Blueprint for a Major Tax reform

On 18 July 2022, Finance Minister Vincent van Petegem, published a Blueprint for a Major Tax Reform. In his blueprint (see the text in Dutch/French), the Minister lays out his proposals for a lower, fairer and more modern tax system. The Minister opts to continue to tax earned income and replacement income at (lower) progressive rates, and to tax income from assets and capital gains at a fixed rate,. This must achieve a better balance in the taxation of active and passive income.

The Minister proposes to introduce a dual income tax regime with progressive rates for earnings and pensions and a fixed tax rate of 25 percent for most investment income.

1. Income from work and replacement income

The Minister proposes to raise the personal allowance and to reduce the tax rates by 5 percent, except for income over EUR 84,740.

• The definition of ‘remuneration’ will be aligned for income tax and social security and fringe benefits (free use of a house, heating, electricity and house staff) will be revalued for their real value.
• The favourable tax regime for luncheon vouchers would be maintained.
• Eco vouchers, sports vouchers and culture vouchers given to the employee will not be tax exempt anymore.
• Cafeteria plans will be phased out. Cafeteria plans allow employees to put together their own salary package (e.g. a pension plan, medical insurance, gym membership, childcare, a home service, etc ...) based on a plan drawn up by the employer.
• Stock options are on the way out. Contrary to other countries, in Belgium stock options are taxed when they are granted and vested but the gain resulting from the exercise of the options or from the sale of the stocks is not taxed.
• The use of special tax regimes, such as the favourable royalties scheme for copyright paid to employees on top of their salary will be limited to sustaining the viability of the sectors (IT, journalism, …).

Personal allowances and allowances for children will be harmonised

• The marital deduction will be phased out. The marital deduction allows a transfer of a percentage of the income of a spouse or partner to the other spouse or partner whose earned income does not exceed 30 percent of the couple's total earned income.
• The allowance for children will be the same for all children (currently, the allowance per child depends on the number of children).
• The cost of tax-deductible childcare will be raised.
• Maintenance payments for children will not be tax deductible anymore for the payer or taxable for the recipient.
• Income from work in the sharing-economy, work for associations, incidental work or flex-jobs that are performed in addition to the taxpayer's regular employment will be exempted up to EUR 6,000.

For companies

• The corporate income tax rate for small and middle-sized enterprises will be reduced from 20 to 15 percent. The main corporate income tax rate over EUR 200,000 (currently EUR 100,000) will remain at 25%.
• A minimum tax will be introduced for multinational companies, in line with the OECD proposals.
• Individuals will be discouraged from using companies by raising the minimum salary the company must pay its director.

2. Investment income

Tax exemptions for certain types of investment income will be gradually phased out while respecting acquired rights.

• The withholding tax on dividends and interest will continue to be a final tax, but reduced from 30 to 25 percent ; this income will not need to be declared in the income tax return.
• Each taxpayer will be entitled to a personal allowance of EUR 6,000 for investment income and capital gains that the taxpayer can claim in his income tax return.
• A capital gains tax would be introduced on all stocks, bonds and other financial instruments at a rate of 15 percent. Capital losses would be tax deductible. That acquired rights will be respected presumably means that past capital gains will remain tax exempt.
• There will be a special, limited, exemption for capital gains on shares if the company is transferred and remains in business.
• Existing wealth taxes such as the annual tax on securities accounts and the tax on stock exchange transactions would be abandoned.

For real estate, the Minister proposes

• to tax the actual rental income at a fixed rate of 25 percent, with an 'expected return’ as the minimum taxable base (for second residences).
• Landlords will be able to deduct 30 percent for expenses and maintenance, as well as the personal allowance of EUR 6,000.
• The federal tax credit for second residences will be phased out gradually.
• Landlords who renovate their properties will be able to deduct real expenses.
• Capital gains on real estate will be taxed at a fixed rate of 15 percent. Capital gains before the introduction of the new rules would be exempted and capital losses will be tax deductible.
• The main residence will remain free of income tax and capital gains tax.

For occupational pensions

• Access will be extended to all, with an individual maximum for all taxpayers.
• Occupational pensions are currently geared to be fully drawn down at the retirement age at favourable tax rates of 16.5 or 10 percent. This will be progressively phased out and replaced by a system of pension payments.

3. VAT and consumption taxes

The standard VAT rate is 21 percent, with a single reduced rate of 9 percent VAT rate and a zero rate for fruit and vegetables, medicine, nappies and other products for intimate hygiene, and publicly organised and subsidised passenger transport.

• 9 percent VAT for the demolition and reconstruction of the only main residence
• 9 percent on electricity but 21 percent VAT on natural gas, coal and firewood
• The excise duties will be reformed to distinguish between basic and additional consumption.
• a CO2 tax for areas that are not covered by the European Emissions Trading System (ETS). A fair contribution will be required from those who travel with a high social cost when there are sustainable alternatives. Belgium will support the European proposal for an aviation fuel tax and international efforts to levy VAT on air tickets in the future. Tax advantages for commercial diesel will be reduced to stimulate sustainable innovation in the transport sector.
  The Minister proposes tax incentives for commuting by bike but he does not propose to phase out the tax regime for company cars, but it will be reformed to accelerate the transition to electric cars, while retaining the tax advantage for zero-emission vehicles.

A first analysis

This blueprint is the first effort to reform the Belgian tax regime.

Everyone agrees that the tax on labour is too high in Belgium. The minister is therefore shifting the tax burden from labour to investments (25% on income, 15% on capital gains). However, this shift cannot be made in a vacuum and must also take account of other taxes: the introduction of a capital gains tax would logically be accompanied by the abolition of the tax on security accounts and the stock exchange tax..

Reducing the tax on labour is admirable, but abolishing fringe benefits which have been used by employers for decades to grant their workers a higher net income. Losing these fringe benefits will offset the lower income tax rates. Moreover, the cost for the employer will also go up as these fringe benefits do not trigger social security.
It is not clear whether the whole plan is neutral for the budget. The blueprint starts from the principle of fiscal justice, but each political party has a different interpretation of this principle. E.g. can it be justified that income from work is taxed at progressive rates while investment income is taxed at fixed rates. Furthermore, is it fair to grant a tax-free allowance of EUR 13,390 for on earned income and EUR 6,000 for investment income. Taxpayers who have no investment income have a tax free allowance of EUR 13,390, while taxpayers who have work and investment income will have a tax free allowance of EUR 19,390.

And what about legal certainty? To maintain taxpayers' confidence and to respect the principle of legal certainty, it is important that the reform does not undermine decisions that were made in the past based on the legislation in force at the time and which taxpayers cannot easily undo.

Workplace pensions are an example. Many taxpayers have been encouraged by the legislator with the promise that they will be able to get their pension capital paid out when they retire with a favourable tax regime. What is more, the legislator has allowed members to take out advances on these funds or to use them as collateral to finance property purchases. It is therefore essential that the contracts be liquidated in the form of a capital sum to be paid out at retirement.

There are two proposals that risk harming the taxpayer. The Minister wants to introduce an individual ceiling, but there is already a ceiling linked to the taxpayer’s remuneration (the so-called 80% rule). He also wants to "progressively eliminate the preferential treatment of a capital payment compared to an interest payment" (annuities), which undermines the legitimate expectations of taxpayers who have subscribed to these contracts, being encouraged by the legislator at the time.

The taxation of real estate is much more problematic.

The taxation of the actual rent should logically mean that properties that do produce income- (e.g. second residences) are tax exempt. However, the Minister wants to tax a fictitious income from second residences.

Introducing a capital gains tax on real estate ignores the fact that transfers of real estate are already heavily taxed with registration taxes on purchases of property and inheritance tax upon death. As registration tax is due upon the purchase, this would be a double tax with the capital gains tax . And registration tax is a matter for the regions, not for the Federal Minister of Finance.

There is still a lot of work to be done for a successful major tax reform and, unfortunately, tax laws are usually voted in a hurry without much regard for the perverse effects.

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