3 March 2023
Employment Tax
Impact: High
Intro
The word is out there. The cages rattled. Mr Van Peteghem came back from the drawing board and his administration has prepared a pre-draft legislation that will soon result in a first legislative government proposal addressing a wide range of items within the Belgian tax system, aiming to trigger a ‘tax shift’ which could have a significant impact.
What’s on the table?
Please find below an overview which is mainly focused on employment tax and personal income tax related matters. It is by no means exhaustive and cannot be considered as final, due to the fact that the actual draft legislation still has to be introduced in Parliament. As a moving ‘target’, the potential initiatives can (and most likely will) be subject to multiple amendments and fine tuning.
1. Reshaping the world of alternative remuneration: “equity awards”
It is anticipated that the Belgian income tax code will be updated with a specific section in relation to “financial instruments of remuneration” (shares, share certificates, options) that can be granted to employees or company directors (as of 1 January 2024) by virtue of or at the occasion of their professional activity.
Will this impact the taxation of stock options in Belgium?
Yes, the current legislation, which is based on the Law of 26 March 1999, will be incorporated in the Belgian income tax code and will be amended on specific points. As this is income tax legislation, no specific provisions are included regarding the social security treatment of stock options. In the current regime, taxation typically takes place at the moment of grant if the stock options are accepted in writing within 60 days following the offer date.
However, in case the options are not accepted within this 60-day period, the options (deemed refused options) fall outside the scope of the Belgian stock option legislation and will become taxable at exercise. Under the new pre-draft legislation it is anticipated that taxation could still occur at the moment of grant (i.e. pre-financing of taxes by the beneficiary), if certain conditions are met:
– The option should exclusively relate to shares of the company in which the beneficiary is an employee or company director, or a company which controls the first mentioned company or which is controlled by it. As a result, this tax regime would no longer be applicable for individuals who are providing services through their own management company.
– Furthermore, the option must be non-transferable. As a result, Over-The-Counter stock options (OTC) and warrants (i.e. quoted options on an investment fund), which may have the same characteristics as ordinary stock options, will be excluded from this tax system.
– The actual wording will need to be checked, but it is anticipated that during a period of 60 days following the offer, the beneficiary will have a choice to become taxed at grant (accepting the offer) or ending up with taxation at exercise.
Just like under the current system, in case of taxation at grant, a lump-sum valuation will be applicable. For unquoted options with a life of 5 years maximum, the taxable benefit (time value) will be determined as 18% of the stock value (to be increased with 1% for each year or part of a year exceeding the 5 year lifespan). If certain conditions are met, these percentages can still be reduced by half. In case the exercise price (strike price) of the option would be lower than the (fair market) value of the underlying shares at the offer date, the discount will still constitute a taxable benefit.
Under the current regime, under specific circumstances, a “guaranteed benefit” could be provided to the beneficiary (e.g. cash compensation for the pre-financed taxes paid at grant), without triggering an additional taxable income. It is clear that this practice will no longer be possible under the new legislation. In principle, any guaranteed benefit will create a taxable income.
Free grant of shares: Introduction of a new system (tax deferral)
We can expect fundamental changes here. Under the current Belgian tax rules, taxation is generally triggered when the ownership of the granted shares is transferred to the beneficiary. Shares can be granted directly to an employee or to a company director. However, the beneficiary can for example receive Restricted Stock Units (RSU), which are commonly used in international long-term incentive plans and via which the employer/company essentially makes a promise to grant shares for free at a later date (typically when a vesting period will have ended).
It is anticipated that the draft legislation will introduce a specific tax regime in relation to the free grant of shares. Under this new system, in case of free grant of shares, taxation will be deferred until the moment of actual disposal (taking into account a First In First Out / FIFO approach). Such a tax deferral is rather new in Belgium and may trigger a new reporting requirement in the Belgian resident or non-resident income tax return.
The new legislation foresees taxation (as professional income) at the progressive tax rates upon the sale of the shares and this on the FMV of the shares at vesting (transfer of the ownership to the beneficiary). For free shares that are granted unconditionally (without specific vesting schedule), this will be the FMV at grant (i.e. when the shares are granted to the beneficiary). Any capital gain realised at the time of sale will then be taxed as miscellaneous income in the hands of the beneficiary at a flat tax rate of 15%.
Moreover, it is anticipated that “exit tax” formalities will become due for beneficiaries that have received shares but will break their Belgian tax residency prior to the disposal of the shares.
Management incentive plans with disproportionate return
It is anticipated that specific provisions will be foreseen with respect to “management incentive plans” and “carried interest plans”, regardless of the legal form/construction, that provide financial instruments (e.g. preference shares) to managers at a low entry price, with the purpose of generating a disproportionate (surplus) return – compared to the normal return on investment that an external investor (who is not professionally active in the company) could generate with the same amount invested. Surrounded by legal uncertainty, in practice, taxpayers may have taken the position that such disproportionate return (surplus) was regarded as a tax-free capital gain realised within the normal management of a private estate, at the moment of exit (disposal). In the future, the surplus will most likely constitute a taxable professional income.
2. What about other benefits in kind?
It is anticipated that (as of tax year 2025) certain benefits in kind which are (for tax purposes typically) valued on a lump-sum basis (e.g. electricity, heating, housing) will be harmonised with the treatment for social security. This will be done by approaching these benefits (also from an income tax perspective) more based on their actual value. However, please note that the recent reform of the tax treatment in relation to (the private use of) company cars (incl. fuel card) and its lump-sum valuation will be maintained without (foreseeable) further changes.
3. Changes with respect to personal tax reductions
On the one hand, going forward, other ‘upward’ measures may be expected, such as for example:
– a gradual and substantial increase of the personal tax exempt amount (tax-free allowance) spread across 3 tax years
– a widening of the 45% income tax bracket
– an increase of the tax benefit for childcare expenses
On the other hand, a significant number of (more recent but also sometimes long-standing) individual tax benefits could be abolished or phased-out (as of tax year 2025). This may for example become the case for:
– tax deduction of (80% of the) alimony payments (with a transitory phase-out period of 20 years taking into account a maximum amount, for existing obligations) and the alimony payments will no longer constitute a taxable income,
– marital quotient for married and legally cohabiting couples (i.e. attribution of an income equal to 30% of the gross taxable earnings to the non-earning partner)
– the additional exempt amount for long distance commuting (between the employee’s home and workplace);
– financial employer intervention in the purchase price paid by an employe for a privately owned computer (PC-privé)
– increased tax reduction for private pension savings (the basic tax reduction system for private pension savings would remain applicable)
– tax reduction for individual life insurance (long-term savings)
– tax reduction for the acquisition of new shares in start-up companies and growth companies
– tax reduction the acquisition of employer shares
– tax reduction for expenses incurred in adoption proceedings
– tax reduction for legal expenses insurance premiums
– tax reduction for expenses incurred in acquiring an electric vehicle
– reduction for development fund expenses
– tax reduction for remuneration for a domestic servant
– bonus (bonification) for advance tax payments
4. Annual tax on securities accounts
To partially compensate for the budgetary impact of the lowering of personal income tax, the annual tax on securities accounts will be increased from 0,15% to 0,30% (as of 1 January 2024).
5. Occupational pension schemes
It is likely that the new legislation will amend the tax regime of second pillar pensions (starting as of 1 January 2024, but with transitional measures). The existing 80%-rule would be abolished and replaced with a new regime whereby maximum premium amount would be expressed as percentages of the normal gross annual salary, taking into account the state pension salary ceiling.
6. R&D wage withholding tax incentive
The R&D wage withholding tax incentive, which is applied through payroll, can result in a substantial saving to companies, notably up to 80% of the wage withholding tax withheld on the salaries for R&D personnel, if specific conditions and formalities are met.
With regard to this R&D tax measure the ambition seems to be to increase legal certainty. In this respect, the decision power of the various relevant authorities (BELSPO, tax authorities, …) will be more clearly defined and more clarifications will be provided (in principle applicable as of 1 January 2024). This is no luxury, taking into account the stringent and formalistic tax audits that have taken place on this topic during recent years.
7. Ruling reform
It is anticipated that the draft legislation will address a reform of the ruling practice (as of 1 January 2024), attempting to improve legal certainty of the rulings, through the introduction of a clear framework of cooperation and consultation between the relevant departments/administrations of the FPS Finance.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
• Sandrine Schaumont, Partner | Email: sandrine.schaumont@vialto.com
• Philip Maertens, Partner | Email: philip.maertens@vialto.com
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