Capital gains on shares for corporate tax payers in 2018 – pitfalls and opportunities

Through the press and social media, we received the message that the sale of the shares of RSC Anderlecht by minority shareholders had to be concluded before 31 December 2017 for tax reasons. What exactly are the changes relating to capital gains on taxation that were implemented by the summer agreement?

What will change?

Before the reform introduced by the summer agreement (see also our previous article on corporate tax reform), capital gains on shares were exempt from corporate tax if:

• it concerns a participation (shares in a company);
• the dividends derived from that participation qualify for the Dividend Received Deduction rule (subject to tax requirement of the distributing company), exempting the dividends for 95.00%; and
• the participation must have been held in full ownership for an uninterrupted period of at least one year (detention requirement).

In contrast to the rules for dividends, there was no minimum participation requirement for the capital gain exemption (10.00% or 2.5 million EUR acquisition value). The absence of the participation requirement made Belgium all the more attractive to our neighbouring countries such as the Netherlands and Luxembourg. Please do note that for large companies, a separate levy of 0.412% applied to the realized capital gain. Capital gains that did not meet the detention requirement (but did meet the subject to tax requirement) were taxed at 25.75%.

Before the reform

Detention period < 1 year

• 25.75%                       valuation requirement met
• 33.99%                       valuation requirement not met

Detention period > 1 year

• 0.412%                       not a SME and valuation requirement met
• exemption                 SME and valuation requirement met

After the reform

Assessment year 2019

Detention period < 1 year

• 25.50%          valuation/participation requirement met (under conditions 20.40% for SMEs)

Detention period > 1 year

• exemption     taxation/participation requirement met (if not met, 29.58% or under conditions 20.40% for SMEs)

Assessment year 2021

Detention period < 1 year

• 25.00%          taxation/participation requirement met  (if not met, 25.00% or under conditions 20.40% for SMEs)

Detention period > 1 year

• exemption      taxation/participation requirement met (if not met, 25.00% or under conditions 20.00% for SMEs)

Because of the aforementioned reform, the capital gain exemption is fully synchronized with the dividend received deduction.  This has important consequences:

• one taints all principle: before the reform, in case of disposal of a tainted share (i.e. a share that did not qualify for the dividend received deduction) the full capital gain was not exempted in a whole share package.  After the reform, it is clear that a proportional exemption is possible (like with the dividend received deduction);
• disposal of a part of a qualifying participation: assume that a taxpayer has a qualifying participation (more than 10.00% or 2.5 million EUR) and that he only disposes of a part (e.g. less than 10.00%) of his qualifying participation. Although this is not explicitly mentioned in the law, the legal doctrine agrees that the capital gain exemption should apply in the aforementioned case; and
• exchange of shares: when a Belgian company, subject to conditions, contributes shares in a Belgian or European company in exchange for new shares of the latter company, this capital gain is (temporarily) exempt under the Merger Directive. As a result, it is possible to exchange tainted shares for untainted shares (under the provision of the Merger Directive implemented in Belgian law) and then request an exemption on the basis of the exemption for capital gains on shares mentioned above.  The Belgian legislator has therefore provided for an anti-abuse provision, which limits the capital gain exemption to the capital gain that has accrued after the exchange of shares.  Please note that this provision only applies to shares that do not meet the valuation requirement.  Why the detention and/or participation requirements are not subjects of this provision is not clear and may lead to improper use of this provision.

Please also note that the dividend received deduction will be increased from 95.00% to 100.00% as from assessment year 2019. That makes that Belgium still remains a “holding” country that is interesting under certain circumstances, certainly because the interest on loans taken out for a participation (which qualifies for the dividend received deduction or capital gain exemption) is still deductible.

Hans Decleir