HISTORY AND BACKGROUND

Belgium is a hereditary constitutional monarchy governed by a multi-party coalition. Until 1815, Belgium was part of France and the FrenchCode Napoléon was installed. When Belgium became part of the Netherlands in 1815, the French administration and legal system were adopted.

Belgium became independent in 1830. Between 1970 and 1993, the country evolved into a federal structure. This occurred through five state reforms (in 1970, 1980, 1988–89, 1993 and 2001). As a result, the first article of the Belgian constitution reads today: ‘Belgium is a federal state, composed of communities and regions’.

As Belgium is a federal state, each region (territorial) and community (culture) has to some extent legislative power.

The regional councils and governments have the authority to levy a few taxes and to modify certain federal taxes (registration taxes, gift taxes, inheritance taxes). Consequently, tax rates and tax exemptions may vary according to the region.

The Flemish parties generally favour much larger community (and regional) autonomy, including financial and tax autonomy, while the francophone parties generally oppose it.

In 1957, Belgium was a founding member of the European Union (EU) so European legislation and/or case law has a significant influence also in (cross border) tax matters (merger directive, parent-subsidiary directive, the EU freedom of movement (persons, capital) and EU freedom of establishment).

Brussels hosts the headquarters of the Council and Commission of the EU, North Atlantic Treaty Organisation (NATO), and many other European and international organisations.

The currency is the euro (EUR).

Matrimonial Property Law And Inheritance Law

Upon marriage and during marriage, the property relationship between spouses is regulated by matrimonial property law.

In the absence of a prenuptial agreement or marital contract, the regime of community property of marital gains applies. Under this regime, all property acquired by the spouses during the marriage is common, except for pre-marital, donated and inherited property. The spouses own these separately, although income from such property is shared.

Under Belgian civil law, spouses are, however, entitled to make a prenuptial agreement or marital contract at their discretion. In this agreement the spouses can either limit (separation of property regime) or extend (universal community regime) the aforementioned community property regime.

Matrimonial property law also regulates the liquidation of the community property by death or divorce. In the case of the death of a spouse, first the community property is dissolved and then the assets are divided between the surviving spouse and the estate of the deceased spouse. The devolution of the estate (including the personal assets of the deceased spouse and his or her part of the community property) is regulated by the inheritance rules.

With regard to the applicable matrimonial law, Belgian law allows a limited choice of law by the spouses. If no marital contract has been signed or no choice has been made, the applicable matrimonial property law is determined by the law of the State in which both spouses had their first permanent residence following their marriage.

Belgian inheritance rules apply to the estate of anyone who is domiciled in Belgium at the time of death, as well as to the Belgian real estate of individuals who are not domiciled in Belgium. Under Belgian law, individuals base their domicile where the centre of their family and economic interests lies. Belgium does not know the concept of domicile of origin.

A forced heirship regime limits a person’s freedom to dispose of his assets by will. Forced heirs can only waive their rights to a reserved portion in very limited cases (a spouse can waive his or her reserved portion when there are children from a previous relationship). Children and the surviving spouse (and in some cases also ascendants) are entitled to a reserved portion of the estate of a deceased individual. A will can dispose of the free portion of the estate, but the following rules of forced heirship will first apply:

a) If there is one child, he or she inherits at least half of the assets, two-thirds are reserved if there are two children, and three-quarters if there are three or more children.

b) The surviving spouse has a life interest (or usufruct) in one-half of the assets of the deceased, in particular in the family home.

The life interest (or usufruct) is the right to hold the assets of the estate and to collect and use the dividends, interest, rent, etc. It does not give a right to sell the assets of the estate. Both the heirs and the spouse have the right to ask that the life interest should be converted into full ownership of some of the assets. This right of conversion may be excluded in a will.

When an individual dies without leaving a will, the Belgian inheritance rules stipulate who will inherit the estate. For example, if the deceased has one or more children, the spouse is entitled to a life interest (usufruct) in the estate and the children are entitled to an equal part in the bare property of the estate.

Legal cohabitants (of the same sex or otherwise) have very limited intestate rights and are only entitled to a life interest in the family dwelling and furniture. This can be altered by will. There are no forced heirship rights between legal cohabitants.

With respect to the applicable inheritance law, choice of law is possible with certain restrictions. Such choice is limited to either the law of the State where the deceased has had his last permanent residence or the law of the State of which the deceased was a national. The Belgian forced heirship regime remains applicable, however.

Belgian law recognises the following forms of will: wills executed before a civil law notary; hand-written wills (which must be written, dated and signed by the testator alone); and international wills. A will can be modified or revoked at any time by the testator.

Gifts made between spouses during their marriage, other than by marital contract, are always revocable by the donor (even until after the death of the beneficiary).

Trusts & Other Forms/entities

A. Trusts And Foundations

Belgium does not have the concept of a trust, but a foreign trust can be recognised under Belgian international private law. A trust settlement is, however, only valid insofar it does not violate forced heirs’ rights. Protected heirs can indeed invoke the forced heirship rules.

A Belgian private foundation can be considered as an equivalent structure to a trust. The private foundation is a separate non-commercial purpose-linked estate that is managed by at least three directors to the benefit of certain beneficiaries (listed in the articles of incorporation). Certain individuals may opt to make a gift to the private foundation (tax free or at a flat gift tax rate) or name the private foundation as legatee in their will (flat inheritance tax rate). This estate planning technique may for example be used for individuals having no children and who want to make sure that their estate will be used for certain philanthropic purposes.

The private foundation may also be used for the purpose of certification of shares (a Dutch foundation or Stichting Administratiekantoor is also often used for this purpose.) The result of the certification of shares will be a split between the economic ownership and the legal property of the shares. For certain individuals it is important to make this split so that they can indicate who will or should be in control of the shares (legal property) after their death, whereas the economic ownership can be transferred (by gift or bequest) to all the legal heirs. If the private foundation meets certain requirements (obligation to redistribute the proceeds on the shares), it will be considered as a tax transparent entity for Belgian income tax purposes.

B. Belgian Civil Company

A Belgian civil company (BCC) (maatschap/société de droit commun) can be considered an equivalent structure to a partnership. A BCC is, in principle, a see-through entity for Belgian tax purposes. It is regularly used to transfer portfolio investments, as the use of the BCC allows the donor to keep control over the assets transferred to the BCC when they decide to donate the shares in the BCC to their children.

C. Belgian Holding Company

Belgium has several entities through which (foreign) investors can invest in Belgium. The corporations or entities most often used in practice are public or private limited liability companies (SA or SPRL).

The minimum share capital required for an SA is EUR61,500. The minimum share capital for an SPRL is EUR18,550 (paid in capital of EUR6,200 for an ordinary SPRL while EUR12,500 is required for a one-person SPRL).

An SA, in principle, requires the appointment of at least three directors, except when the SA has two shareholders. Only one director need be appointed in an SPRL. When a corporate entity is appointed as director, an individual permanent representative should also be appointed. No restrictions apply to nationality or residence of the directors, however in order to comply with so-called substance requirements (an increasingly important consideration in international tax practice), it is recommended to have at least one local director.

Taxation

A. Income Taxes

Belgian residents pay personal income tax on their total income from all worldwide sources on a sliding scale. Belgian tax residents are those persons who have established their residence (permanent home where individuals actually live with their family members) or the seat of their wealth (place where individuals manage their economic affairs) in Belgium. According to an irrefutable presumption, the tax residence of married persons is located at the place where the spouse and children reside.

For 2011, marginal income tax starts at 25 per cent with a top limit of 50 per cent for incomes above EUR35,060. Residents also pay communal and regional taxes at rates between 0 per cent and 8.5 per cent of the total personal income tax payable.

Belgium has, however, a wide treaty network. Belgium’s income tax treaties generally provide for (certain) exemption with progression for foreign income from immovable property, a business or a profession.

The taxable income of real estate liable to personal income tax depends on the purpose for which it is owned. There is no personal income tax on gains realised pursuant to the sale of Belgian real estate when (a) the real estate is the taxpayer’s residence or (b) when the sale occurs more than five years after the acquisition of the real estate.

Belgian tax law provides for favourable taxation of investment income (dividend income and interest income) and capital gains, making Belgium an attractive investment location for individual taxpayers.

Dividend income is subject to a withholding tax of 25 per cent (reduced rate of 15 per cent applies in some cases) and interest income (gain realised pursuant to redemption of the shares by an investment fund may be taxable as interest income if the fund invests more than 40 per cent in debt securities) is subject to a withholding tax of 15 per cent. The withholding tax constitutes the final tax (no obligation to refer to this income in the annual tax return). If no Belgian withholding tax is due (foreign bank account and there is no Belgian paying agent) then the individual should mention the dividend and interest income in the annual tax return. Upon liquidation of a Belgian or foreign company, the Belgian resident shareholder is taxed on the liquidation gains at a rate of 10 per cent.

There is no capital gains tax on shares when the gain is regarded as realised within the normal management of your private estate. If the investment is speculative, abnormal or made in the course of business, income tax will, however, be due.

Top executives are often self-employed or use a personal management company. If properly structured, it will not be challenged by either the social security or the income tax authorities.

Foreign executives or employees temporarily assigned to Belgium may benefit from a special tax regime if certain conditions are met. These foreign executives or employees are then treated as non-residents for income tax purposes and are only liable to Belgian income tax on their Belgian source income. They can also benefit from certain allowances that are tax exempt.

With respect to beneficiaries of foreign trusts, a distinction should be made between discretionary trusts and fixed-interest trusts. If the settlor has set up an irrevocable discretionary trust, the beneficiaries do not have any rights to the trust assets and have no obligation to declare the benefits they receive from the trust in their income tax return. In the case of a fixed-interest trust the beneficiaries have the right to receive a specific fixed interest in the trust, therefore the fixed-interest trust will usually be treated as tax transparent for income tax purposes. The distinction between these two types is often difficult to make. It all depends on the factual circumstances.

A legal entity is a Belgian tax resident if it has its legal seat, main establishment or effective management in Belgium. For corporate law purposes, Belgium applies the real seat theory.

Belgian resident companies of Belgian branches of foreign companies are currently taxable at the ordinary rate of 33.99 per cent. Multiple tax incentives exist, however, which, in practice, mean that the effective tax burden can be much lower. Reduced rates apply for SMEs.

Carry-forward of losses is unlimited in time.

I. International Competitive Holding Regime

Under the following conditions, a Belgian company can benefit from the participation exemption up to 95 per cent of the dividends received:

  • the Belgian company shareholder must hold in full ownership during an uninterrupted period of one year a minimum participation of at least 10 per cent or a participation with an acquisition value of at least EUR2.5 million,
  • the subsidiary distributing the dividend must be subject to Belgian corporate income tax or a similar foreign tax (subject to tax requirement). Special rules apply for offshore companies, investment companies and/or finance companies.

When comparing Belgium as a holding company jurisdiction with other European countries, the main attraction of Belgium’s holding regime is the 100 per cent exemption of capital gains on qualifying shares (i.e. participations that successfully pass the subject to taxation requirement and look through provisions) without any threshold or holding period requirement.

As a general rule, interest payments made or charges incurred by a Belgian company in relation to a bank debt or a shareholder’s loan, are in principle tax deductible provided they are made (incurred) in order to acquire or preserve taxable income. Consequently, interest payments in direct economic connection with the acquisition of qualifying shares (tax exempt capital gains) are tax deductible. Recent Belgian case law, however, shows that the Belgian tax authorities are becoming more strict when applying this test.

Ii. Withholding Tax Rules For Dividend Up Streaming

Dividend up streaming is not subject to Belgian withholding tax (WHT) under the conditions of the EU Parent-Subsidiary Directive. Additionally, no WHT is due on dividends paid to companies located in a tax treaty country (provided the treaty contains an exchange of information clause). The latter relief will apply if the parent company: (i) is a resident of a country with which Belgium has a tax treaty; (ii) is subject to corporation tax or to a similar tax; (iii) is not subject to a tax regime that deviates from the common tax regime; (iv) holds a minimum shareholding of 10 per cent in the distributing company for a minimum period of one year; and (v) has a legal form similar to the forms entitling a company to benefit from the Parent Subsidiary Directive. The latter withholding tax exemption provides an additional international tax planning tool; especially knowing that Belgium has a quite extensive tax treaty network (e.g. with USA, Singapore, Hong Kong, etc) and is currently involved in negotiations with several states.

Iii. Notional Interest Deduction (nid)

In 2006, the so-called risk capital deduction or notional interest deduction, as it is more commonly known, was introduced. The notional interest deduction entitles Belgian companies and Belgian branches of foreign companies to deduct from their taxable base a fictional interest based on their aggregate equity amount. The applicable rate for income year 2011 is 3,425 per cent (3,925 per cent for SMEs). Proper tax planning around the notional interest deduction may help to reduce Belgian corporate tax liability considerably. It may also contribute to reduce overall tax liability for multinational groups, especially where a Belgian finance company is established as an alternative to the well-known Belgian coordination centre.

Iv. Patent Income Deduction And Other R&d Incentives

Over the past years the Belgian government made a lot of effort to make Belgium a prime location for R&D activities. In 2007 the so-called ‘patent income deduction regime’ (PID) was introduced. Under this regime, patent income received by Belgian entities (companies and branches of non-resident companies) can benefit from an 80 per cent exemption, resulting in an effective tax burden on the qualifying income of only 6.8 per cent. A combined application of the PID and other tax incentives, like for example the NID, investment deduction, R&D tax credit and/or partial wage tax exemption for researchers may lead to substantial tax savings.

V. Tailor-made Vehicle For Private Equity

In 2003, the Belgian legislator introduced an investment vehicle for private equity investments called the Private Privak (Pricaf). As the original legislation was perceived as being quite stringent, new amendments were introduced in 2008 with the aim to make the Private Privak a much more flexible entity. The main advantage of the Belgian Pricaf is that is offers a combination of separate legal personality and transparency for tax purposes. In practice, the Pricaf is mainly used for private equity investments and exit route structuring.

B. Main Estate Tax Features

I. Inheritance Taxes

The taxable event is the death of a Belgian resident, not the Belgian residence of the heirs of legatees. The tax residence of the deceased determines the applicable legislation (Flemish, Brussels or Walloon regions). The tax residence is the place where the deceased had their actual residence in the last five years before their death.

The tax rate is determined per heir or legatee, taking into account the portion of the estate each of them receives and their degree of kinship with the deceased. Rates vary according to the region and the degree of kinship, and are progressive. In Flanders, the maximum rate is 27 per cent in direct line and between spouses and cohabitants and a maximum of 65 per cent between other persons. In Brussels and Wallonia, the maximum rate in direct line is 30 per cent and 80 per cent between non-related persons.

In principle, all debts are deductible, as well as the costs of the funeral, if the deceased was a Belgian resident. For non-residents, where only real estate located in Belgium is taxable, deduction of real estate debts is possible to some extent.

There is a full exemption for family owned businesses in Flanders and Wallonia and a reduced rate of 3 per cent in Brussels when certain conditions are met.

There is a clear interaction between inheritance taxes and gift taxes. If the donor dies in the three years following the gift, inheritance taxes will be due unless Belgian gift taxes have been paid.

With regard to foreign trusts, no inheritance tax liability arises while it remains uncertain that the beneficiary will get any rights to the trust assets pursuant to the settlor’s death (discretionary trust). Belgian inheritance taxes will be due when the beneficiaries are entitled to the income and/or capital of the trust pursuant to the settlor’s decease.

As Belgian inheritance taxes apply to all assets of a deceased Belgian resident, double taxation can be an issue. Pursuant to Belgian domestic law, relief for double taxation is only granted for inheritance tax paid abroad in relation to foreign real estate. The foreign inheritance tax can then be offset against the Belgian inheritance tax. Belgium has only signed two inheritance tax treaties (France and Sweden).

Ii. Gift Taxes

The taxable event is the gift by a Belgian resident to a beneficiary (not necessarily a Belgian individual or entity) and not the Belgian residence of the beneficiaries.

Belgian gift tax has a rule that payment of the tax on movable goods depends upon the decision of the donor. If the donor makes a gift of movable assets (cash, portfolio, shares) before a Belgian notary, gift tax will be due according to the applicable regional legislation (mostly at 3 per cent or 7 per cent). If a deed is made before a foreign notary, or when no notary deed is drawn up (this is not always legally possible), then no Belgian gift tax is due.

Gifts of Belgian real estate have to be registered (before a Belgian notary) and are subject to higher gift taxes. Gifts of foreign real estate are free of Belgian gift tax.

Iii. Wealth Tax

There is no wealth tax in Belgium.

C. Vat

The ordinary value added tax (VAT) rate is 21 per cent, however in some cases the VAT rate applied is 6 or 12 per cent.

As from 1 April 2007, taxable persons established in Belgium that are closely related through financial, economic and organisational links, are entitled to opt for VAT grouping. The measure contributes to reducing irrecoverable VAT and overall compliance costs.

D. Capital Duty And Real Estate Transfer Taxes

In Belgium, in principle, no capital duty exists. However, 10 or 12.5 per cent transfer tax (calculated on the sales price or market value) is due upon transfer of real estate. Generally, no transfer tax is due when transferring the shares of a Belgian real estate company.

Other Relevant Matters

Ruling Practice

In year 2005, the Belgian ruling procedure has been renewed. Since then, the ruling practice has played an important role in putting Belgium back at the forefront of countries where businesses can get legal certainty on the tax treatment of their operations. Businesses may, in principle, submit a ruling request on any tax issue to the commission. This may be done from the outset in a formal way. It is also possible to start discussions with the commission on an informal basis during so-called pre-filing meetings. To date, business reorganisations and transfer pricing issues are the most popular among the issues submitted.