisitions and does not further elaborate on the Belgian tax treatment of mergers and similar transactions. The discussion focuses mainly on Belgian tax law. Company and accounting law are also highly relevant when dealing with both national and cross-border acquisitions. These areas are outside the scope of this report, but some of the key points are summarized later in this report.

Corporate income tax reform

On 29 December 2017, new legislation implementing a substantial corporate tax reform was published in the Belgian Official Gazette.

The year of entry into force was different for various measures. The reform’s primary objective was to reduce the corporate tax rate to 29.58 percent (including a crisis contribution of 2 percent) as of 2018 (assessment year 2019), and to 25 percent as of 2020 (assessment year 2021).

The key additional measures relevant for the M&A practice in Belgium are as follows.

Measures in effect as of 2018 (assessment year 2019)

• Minimum tax base: A minimum tax base was introduced for companies with taxable profits over 1 million euros (EUR) by limiting certain deductions (e.g. tax losses), which are grouped in a ‘basket’. To the extent taxable profits exceed EUR1 million, only 70 percent of this basket is deductible.
• Full participation exemption for dividends and capital gains on shares: A dividend received by a Belgian corporate taxpayer is 100 percent deductible (previously 95 percent) when certain quantitative and qualitative conditions are met. Subject to similar conditions, capital gains on shares are fully exempt. Existing participation requirements for dividends now also apply for capital gains. The taxpayer needs to hold a participation of at least 10 percent or the participation needs to have an acquisition value of at least EUR2.5 million, for an uninterrupted period of at least 1 year. These new requirements have a negative tax impact for minority participations, which may be relevant for management investment schemes.
• Notional interest deduction: This deduction is now calculated on the average qualifying increase of additional equity over 5 years (rather than on the full increase).
• Requalification of capital reduction: A reduction of capital is considered to be a pro rata reduction of capital and pro rata distribution of (taxed and in some cases untaxed) available reserves. For reserves in this case, the dividend withholding tax (WHT) at the standard rate of 30 percent is due, where no exemption applies.
• Cash Tax for Tax Audit Adjustments: An effective cash taxation has been introduced related to tax audit adjustments. No tax attributes are allowed to be offset against the tax due on the part of the result that has been added following the tax audit adjustment, except for the current year participation exemption. This new rule is limited to assessments for which a tax increase has effectively been imposed by the tax authorities at a rate of at least 10 percent.

Measures in effect as of 2019 (assessment year 2020)

• Tax consolidation: This is organized through a system of group contribution whereby profits can be shifted between group companies. This contribution constitutes a tax deduction for the contributor and is taxable for the recipient. It is, however, subject to strict conditions, in particular a participation condition of at least 90 percent continuously held during the calendar year linked to the assessment year and the 4 preceding calendar years.
• Implementation of Anti-Tax Avoidance Directive: The implementation of the European Union (EU) Anti-Tax Avoidance Directive (ATAD) introduced inter alia new interest limitation rules (earnings-stripping rules), controlled foreign company rules, enlargement of the scope of the Belgian exit tax and measures preventing hybrid mismatches/branch mismatch arrangements.
• Earnings-stripping rules: The implementation of ATAD resulted in a new interest limitation rule, whereby the financing cost surplus (i.e. the net interest cost or exceeding borrowing costs on third-party loans and intercompany loans concluded as of 17 June 2016) will not be tax-deductible to the extent that it exceeds the higher of a minimum threshold of EUR3 million or 30 percent of the tax adjusted earnings before interest, taxes, amortization and depreciation (‘fiscal’ EBITDA; consolidated Belgian base). The surplus that cannot be deducted because of the limit can be transferred to the following years without any time limitation. Companies having a surplus of deduction capacity can transfer this to another company under certain conditions. Exclusions apply.

Measures in effect as of 2020 (assessment year 2021)

• Losses of foreign branches: Starting assessment year 2021, losses of foreign branches, of which the profits are exempt by treaty in Belgium, are no longer deductible in Belgium except if they concern ‘definitive’ losses within a European Economic Area (EEA) member state.

Other legislative updates

• Reconstruction reserve: This new regime, open to both Belgian companies and Belgian permanent establishments, allows companies to rebuild their equity in a tax-friendly way by exempting their reserved profits for financial years 2021–2023 by means of accruing a tax exempt reserve. The amount of the tax exempt reconstruction reserve is limited to a total of the operational accounting loss of the financial year 2020 and is hard capped at EUR20 million.
• DAC6 / Mandatory disclosure rules: These new rules require the disclosure of information on reportable cross-border arrangements to local tax authorities. The information reported is exchanged between EU member states.

The mandatory disclosure rules (MDR) were transposed into Belgian legislation in December 2019 and took effect on 1 July 2020. However, a transitional retroactive period applied to qualifying cross-border arrangements between 25 June 2018 and 30 June 2020. Additionally, a deferral of the reporting obligations applied until February 28, 2021.

In principle, reportable cross-border arrangements must be reported within 30 days.

While the legislation primarily targets potentially aggressive tax planning structures, its scope is quite broad. Accordingly, cross-border tax arrangements that contain one of the defined hallmarks must be reported to the tax authorities. Non-compliance with the reporting obligations can lead to fines of up to EUR50,000 or EUR 100,000 in case of fraudulent intent.

From a buyer’s point of view, an asset deal may be favorable because it may allow the buyer to recover a significant part of the cost of the acquisition through depreciation of certain assets acquired at a relatively high corporate tax rate of 25 percent in Belgium (as of 2020). Under Belgian tax law, depreciable assets can include goodwill as well as other intangible elements.

Inherent goodwill acquired when shares are purchased is not tax-deductible for the buyer, nor are future reductions in the value of shares or capital losses incurred on disposal of the shares. The only exception is a capital loss a corporate shareholder incurs following the liquidation of a company in which it owns shares. Such loss is only deductible to the extent that the liquidation distributions made by the subsidiary are lower than the subsidiary’s fiscal paid-in capital.

From a Belgian seller’s perspective, a sale of shares generally is the preferred option because capital gains realized on shares are generally tax-free or low-taxed for Belgian individuals and companies. Where the seller is a Belgian company, there are certain exclusions from the favorable tax treatment for capital gains on shares (e.g. for shareholdings in tax-privileged companies). Also, as noted, a minimum holding period of 1 year applies as well as a minimum participation requirement (i.e. participation of at least 10 percent or with an acquisition value of at least EUR2.5 million).

For individuals, Belgian tax law provides that a capital gains tax (at a rate of approximately 18 percent) may be due in certain cases (substantial participation), where the buyer of the shares is a non-Belgian company resident outside the EEA. Further, the disposal of shares by Belgian individuals is taxable as miscellaneous income at a tax rate of approximately 35 percent where the transaction can be considered realized outside the management of the private estate. This may be particularly relevant in management buy-out structures.

In Belgium, most acquisitions take the form of a share deal, which allows the seller to avoid an upfront tax cost on capital gains and the buyer will take into account the absence of a step-up in the pricing.

Purchase of assets

A purchase of assets usually results in an increase in the base cost of those assets for both capital gains tax and depreciation purposes. In principle, this increase is taxable to the seller.

In an asset deal, shortly before the closing of the asset transfer agreement, the seller should request several certificates stating that the selling entity has no outstanding tax or other liabilities from the Belgian corporate income tax, Value Added Tax (VAT) and social security tax authorities. The buyer must notify the Belgian authorities of the asset transfer agreement. These formalities are necessary for the asset deal to be recognized by the Belgian tax authorities and to avoid the joint liability of the buyer for unpaid taxes of the seller. If the asset purchase agreement is properly structured and the required notifications are lodged, no historical tax liabilities of the seller should transfer to the buyer in an asset deal. However, joint liability rules may apply where assets are transferred under legal continuity (an optional legal feature that is significant where a number of important contracts need to be transferred in the asset deal).

Purchase price

The assets should be acquired and recorded at fair market value. The excess paid over the book value in the hands of the seller must be allocated to specific assets. If that is not possible, the assets must be recorded as goodwill in the books of the buyer. Depending on the purchase price paid, the asset purchase therefore results in a step-up in tax basis for depreciation purposes.

A corporate seller is taxable at the normal corporate tax rate of 25 percent (as of 2020) on any capital gain realized on the sale of assets, and tax deferral is possible where certain conditions are met (but not applicable to own built-up goodwill). An individual seller is subject to tax at progressive tax rates on the professional assets sold. The seller generally can use tax losses or other available tax attributes to shelter the capital gain.

Goodwill

For tax purposes, goodwill must be depreciated over a minimum of 5 years. However, in most cases, the Belgian tax authorities argue that the depreciation period should be 10 to 12 years, and it is up to the taxpayer to demonstrate that the economic lifetime of the goodwill concerned is shorter. For accounting purposes, goodwill is depreciated during its economic life span, which is maximum 10 years if the economic life span cannot be determined.

Depreciation

Under Belgian tax law, depreciation of business assets is calculated on the basis of the acquisition cost over the useful life of the assets.

Until the financial year 2020, both straight-line and declining-balance depreciation methods were accepted. For assets acquired or established as of 1 January 2020 (assessment year 2021), only the straight-line method is allowed for tax purposes, while the double declining-balance method may be acceptable for accountancy purposes.

Intangible fixed assets, cars and tangible assets that are depreciated by the owner but for which the right to use has been transferred must be depreciated on a straight-line basis.

Apart from intangible fixed assets, which must generally be depreciated over a minimum of 5 years using the straight-line method, the tax law does not provide for any specific periods and rates. For certain assets, indicative rates are set by administrative instructions (e.g. 5 percent for industrial buildings).

Tax attributes

Tax loss carry forwards that were available to the company from which assets are acquired and current-year losses of that company are not transferred to the acquiring company. The same restrictions apply to any carry forward of notional interest deduction (NID) and investment deduction.

Generally, the seller can use those tax attributes to shelter the capital gain arising on the sale of assets.

Value Added Tax

The sale of assets of a business, except land and buildings, by a VAT payer is, in principle, subject to VAT. If a building is new within the meaning of the VAT code, the taxpayer has the option to bring the sale of the building within the charge to VAT. Certain sales of new buildings are always subject to VAT.

Sellers may need to revise (partially repay) the VAT that they originally deducted on certain assets.

The transfer of a separate activity capable of separate operation — a transfer of a going concern — is not subject to VAT if the recipient is, or becomes as a result of the transfer, a VAT taxpayer.

Transfer taxes

Where Belgian real estate is involved in a purchase of assets, a real estate transfer tax is due (12.5 percent or 10 percent depending on the location of the real estate) on the market value of the real estate. For the transfer of real estate lease agreements, a 0.2 percent transfer tax is due. The rate is 2 percent for the transfer of leasehold rights. If the acquired assets do not include real estate, no transfer tax or stamp duty is levied.

Purchase of shares

On an acquisition of shares, no (separate) expression of goodwill is possible and depreciation and capital allowances are not allowed for tax purposes. In accounting, a write-down in value is required where the actual value of the participation is lower due to a long-term deterioration of the financial or economic situation of the underlying company. However, these write-downs are not tax-deductible.

On the seller’s side, the capital gains realized on the shares are generally tax-exempt for individuals as well as for corporate sellers. As noted earlier, the favorable tax treatment for corporate taxpayers is subject to a minimum holding period of 1 year and a minimum participation of 10 percent or an acquisition value of at least EUR2.5 million.

Tax indemnities and warranties

In a share acquisition, the buyer takes over the target company, together with all related liabilities, including contingent liabilities. The buyer therefore generally needs more extensive indemnities and warranties from the seller in a share deal than in an asset acquisition. If significant sums are at issue, the buyer usually initiates a due diligence exercise, which normally incorporates a review of the target’s tax affairs. To the extent possible, the findings of the due diligence investigation should be reflected in tax representations, warranties and indemnities in the share-purchase agreement. Typically, in a Belgian context, indemnifications are structured as a reduction of the share-purchase price so that they are not taxable to the recipient.

Tax attributes

In principle, prior years’ tax losses are available for set-off without time limitation. As noted, however, as of 2018, the government introduced a minimum tax base for companies with a taxable profit that exceeds EUR1 million by limiting certain deductions, grouped in a ‘basket’. These deductions are only deductible from 70 percent of the taxable profit exceeding EUR1 million.

Further, following the introduction of certain measures intended to counter reorganizations or acquisitions that merely seek to use a company’s tax losses, a change in control may limit the carried forward tax losses of the companies involved. Generally, previous tax losses of a Belgian company may not be deducted from future profits in the case of a change in control of that company, unless the change of control is for sound business, financial or economic reasons. This rule applies equally to a direct change of control and an indirect change of control further up the shareholder’s chain.

The same rule applies to any carry forward of NID, investment deduction and unutilized dividends received deduction.

The burden of proof lies with the taxpayer. The Belgian tax authorities generally take the position that the financial or economic reasons for the transaction need to be assessed in the context of the company subject to the change of control. Among other things, financial and economic reasons are deemed to exist where, following the change of control, the company continues to operate in the same business with all or some of its employees.

Crystallization of tax charges

Taking into account the specific characteristics of the new fiscal consolidation regime entered into force as of 2019 (see ‘Debt’ section below), no tax charges related to previous intragroup transfers should crystallize in the target on acquisition of the shares of the target company.

Transfer taxes

No stamp duty is due on the transfer of shares. A share deal should not give rise to real estate transfer tax.

Several possible acquisition vehicles are available to a foreign buyer, and tax factors generally influence the choice. There is no proportionate capital duty on the introduction of new capital into a Belgian company or branch. In a Belgian context, the strict conditions to benefit from the system of tax consolidation need to be considered when determining the transaction structure.

Local holding company

Belgium generally has favorable rules for the implementation of a local holding company in Belgium: dividends and capital gain exemptions, consolidation regime, and the tax deductibility of transaction costs incurred on an acquisition of shares.

At the time of the sale of the shares in the target company by the Belgian company, capital gains realized are tax-exempt where the shares qualify for the 100 percent dividend received deduction (i.e. Belgian participation exemption regime, generally requiring that the target be subject to a normal tax regime).

As indicated, a 1-year minimum holding period applies for capital gains on shares as well as a minimum participation requirement (i.e. participation of 10 percent or with an acquisition value of at least EUR2.5 million).

The acquisition by a Belgian company is particularly attractive where the buyer already has a taxable presence in Belgium. In this case, the existing tax capacity could be used to shelter the acquisition costs and interest expenses.

A Belgian acquisition vehicle should have appropriate substance in Belgium. The question on what a sufficient level of substance from a Belgian tax perspective would be is basically a matter of facts and circumstances, where the factual situation has priority over the mere legal situation (i.e. the articles of association).

A capital increase into a Belgian holding company is subject to a flat registration tax of EUR50. The sale of shares is not subject to stamp duty.

Foreign parent company

A foreign parent company could be considered where the interest expenses from the acquisition financing can be offset against taxable profits of the foreign company.

In addition to the exemptions on the basis of the EU Parent-Subsidiary and Interest and Royalty Directives, Belgium also has an extensive tax treaty network that significantly reduces or eliminates WHT on interest payments and dividends to a foreign parent.

For Belgian individuals, Belgian tax law provides that a capital gains tax (at a rate of about 18 percent) may be due on the sale of (or part of) a substantial participation in a Belgian company to a non-Belgian legal entity located outside the EEA. A ‘substantial participation’ generally is defined as the ownership (alone or with relatives) of more than 25 percent of a Belgian company in the current or preceding 5 years.

Only participations in Belgian-based companies trigger this taxation.

The transfer of shares to a foreign buyer is not subject to stamp duty.

Non-resident intermediate holding company

If the country of a foreign buyer taxes capital gains and dividends received from a Belgian target, an intermediate holding company resident in another territory could be used to defer this tax and perhaps take advantage of a more favorable tax treaty with Belgium. Generally, neither Belgian domestic rules nor the Belgian tax treaties currently include severe beneficial ownership restrictions. However, sufficient substance is required to claim benefits under treaties or the EU directives. In recent case law, the EU Court of Justice has stressed the importance of the beneficial ownership and substance criteria. According to the EU Court of Justice, a substantial analysis should be performed to assess whether the recipient entity in fact benefits economically from the interest and is not merely a pass-through vehicle.

Local branch

As an alternative to the direct acquisition of the target’s assets, a foreign buyer may structure the acquisition through a Belgian branch. For income tax purposes, a branch is not subject to additional tax duties and is taxed at the standard corporate tax rate of 25 percent (as of 2020). No WHT applies on profit repatriations from the branch to the foreign head office. Where the Belgian operation is expected to make losses initially, a branch may be advantageous since, subject to the tax treatment applicable in the head office’s country, a timing benefit could arise from the ability to consolidate losses with the profits of the head office.

The sale or withdrawal of assets from a branch triggers a tax liability on any capital gains, apart from capital gains on shares, which generally benefit from favorable tax treatment, as noted previously.

Joint ventures

Under Belgian tax law, joint ventures are generally structured as corporate vehicles, and no specific tax rules apply to them. Under Belgian company law, possibilities to structure joint ventures as unincorporated partnerships are limited.

A buyer using a Belgian acquisition vehicle for an acquisition for cash needs to decide whether to finance the transaction with debt, equity or a hybrid instrument that combines the characteristics of both.

Debt

Financing an acquisition with debt has the traditional advantage that the interest cost and other expenses (e.g. bank fees and other transaction costs) may be tax-deductible. Belgium’s new system of fiscal consolidation as of financial year 2019 (assessment year 2020) may facilitate the offset of interest expenses on acquisition financing at the level of a Belgian acquisition vehicle against operating income of the target company, after a certain period of time. However, taking into account the strict conditions that must be met to benefit from this fiscal consolidation regime (i.e. only available from the fifth taxable period after the acquisition (see ‘Group relief/consolidation’ section), alternative debt pushdown mechanisms may be required, such as the following:

• Equity reduction: One way to obtain a (partial) debt pushdown is to replace the distributable reserves (and share capital) of the target company with debt (equity stripping). However, the Belgian tax authorities are on the lookout to challenge the interest-deductibility for such transactions, backed by some first negative court decisions for taxpayers. In March 2020, the Supreme Court confirmed two court decisions, both rejecting the interest deduction on a loan (both a bank loan and intercompany loan) used for a leveraged dividend and equity distribution.
  It is important to note that the Supreme Court has not excluded the deductibility of interest costs in the context of a leveraged equity refinancing, but has made clear the importance of sufficiently upfront documenting the decision to draw a loan.

• New activities: To use the interest charges on the acquisition financing, taxable income could be created at the level of the acquisition vehicle, for example, by transferring activities or developing new activities, which may include management services. Potential exit taxes should be taken into account.
• Merger: A debt pushdown through merger could be organized, although the Belgian tax authorities would likely deny the tax-neutral status of a merger of a pure holding company (acquisition vehicle) and its operational subsidiary, triggering a tax cost on all hidden capital gains (including goodwill) at the level of the operating company. A legal merger may be feasible in the case of an acquisition by a Belgian operating entity.

Deductibility of interest

Generally, interest incurred to acquire shares should be tax-deductible in principle. However, some restrictions need to be taken into account.

Following the implementation of the EU ATAD, as of financial year 2019 (assessment year 2020), the financing cost surplus (i.e. the net interest cost or exceeding borrowing costs) will not be tax-deductible to the extent that it exceeds the higher of a minimum threshold of EUR3 million or 30 percent of the tax adjusted earnings before interest, taxes, amortization and depreciation (‘fiscal’ EBITDA; consolidated Belgian base).The net surplus that cannot be deducted because of the limit can be transferred to later years indefinitely.

Following the implementation of the above-mentioned earnings-stripping rules, the scope of the 5:1 debt-to-equity ratio became narrowed (only for grandfathered loans concluded before 17 June 2016 to which no fundamental changes have occurred, and loans from tax havens).

Other limitations

Generally, interest payments are not tax-deductible where they exceed the market interest rate for the type of loan concerned, taking into account the particular circumstances of the loan. This limitation does not apply to interest paid to Belgian banks, financial institutions or their branches, or to interest paid on publicly issued bonds.

Interest paid directly or indirectly to a tax-privileged non-resident taxpayer (whether or not affiliated) or to a tax-privileged foreign branch is tax-deductible only where the paying company can demonstrate that the payments are for bona fide purposes and that the interest paid does not exceed an arm’s length interest rate.

A general disclosure obligation applies for payments to tax havens if certain thresholds are exceeded.

Withholding tax on debt and methods to reduce or eliminate it

In principle, under Belgian domestic law, interest paid by a Belgian company is subject to a 30 percent WHT.

Important exemptions from interest WHT include:

• interest paid to a Belgian-resident company
• interest on registered bonds subscribed by a non-tax-privileged foreign investor
• interest paid by Belgian enterprises (including Belgian companies and Belgian permanent establishments of foreign companies) to financial institutions established in an EEA member state or tax treaty state.

A specific WHT exemption applies to interest paid by Belgian taxpayers qualifying as a (listed) holding company or ‘financial enterprise’ (essentially defined as an intragroup bank; see below) on loans from non-resident lenders.

For purposes of this exemption, a ‘holding company’ is defined as a Belgian company or a Belgian branch of a foreign company:

• that owns shares that qualify as financial fixed assets that have an acquisition value of at least 50 percent, on average, of the total assets on its balance sheet at the end of the taxable period before the attribution or payment of the interest
• the shares of which are listed on a recognized stock exchange, or at least 50 percent are held, directly or indirectly, by a listed company that is subject to corporate income tax, or to a similar foreign income tax regime, and that does not benefit from a special tax regime or from a tax regime that is considerably more favorable than that in Belgium.

A ‘financial enterprise’ is defined as a Belgian company or a Belgian branch of a foreign company that:

• belongs to a ‘group of related or associated companies’ as defined by company law
• carries out its activities exclusively for the benefit of group companies
• engages exclusively or predominantly in services of a financial nature
• seeks external funding exclusively with resident or non-resident companies with the sole purpose of financing its own activities or those of group companies
• owns no shares with an acquisition value that exceeds 10 percent of the financial enterprise’s net fiscal value.

Further, Belgium has opted for a flexible implementation of the EU Interest and Royalties Directive. From a Belgian perspective, the debtor and the beneficiary of the interest (or royalties) are associated companies where, at the moment of attribution or payment, one of the companies has had a direct or indirect holding of at least 25 percent in the capital of the other company for an uninterrupted period of at least 1 year, or both companies have a common shareholder established in the EU that has had a direct or indirect holding of at least 25 percent in the capital of both companies for an uninterrupted period of at least 1 year. In principle, interest and royalties paid between ‘associated companies’ (as defined earlier) are exempt from WHT. The Belgian government has extended the scope of the exemption beyond those mentioned in the directive to all companies resident in Belgium.

Checklist for debt funding

• The use of bank debts may avoid transfer pricing problems and should facilitate the interest deduction as long as interest payments are at arm’s length.
• Within a 5:1 debt-to-equity ratio (for old loans) and the new earnings-stripping rules, interest on intragroup loans generally is tax-deductible (subject to certain other specific restrictions).
• In principle, interest payments are subject to a WHT of 30 percent, but various exemptions or reductions are available.
• Taking into account the strict conditions to be fulfilled to benefit from the system of fiscal consolidation entered into force as of 2019, the actual tax savings for interest payments on acquisition financing still depend on the amount of taxable income available at the level of a Belgian acquiring company. As noted earlier, various debt pushdown mechanisms are available.

Equity

If an acquisition is funded with equity, dividend payments to the parent company are not deductible for Belgian tax purposes (unlike interest payments).

However, in some situations, funding with equity may allow for the deduction of notional interest. The benefit of the Belgian NID regime on equity has significantly reduced since its introduction. Initially the NID was based on the full equity (after some corrections). As from 2018, however, the NID is limited to the average increase of the equity over a period of 5 years. For 2019, the rate was 0.726 percent (determined each year and linked to 10-year government bonds). The rate for 2020 is 0 percent.

Withholding tax on equity and methods to reduce or eliminate it

Under Belgian domestic law, dividends paid by a Belgian company are currently subject to a 30 percent WHT. As of 7 July 2013, small companies may benefit from a 15 percent WHT on dividends (subject to certain conditions).

An exemption from dividend WHT is available for dividends paid by a Belgian subsidiary to its parent company, provided the parent company is a Belgian company or a qualifying resident company of another EU member state that has or will hold at least 10 percent of the shares, or a participation with an acquisition value of at least EUR2.5 million (the latter exemption is only applicable in case the Belgian subsidiary pays a dividend to a non-Belgian EU parent company) in the Belgian subsidiary for an uninterrupted period of at least 1 year.

Finally, a general exemption from WHT was introduced for dividend payments to companies located in a tax treaty country made under conditions similar to those set out in the EU Parent-Subsidiary Directive (provided that the tax treaty (or any other treaty) provides for the exchange of information in fiscal matters).

Equity reorganizations

According to Belgian tax law, the following conditions must be met for a domestic reorganization (mergers, (partial) divisions or demergers, and contributions of a line of business or of a universality of goods) to take place under a tax-neutral regime:

• The absorbing company must be a resident of Belgium or another EU member state (EU Merger Directive requirements must be met).
• The reorganization must not have as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance.

The tax-neutral framework is thus available both for domestic reorganizations as well as for cross-border reorganizations within the scope of the EU Merger Directive.

Discounted securities

Under Belgian tax law, there are no specific tax rules for securities acquired at a discount. Specific tax rules may apply to non-interest-bearing receivables or receivables with an interest rate below the market rate.

Deferred settlement

If properly structured, future additional payments for the acquisition of a target company on the basis of its future profits (earn-out clauses) can usually qualify as part of the purchase price of the shares. In principle, this additional purchase price benefits from favorable tax treatment to the seller and increases the share purchase price (non-tax- deductible) to the buyer.

Company law and accounting

Previously, Belgian companies were not entitled to give advances, grant loans or provide securities to third parties to enable the latter to acquire their own shares (prohibition of financial assistance). This restriction was removed and replaced by an entitlement, as a matter of principle, for companies to provide financial assistance with a view to the acquisition of their shares by a third party. Financial assistance is subject to strict conditions:

• The operation must take place under the responsibility of management and under fair and equitable market conditions (last condition no longer applicable for a Belgian private limited company).
• The operation requires the prior consent of the general meeting.
• Management must draw up a report indicating the reasons for the proposed transaction, the interest for the company, the conditions under which the transaction will take place, the risks inherent in the transaction to the company’s liquidity and solvency, and the consideration for which the third party will acquire the shares (the content slightly differs for a Belgian private limited company).
• The sums used under the operation must be available for distribution (net asset test) and (only for a Belgian private limited company) in accordance with the so-called liquidity test. The company must book, on the passive side of the balance sheet, a non-distributable reserve equal to the amounts used for the financial assistance.
• Where a third party acquires shares that have been subject to financial assistance or subscribes to a capital increase, within a Belgian public limited liability company, such acquisition or subscription must take place at a fair price.
• Belgian company law provides certain exceptions to financial assistance without the strict conditions noted above (e.g. for employee takeovers).

There are no specific issues relating to acquisitions from a Belgian accounting perspective.

Group relief/consolidation

As of financial year 2019 (assessment year 2020), Belgian corporate income tax law provides for a system of fiscal consolidation, allowing for a shift of taxable profit through a ‘group contribution’ (for tax but not accounting purposes). To benefit, a 90 percent participation is required and both the payer and beneficiary must be resident of the EEA and subject to tax in Belgium. In addition, the 90 percent participation must be held for an uninterrupted period of 5 taxable years. As a result, the first post-acquisition group contribution between the acquiring company and the acquired company will only be possible from the fifth taxable period after the takeover. The group relief legislation includes specific clauses on the impact of mergers, acquisitions and similar transactions on the minimum holding period.

An indirect technique to obtain tax consolidation involves the use of tax-transparent partnerships. Here, care must be taken to ensure the tax authorities have no reason to impute abnormal profit-shifting to either a foreign group entity or a Belgian loss-making company. For foreign group entities, the profit shifted abroad is added back to the taxable income of the transferring company. For Belgian loss-making companies, the Belgian beneficiary is not permitted to offset its brought forward and current-year losses against the abnormal income received.

Abnormal profit shifting can be deemed to exist not only in the absence of adequate compensation for the transferor but also where a transaction is carried out in economically abnormal conditions. Where a profit-generating activity is transferred to a loss-making related company (e.g. through a tax-neutral contribution of a separate activity) in order to obtain an indirect tax consolidation, the tax authorities might deny the loss-making company the right to offset its brought forward losses against the profits from the activity transferred.

In some cases, where a Belgian target company has accumulated losses, an indirect corporate tax consolidation can be achieved through the waiver or forgiveness of a debt claim on the loss-making company. A common technique in Belgium is a conditional waiver of a debt claim, where the loan is reinstated if the debtor’s financial position improves. Close attention should be paid to such waivers because the Belgian tax authorities scrutinize the business motivation closely.

The concept of VAT-unity was introduced in Belgian law, but specific rules apply where a Belgian target company is extracted from an existing fiscal unity as a result of an acquisition.

Transfer pricing

After an acquisition, where an intercompany relationship develops between the buyer company or group and the target, due care needs to be taken to ensure all such transactions are at arm’s length. Failure to comply with the arm’s length principle may give rise to transfer pricing problems. In a Belgian context, both abnormal and benevolent advantages received or granted could give rise to adverse tax consequences.

An advantage is generally considered by the tax authorities as abnormal or benevolent where the receiving party enriches itself without adequate or real compensation. Belgian case law has defined the notion of ‘abnormal or benevolent advantage’ as follows:

• Abnormal is anything that is contrary to the normal practice in a similar situation.
• Benevolent implies the idea of a gift without (sufficient) compensation.

Where a Belgian enterprise grants an abnormal or benevolent advantage, the amount of the advantage is added back to the taxable base of the enterprise concerned unless the advantage is taken into account when determining the taxable base of the recipient of the advantage. In principle, where the recipient is a Belgian company, the tax authorities accept that this anti-abuse provision does not apply. This should also be the case where the recipient is in a tax loss position.

Tax losses and certain other tax attributes (e.g. investment deduction, NID) cannot be set off against income from abnormal or benevolent advantages received from enterprises that are directly or indirectly related to the company receiving the benefit. The Belgian company receiving the abnormal or benevolent advantage cannot offset prior or current-year tax losses or other tax attributes from the (implied) profit corresponding to the received advantage. The Belgian tax authorities’ position is that this results in the advantage being immediately taxed in the hands of the company receiving the advantage (cash-out), irrespective of prior or current-year tax losses or other available tax attributes. The minimum taxable basis of a Belgian company thus includes the total amount of abnormal or benevolent advantages received. In the case of such adjustment, the tax loss carry forward is increased and the advantage is effectively subject to tax. Therefore, the overall effect generally would be a timing difference (deferral of use of tax losses).

Dual residency

In Belgium, no specific rules apply to dual resident companies. In general, a company is considered a Belgian company for tax purposes if its place of effective management is in Belgium.

Foreign investments of a local target company

In principle, profits realized through a foreign branch are tax-exempt at the level of the Belgian target company under an applicable tax treaty. If no tax treaty is available, the branch profits (net of any foreign income taxes) are taxable at the ordinary Belgian corporate income tax rates.

As from assessment year 2021, tax losses of foreign branches of which the profits are exempt by treaty in Belgium, will only be deductible at the level of the Belgian head office if they concern ‘definitive’ losses within an EEA member state. This will be the case if the foreign branch ceases its activities and the losses can no longer be deducted from the profits of another establishment or legal entity in that member state.

Finally, Controlled Foreign Corporation rules entered into force as of 2019 (assessment year 2020). Belgium has adhered to the transactional approach, with the aim of tackling artificial arrangements with the primary purpose of obtaining a tax benefit.

Advantages of asset purchases

• The purchase price (including goodwill) may be depreciated/amortized for tax purposes.
• In general, no previous (tax) liabilities of the seller are inherited.
• The buyer assumes no inherent tax liabilities on tax-exempt or hidden reserves.
• Possible to acquire only part of a business or some valuable assets (‘cherry-picking’).
• Automatic consolidation of profits or losses of the acquiring entity (including transaction costs and interest charges) with profits or losses of the business acquired.

Disadvantages of asset purchases

• Possible need to renegotiate certain business-related agreements (e.g. supply agreements, renewal of licenses). In principle, the option to subject the asset deal to the system of legal continuity results in a transfer of all applicable agreements by force of law (subject to exclusions).
• Where only assets are acquired, a higher capital outlay is usually involved (unless the liabilities of the business are also assumed).
• Usually unattractive to the seller (due to tax charges on capital gains resulting from an asset deal), thereby increasing the price.
• Real estate transferred is subject to a 10 or 12.5 percent registration duty (unless the transfer is within the VAT regime) and must comply with environmental legislation. Also, a real estate transfer may trigger a VAT revision.
• Accounting profits may be affected by the creation and authorization of acquisition goodwill.
• The potential benefit of any pre-acquisition tax losses or other tax attributes remains with the seller.

 Advantages of share purchases

• Only net assets are purchased, so the capital outlay is lower.
• More attractive to the seller because capital gains on shares may be tax-exempt.
• Carried forward tax losses and other tax attributes of the target company generally remain unaffected if there are business reasons for the change in control.
• Buyer may gain the potential benefit of existing business agreements (subject to any change in control clauses).
• No registration duties and VAT revisions apply on the transfer of shares (unless anti-avoidance provisions apply).
• No environmental formalities are required on a transfer of real estate as part of a share purchase.

 

Disadvantages of share purchases 

• Buyer acquires inherent tax liabilities on tax-exempt reserves and hidden reserves.
• Previous (tax) liabilities of the company are inherited.
• The purchase price or any goodwill included in the purchase price cannot be depreciated for tax purposes. This is generally compensated by a lower purchase price. 
• Strict conditions need to be met to benefit from the system of tax consolidation (as of 2019), and specific debt pushdown mechanisms will likely still be required.

Wouter Caers
KPMG Tax and Legal Advisors Luchthaven Brussel Nationaal 1K
Zaventem 1930
Belgium

T: +32 (0) 3 821 19 73
E: wcaers@kpmg.com

This country document does not include COVID-19 tax developments. To stay up-to-date on COVID-19-related tax legislation, refer to the below KPMG link:

Click here — COVID-19 tax measures and government reliefs

This country document is updated as on
5 February 2021.