1 Unique TAX INCENTIVES in Belgium 2015 Michela Ritondo Fiscal Department for Foreign Investments Federal Public Service Finance

2 Effective (Average) Corporate Tax Rate (ECTR) Sources : ZEW, Centre for European Economic Research, Manheim Effect Tax Levels – Report 2013 Especially in Belgium, the ECTR is considerably below statutory tax rates (-7,7%) 2

3 1/ Tax incentive for risk capital : Notional Interest Deduction Principle Companies are allowed to deduct a fictitious interest calculated on the basis of their shareholders equity Consequences Reduced effective tax rate Federal Public Service Finance Federal Public Service Finance

4 Who? Companies subjected to  Corporate tax  Non-residents / Corporate Tax Federal Public Service Finance 1/ Notional Interest Deduction

5 How does it work ? Annual Tax Deduction = EQUITY (in the opening balance sheet of the taxable period) X RATE ( 10-year OLO ) Federal Public Service Finance 1/ Notional Interest Deduction

6 « Qualifying » equity  Equity = total equity as defined under Belgian GAAP (includes retained earnings)  in the opening balance sheet of the taxable period  “ adjusted ” to avoid double use and abuse. 1/ Notional Interest Deduction Federal Public Service Finance

7 Interest Rate  RATE = annual average of the monthly published rates of the long term Belgian Government Bonds (10-year OLO) of the months July, August and September of the penultimate year prior to the tax year (budget law 2013)  Fixed yearly for 2015 (Tax Year 2016):  1,63% (2,13% SME’s) 1/ Notional Interest Deduction Federal Public Service Finance

8 (Return on Equity: 4%) AssetsLiabilities Group Financing Share Capital / Notional Interest Deduction Example P&L Account Profit before tax N.I.D. (1,63%) Taxable Corporate Tax (33,99 %) Effective Tax Rate Before N.I.D / ,99 % With N.I.D ,1 % Federal Public Service Finance

9 EXAMPLE 2: Net Result (Return on Equity) Effective Tax Rate ≤ 1,63 %0 % 4 % (Previous slide)20,1 % 5 %22,9 % 6 %24,7 % AssetsLiabilities Business Assets Share Capital Federal Public Service Finance 1/ Notional Interest Deduction

10 Other particularities  For SME’s: + 0,5%  Rate = 2,13%  Permanent measure  No ruling nor agreement is needed  Suppression of the 0,5% capital duty as of 1/1/2006  EU compliant Federal Public Service Finance 1/ Notional Interest Deduction

11 Principle The investor describes the facts to the tax administration, allowing him to know, in advance, how the tax laws are to be applied on a case by case basis Consequences Confidence to invest Legally binding & accurate forecast Scope of applications Corporate tax, individuals tax, customs, VAT, Transfer pricing, Business Restructuring, Deductible expenses Financing, Branches, Bonded warehouses, etc. 2/ Tax Ruling Federal Public Service Finance

12 Belgian DISTRIBUTION Centre Belgian SERVICES Centre Operational Companies Operational Companies PARENT COMPANY e.g. USA / Japan… * OECD accepted norm: arm ’ s length standard Cost plus % case-by-case ruling * Federal Public Service Finance 2/ Tax Ruling

13 Examples of matters that can be cleared in advance:  Transfer pricing issues Cost plus ruling for European Distribution Center (EDC) Cost plus ruling for Service Sharing Center (SSC)  Taxable presence or not in Belgium ? In the hands of the foreign principal of a Belgian manufacturer or sales function In the hands of the service recipients of a EDC or SSC  Personal tax issues Amount of tax-free lump sum allowances for personnel  VAT issues  “Tonnage” tax regime for shipping … Federal Public Service Finance 2/ Tax Ruling

14 3/ Dividend withholding tax exemption Conditions to benefit  be resident in a country with which Belgium has concluded a double tax treaty;  the beneficiary holds a participation of at least 10% in a Belgian subsidiary, for an uninterrupted period of at least 12 months = low participation threshold; Federal Public Service Finance

15 Parent company (treaty partner of Belgium) Belgian Subsidiary  No WHT  No LOB  10% shareholding  12 months Federal Public Service Finance 3/ Dividend withholding tax exemption

16  Participation exemption  dividends received : deduction of 95%  Deductibility of interest paid to acquire shares  No capital duty  For large enterprises: low taxation of 0,412% on realized capital gains on shares if minimum holding period of 12 months is fulfilled  For SME’s: full exemption of realized capital gains on shares if min holding period of 12 months is fulfilled 4/ Holding regime Federal Public Service Finance

17  For foreign executives and managers temporarily detached in Belgium :  Tax free expatriate allowance (cost of living, cost of housing, tax equalization)  operational entity: € / an  HQ or R&D centre: € / an  Reimbursement of non-repetitive expenses (installation costs, moving expenses, school fees)  unlimited amount tax free  « Travel exclusion » : workdays performed outside Belgium  tax free in Belgium 5/ Expatriate status Federal Public Service Finance

18  For employers :  No tax, no social security contributions on expatriate allowances and reimbursement of expenses  Deductible from Corporate tax Federal Public Service Finance 5/ Expatriate status

19 6/ 10 good reasons to invest in R&D 1. Patent Income Deduction 2. Investment deduction for R&D related investments and patents 3. R&D Tax Credit 4. Partial exemption salary withholding tax for researchers 5. Tax allowance for additional employee

20 6/ 10 good reasons to invest in R&D ! 6. Innovation premium 7. Expatriate status in R&D 8. Tax exoneration for regional grants 9. Accelerated depreciation of R&D intangibles 10. Deductible gifts

21 6/ Tax incentives for R & D 1/ Patent income deduction What is it ? Deduction of 80% of the income from patents from the taxable basis, resulting in an effective tax rate of maximum 6,8% on this income Who can benefit ? Belgian companies and Belgian establishments of foreign companies

22 6/ Tax incentives for R & D 1/ Patent income deduction Example Patent income: 100 Deduction: ( 80) Taxable basis: 20 Corporate Tax (33,99%) (6,8) Net income after tax: 93,2  Effective Tax rate: 6,8 %

23 6/ Tax incentives for R & D 1/ Patent income deduction Patents concerned self-developed or co-developed by a Belgian company or branch; acquired by a Belgian company or branch provided they are being further developed in Belgium or abroad (by acquisition, or license,…) Large companies must have in-house R&D activities in a R&D center that qualifies as branch of activity As of 1 January 2013 SME’s are exempted from the R&D center requirement

24 6/ Tax incentives for R & D 1/ Patent income deduction Calculation of the deduction For patents that are licensed: 80% of the patent income received, to the extend the income is at arm’s length For patents that are used in the production process: deemed deduction of 80% of the at arm’s length royalty that would have been received had the patents been licensed to unrelated third parties

25 Développer une entreprise axée sur R&D

26 6/ Tax incentives for R & D 1/ Patent income deduction Applies to variable income streams, fixed income streams, as well as upfront fees, milestones, etc. Other intellectual property rights (copyrights, know- how, designs, trademarks, etc.) do not qualify.

27 6/ Tax incentives for R & D 1/ Patent income deduction Highly competitive measure Very low effective tax rate of maximum 6.8% and absence of any capping rules; Tax deduction in addition to normal tax-deductibility of R&D related expenses; Can be combined with Notional Interest Deduction for invested equity, etc.

28 6/ Tax incentives for R & D 2/ Investment deduction for R&D related inv. and patents Investment deduction for R&D related investments: for assets which aim to promote R&D of new products and advanced technologies which are environment-friendly :  deduction of 13,5% on the investment value (in one shot) OR 20,5% on the annual depreciation (spread deduction) Investment deduction in patents acquired or self-developed by the company  deduction of 13,5% on the investment value NB: In case of insufficient profits, deduction carried forward for an unlimited period.

29 6/ Tax incentives for R & D 3/ R&D Tax Credit Corresponds to the tax saving linked with the investment deduction Ex.: Investment of € Tax credit = x 13,5% x 33,99% = € Advantage: improved presentation in accounting terms of the cost price of R&D in Belgium In case of insufficient profits, the Tax Credit can be carried over to the subsequent 4 tax years; The part not used after 5 years is refunded.

30 6/ Tax incentives for R & D 4/ Income tax reduction for researchers, in favor of employers Principle: the salary withholding tax is normally retained on the remunerations paid to the researcher, but the amount of tax so retained must not be totally paid to the Belgian Treasury (= extra financial means for the employer)  80% exemption ! For researchers with a specific degree, engaged in R&D program

31 6/ Tax incentives for R & D 5/ Tax allowance for additional employee Exemption of € (year 2015) from the enterprises profits: for the manager of Total Quality department for the manager of Exportations department

32 6/ Tax incentives for R & D 6/ Innovation premium Principle: the premiums must be granted for an innovation which creates genuine added value for the normal activities of the employer  exemption from personal income tax for the beneficiary  exemption from social security contributions  deductible against corporate income tax for the employer Conditions:  the amount paid per worker may not exceed one month’s gross salary per calendar year  Publication within the company of the criteria, identification of the project,…and communication to the Ministry of Economic Affairs

33 6/ Tax incentives for R & D 7/ Expatriate status in R&D Attractive conditions for foreign executives and researchers: Exclusion from the taxable remuneration of expatriation allowances  max € per year for repetitive expenses (cost of living, cost of housing, tax equalization)  tax free reimbursement of installation costs, school fees,… Exclusion from the taxable remuneration of workdays performed outside Belgium Attractive conditions for employers: Reduction of employment cost for expatriates with simple proceedings

34 6/ Tax incentives for R & D 8/ Tax exoneration for regional grants in favor of R&D Subsidized assets or intellectual property out of a subsidized project can not be transferred during a 3 year period

35 6/ Tax incentives for R & D 9/ Accelerated depreciation of R&D Intangibles Tax depreciation rules on R&D investments (intangibles):  accelerated depreciation in 3 years instead of 5, according to the straight-line method of depreciation

36 6/ Tax incentives for R & D 10/ Deductible gifts Cash contributions aiming at sponsoring public R&D programs  deductible from the net taxable income  max. 5% of the net income or €

37 People Wage withholding tax exemption Tax allowance for additional employee Innovation premium Expatriate tax regime Belgian R & D Centre Activities Investments Patents Favourable transfer pricing rulings Investment deduction R&D Tax credit Accelerated depreciation Tax exoneration for regional grants Patent Income Deduction

38 Example Manufacturing company with a R&D division: Share capital: (of which = contributed patent value) Return on equity: 12%  Net profit: (of which = patent income ; = product revenue) To deduct Invest. ded. on patents: 13,5% x = 2700 Patent Income Ded.: 80% x = 2400 N.I.D. 1,63% x = 1630 Taxable basis:  Corporate Tax: (5 270x 33,99%) =  Effective tax rate: 14,9 % INVEST IN BELGIUM – increase your profits

39 More information ? Contact Federal Public Service Finance Fiscal Department for Foreign Investments Rue de la Loi, 24 (Parliament Corner) 1000 Brussels - BELGIUM Michela Ritondo Tel.: