Setting up for business
Despite its reputation as a relatively high tax country, Belgium actually offers several very attractive tax incentives, including deductions for the cost of capital, on patent income and other research-related costs, and on capital gains. Expatriate executives also may benefit from substantial tax advantages.
Notional interest deduction
All companies subject to Belgian tax and Belgian branches of non-tax resident companies are allowed to claim a notional interest deduction on tax reflecting the economic cost of using capital. The cost of capital is calculated as the average of published interest rates for 10-year Belgian government bonds (OLOs).
No advance ruling (see 'Advanced ruling' hereunder) is required to apply for the deduction. It is equal to the amount of risk capital multiplied by 3.8 for a large company and 4.3 for small and medium sized companies.
If there are insufficient tax liabilities in the year of deduction, the taxable amount can be carried forward for seven years.
This measure has the following advantages:
- Reduces the taxable base of the company, thus providing attractive tax savings.
- Protects the capital of companies, so they can be financially stronger and more independent.
- Provides flexibility, because under certain circumstances it is possible to carry forward any unused amount of the deduction.
- Complies with EU regulations and offers companies legal certainty.
Advance ruling in tax matters
A tax ruling is a unilateral written declaration by the Belgian Tax Authorities at the request of a (potential) taxpayer about the application of the tax law in a specific situation, which has not yet occurred, and as described by the taxpayer. Advance tax rulings are of particular importance in evaluating the potential net profits of a planned investment project.
The ruling application must be submitted on paper to the Federal Public Finance Department and must contain the following elements:
- Identity of the applicant and, if applicable, of third parties.
- Description of the activities of the applicant.
- A complete and detailed description of the particular situation or operation.
- Reference to the legal or regulatory provision on which the decision should be based.
Until a final decision is made, the application must be updated with any new information that relates to the operation or situation.
Applications can be submitted at any time on paper and the tax authorities have three months in which to answer the request for a ruling. This timeframe can be altered by mutual consent of the taxpayer and the tax administration. The tax authorities must inform the taxpayer of the established timeframe no later than 15 days after the receipt of the completed request for a ruling.
A decision is valid for five years, unless the object of the request justifies a different period.
Foreign executives who are temporarily assigned to work in Belgium within an international group of companies or who have been recruited directly abroad by a Belgian company belonging to such an international group in order to render services in Belgium temporarily can benefit from a special tax regime.
The assignment to Belgium must, in principle, be of a temporary nature, and the foreign executive will have to prove that he maintains his centre of economic interests outside Belgium.
In general, the employer has to be a part of an international group of companies. This special expatriate tax regime offers two important tax advantages to foreign executives:
- Foreign executives on temporary assignment qualify, for Belgian tax purposes, as non-residents. This means that only the expat’s income related to his activities in Belgium and his other Belgian source income will be taxed.
- Within certain limitations, reimbursements of expenses incurred by the employee as a result of his temporary stay in Belgium are not taxable. These costs are considered expenses that are attributable to the employer rather than the employee.
In order to be treated as an ‘expatriate’, the following conditions must be fulfilled:
- The executive must have a foreign nationality.
- Expatriates who apply for the special tax regime are mainly management personnel, research personnel, and foreign personnel without managerial responsibilities who are highly specialised.
- The employment in Belgium must be temporary.
Patent income deduction
Eighty percent of the income from patents can be deducted from the tax basis. This results in an effective tax rate of maximum 6.8% on this income. This tax incentive is available to all corporate taxpayers in Belgium, both Belgian resident companies and the Belgian branch offices of non-resident companies.
|Corporate tax (33,99%)||(6.8)|
|Net income after tax||93.2|
|Effective tax rate||6.8%|
This is a very attractive measure as it:
- Provides a very low effective tax rate of maximum 6.8% and there is no ceiling on the amount of the deduction.
- Is in an extra deduction on top of the normal tax deduction for R&D related expenses.
- Can be combined with the notional interest deduction for invested equity.
The tax deduction for patent income applies to:
- Patents or extended patent certificates owned by a Belgian company or establishment as a result of its own patent-development activities (partly or fully) in Research & Development centres in Belgium or abroad.
- Patents or extended patent certificates acquired by a Belgian company or establishment provided it has further developed the patented products or processes in the company’s research centres in Belgium or abroad.
The Belgian company or establishment can use the patents - owned by it or licensed to it - to manufacture patented products or have them manufactured on its behalf. Alternatively, it can license the patents to other parties.
To benefit from the deduction, the research centre should qualify as a so-called ‘line of business’. In essence, it should be an entity or a division of an entity that is capable of operating autonomously.
Calculating the patent income deduction
For patents licensed by the Belgian company or establishment to any party – whether related or unrelated – the tax deduction amounts to 80% of the relevant patent income, to the extent that the income does not exceed an arm's length price.
For patents used by the Belgian company or establishment for the manufacture of patented products - manufactured by itself or by a contract manufacturer on its behalf - the tax deduction is 80% of the licence fee that the Belgian company would have received had it licensed the patents used in the manufacturing process to an unrelated party.
Partial exemption on salary withholding tax for researchers
Belgian law has recognised the importance of providing tax incentives to stimulate innovative activities in Belgium by allowing the partial exemption of Belgian payroll withholding tax on salaries paid to researchers.
Typically, an employer deducts withholding taxes, among other sums, from employee salaries. The employer then passes this amount on to the tax authorities. This measure exempts the employer from paying a part of this amount, thus resulting in increased profit for the company.
In other words, withholding taxes are calculated as before and recorded on the employee’s tax slip. However, the employer keeps a part of these income taxes.
The exemption can be applied in the two following cases:
- For innovative start-up companies: the employee concerned is either a researcher, a research technician, or a research and development project manager.
- For highly skilled researchers employed in Research & Development projects: researchers with a diploma such as a doctor of applied sciences, natural sciences, medicine or veterinary medicine, or civil engineering.
Exemption of capital gains on shares
Capital gains realised by a Belgian resident company on shares in a Belgian or foreign company are fully exempt from corporate income tax, provided that the dividends on the shares qualify for the participation exemption. For purposes of the participation exemption for capital gains the minimum participation test is not required.
Unrealised capital gains on shares that are recognised in the financial statements (recognition is not mandatory) are taxable. But roll-over relief is granted if, and as long as, the gain is booked in a separate reserve account on the balance sheet and is not used for distribution or allocation of any kind.
As a counterpart to the exemption of realised capital gains, capital losses on shares, both realised and unrealised, are not tax deductible. However, the loss incurred in connection with the liquidation of a subsidiary company remains deductible up to the amount of the paid-up share capital.
Capital gains on other assets are taxed at the ordinary rate. If the total amount of sales is used for the purchase of depreciable fixed assets within 3 years, the taxation of the capital gains will be spread over the depreciable period of these assets.
Depreciation can be applied on set-up expenses and on intangible and tangible fixed assets with a limited economic lifetime.
Two depreciation methods are applicable: the straight-line and the double declining balance method.
- Under the straight-line depreciation method the asset is depreciated over its useful economic lifetime based on a fixed percentage of the acquisition value.
- The double declining balance method takes as depreciation percentage the double of the straight-line depreciation percentage with a maximum of 40% of the acquisition value, calculated on the value of the asset at the end of the previous fiscal year.
For certain new fixed assets, the tax administration has issued maximum depreciation rates:
|Commercial buildings and office buildings||3%|
|Machinery and plant equipment||10 to 20%|
|Office furniture and equipment||10 to 15%|
|Vehicles||20 to 25%|
|Small equipment||33 to 100%|
Companies may deviate from these percentages in specific circumstances.