Proposal for “broad tax reform” heralds a changing M&A landscape

On 2 March 2023, the Belgian minister of finance released an amended proposal for the first phase of a “broad tax reform”, following the release of the original proposal in October 2022. Some of the new measures proposed have the potential to be true game changers, leaving a permanent mark on the M&A landscape. This is particularly true for the suggested amendments to management incentive plans and carried interest structures, which are pivotal in a deal context and which will be the subject of a separate alert. In this alert we consider some other aspects of the reform which are expected to be of significance for the M&A community. It is important to note that this commentary is based on the current version of the legislative proposal, which may be subject to amendment throughout the legislative process.

From a dividends received deduction (DRD) to a dividends received exemption (DRE) 

Responding to anomalies resulting from previous legislative amendments and alleged incompatibilities of the existing DRD regime with European legislation, one of the measures within the tax reform proposal would convert the existing hybrid model–where the exemption is technically structured as a deduction– into a genuine exemption regime. Whereas dividends received are currently initially included in a company’s taxable basis subsequently to be deducted in the fourth stage of the calculation of taxable profits, the new measure suggests that dividends received immediately be exempt. This change is expected to have wider ramifications than simply being a technical modification, potentially including the following:

• In the absence of sufficient business profits, surplus DRD deductions arising after the entry into force of a new DRE regime may no longer represent a distinct tax attribute, but would be regarded as carried forward tax losses. In such a case, the specific transfer and limitation rules in relation to carried forward DRD for tax neutral restructurings would become obsolete and likely be superseded by the rules governing carried forward tax losses, except for some possible transitional rules in relation to existing carried forward positions. It is useful to note in this context that the 22 October 2022 judgement of the Court of Justice of the European Union in Allianz Benelux (case C295/21) resolved that Belgian legislation limiting the transfer of DRD surpluses on a corporate reorganization does not violate the provisions of the EU parent-subsidiary directive.
  
• It also seems that the bifurcated approach between dividends originating from countries within the European Economic Area (EEA) (which qualify for carry forward of surplus DRD) and non-EEA dividends (which do not qualify for the carry forward) would be abolished. Going forward, dividends received from subsidiaries located in non-EEA countries may also be tax exempt (subject to satisfying the relevant conditions).

Progressing from a deduction to an exemption equally implies that the adverse–and even discriminating–effects of a dividend received on the group contribution regime would be removed, which is good news for target groups that are involved in any cash repatriation planning either prior to or following a transaction. 

As regards the application requirements, the minimum holding requirement would be revisited in such a way that a participation of less than 10% but with an acquisition value of at least EUR 2.5 million would require the additional condition that the participation is recorded as a financial fixed asset for statutory GAAP purposes. This change aims at reserving the DRE–and by extension also the capital gains exemption on shares, which applies broadly the same conditions–for participations where a long-term relationship is established. This is particularly relevant for investors holding short-term equity interests of less than 10% as the new rules may distort their cash repatriation and/or exit strategy. Although the impact of this proposal may be limited, the opposite is true of the proposal that would require investments in so-called “DRD investment companies” to satisfy the minimum holding requirement to be eligible for the DRE and the exemption of capital gains on shares. Such a change would undoubtedly provoke a strong unfavourable reaction from venture capital funds, private equity funds, and investors in general.

As regards tax neutral restructurings, the existing fiction of nonrealisation of share exchanges would remain unaffected.

Ruling practice 3.0

Another relevant measure for the deal practice concerns the proposed introduction of several changes to the Law of 24 December 2002 relating to the advance tax ruling system. The changes are mostly aimed at strengthening and deepening the cooperation between the Office for Advance Tax Rulings (the “rulings office”) and the Belgian Tax Administration generally, thereby improving the legal certainty of such rulings. It has occasionally been the case that advance rulings have been challenged–and even ignored–by the Special Tax Inspectorate, undermining the legal certainty of the rulings. In this regard, the current proposals would fully integrate the existing rulings office into the Tax Administration without prejudice to its independent decision-making position.

Tax deductibility of costs relating to the holding of shares

A final though important observation for the M&A industry comes from the rumour that did not make it to the proposal, i.e., the nondeductibility of costs relating to the acquisition, financing, and holding of shares. This measure was identified as significantly damaging to Belgium’s attractiveness as an investor location and is no longer retained in the pre-draft law.