## Group Taxation Regimes in Europe

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### Overview and context
- Corporate tax reform has been under consideration by the Belgian coalition government; topic increasingly relevant given international initiatives (e.g., the new anti-tax avoidance Directive in the EU) and concerns about intensive tax competition.
- Paper explores key features of Belgium’s CIT regime to identify potential reform options that would be growth enhancing, while safeguarding revenues and limiting distortions.
- Belgium faces tight fiscal constraints, limiting scope for reducing overall revenue from business and investment income; shifting the tax burden to other activities is difficult because the labor tax wedge is still high.

### Corporate tax in Belgium — scale and productivity
- In 2014, the CIT raised 3.2 percent of GDP in Belgium, above the EU average of 2.3 percent of GDP.
- CIT revenue productivity (CIT revenue-to-GDP ratio divided by the statutory CIT rate) is close to 0.1 percent of GDP (approximately €400 million per point of CIT) in Belgium, slightly below the European average of 0.11.

### Statutory and progressive CIT rates
- Statutory standard CIT rate: 33 percent; a 3 percent austerity surcharge (imposed since 1991) makes the overall applicable CIT rate 33.99 percent.
- Comparative averages: EU average CIT rate 22.5 percent; Euro area 24.3 percent; OECD 24.7 percent.
- Progressive structure for corporate profits below €322,500:
  - 24.98 percent applied to incomes up to €25,000
  - 31.93 percent for income between €25,000 and €90,000
  - 35.54 percent between €90,000 and €322,500

### Effective tax rates and investment distortions (2015)
- Measures:
  - Marginal effective tax rate (METR): derived from user cost of capital.
  - Average effective tax rate (AETR): matters for inframarginal investment and indicative of fiscal revenue collected.
- Reported figures:
  - AETR in Belgium: 26.7 percent (lower than statutory CIT rate of 33.99 percent).
  - EU average AETR: 21 percent.
  - METR in Belgium: 12.5 percent (among the lowest in the EU and similar to Ireland).
- Interpretation:
  - Relatively high AETR implies significant disincentives to discrete FDI location decisions.
  - Relatively low METR implies relatively small marginal investment distortions for additional investment by firms already in Belgium.

### Corporate tax base, incentives, and revenue forgone
- Deductibility and depreciation:
  - Legitimate business expenses are deductible.
  - Accelerated straight line depreciation available at 33 percent per year for some machinery.
  - Straight line depreciation for industrial buildings at 5 percent per year.
  - Depreciation for intangible assets is in line with other countries.
- Innovation incentives:
  - R&D tax credit subsidizes R&D costs by between 5 and 8 percent.
  - Exemption from payroll withholding tax for qualified researchers reduces labor component of R&D costs by between 15 and 20 percent.
  - Innovation box: income from qualified intellectual property receives an 85 percent exemption from the CIT; only the remaining 15 percent is taxable at the statutory CIT rate of 34 percent, producing an effective rate on this income of 5.1 percent.
  - Virtually all benefits of the innovation box accrue to large enterprises in the manufacturing sector.
- Loss offset and group treatment:
  - Losses can be carried forward indefinitely, but without interest.
  - No loss carry backward.
  - Belgium does not allow group taxation; tax results of companies in a group cannot be consolidated.
- Magnitude of tax expenditures (2012 data, Federal Public Service Finance 2016):
  - Overall corporate tax expenditures in Belgium are 12.8 percent of CIT revenue.
  - Approximately one quarter of this is due to R&D tax incentives.
  - Approximately 14 percent is due to the innovation box.
  - Remainder associated with special investment tax incentives and exemptions for certain entities (e.g., inter-municipal associations and firms in the audio-visual arts sector).

### Notional Interest Deduction (NID) — design and statistics
- Since 2006, Belgium allows a notional interest deduction (NID) intended to neutralize CIT treatment of debt and equity by providing a deduction equal to the book value of equity times a notional interest rate.
- NID rate for 2017 is 0.237 percent; it is 0.5 percentage points higher for small companies.
- Since 2013, unused NID can no longer be carried forward.
- The NID’s implications for revenue, financial stability, and economic growth are discussed further below.

### Group taxation regimes in Europe (Box 1 findings)
- Many European countries apply some form of group taxation, consolidating losses and profits within corporate groups.
- Participation thresholds defining consolidated group members usually range between 50 and 95 percent.
- Consolidation approaches:
  - Full consolidation: tax base calculated on entire basis, disregarding shares held by minority shareholders.
  - Proportional aggregation: e.g., international tax consolidation in France.
  - Some countries extend consolidation across borders under strict conditions (Netherlands, Denmark, Italy, Luxembourg, Ireland).
- Countries allowing intra-group profit/loss sharing within a tax period (but not full consolidation): Austria, Cyprus, Iceland, Finland, Sweden, Ireland, Latvia, Lithuania, Malta, United Kingdom.
- Other models: German model requires subordinated members to transfer profit/loss by formal commercial agreement to the parent company, which assumes tax liabilities.
- Countries without group tax treatment (treat members as independent taxpayers): Belgium, Bulgaria, Croatia, the Czech Republic, Estonia, Greece, Hungary, Romania, Slovakia, Slovenia, Switzerland — economic inefficiencies can be overcome using branches instead of subsidiaries.

### Tax neutrality across business and investment income; distributional effects
- CIT functions as a backstop for the PIT for the majority of firms (about 98 percent of firms are purely domestic and employ more than 70 percent of Belgian employees), limiting tax avoidance between corporate and non-corporate forms.
- Under the PIT, business income from non-corporate SMEs is taxed under progressive rates ranging from 25 to 50 percent.
- Owner-directors of closely-held corporations must pay a minimum director’s remuneration of €36,000 (deductible for CIT but taxed as labor income under the progressive PIT); remaining corporate income is subject to progressive CIT and distributed dividends face a dividend tax of 30 percent.
- Absence of personal tax on capital gains for realized retained earnings creates a lock-in effect, encouraging entrepreneurs to register as corporations and retain earnings rather than distribute dividends.
- Illustration (Figure 4) insight:
  - Average and marginal tax burdens are similar for non-corporate businesses and corporate businesses that distribute dividends.
  - Corporate businesses that retain profit and realize income as capital gains are taxed much lighter, reflecting absence of a personal capital gains tax.
- Only four other European countries leave personal capital gains entirely untaxed: Malta, Cyprus, Czech Republic, and Luxembourg.

### Shift in business form and economic implications
- 1983: less than 20 percent of all businesses were incorporated while more than 80 percent were run in the non-corporate form.
- 2012: share of businesses in the corporate form had risen to over 50 percent and was still increasing.
- Many professionals and self-employed people now organized as closely-held corporations.
- Economic implications:
  - Fiscal: potential lower PIT collection due to tax-induced form change.
  - Non-fiscal: organizational inefficiencies and misallocation of capital from tax-induced business form changes.

### Treatment of multinational corporations (MNCs)
- International tax rules:
  - Companies receiving dividends or qualified capital gains from abroad benefit from a 95 percent participation exemption (with the remaining 5 percent taxable in Belgium).
  - Foreign subsidiaries and branches in Belgium are taxed on their source income through the CIT and possibly withholding taxes on dividends, interest and royalties.
  - 93 bilateral tax treaties exist.
- Historical targeted incentives: regime for coordination centers (before 2006); NID (after 2006); innovation box; specific rulings such as an excess profit tax ruling.
- FDI stocks (2015, IMF CDIS):
  - Inbound stock of FDI approximately 100 percent of GDP.
  - Outbound stock of FDI from Belgium is of equal size.
  - Around 35 percent of outstanding inbound FDI is in special purpose vehicles (“captive financial institutions and money lenders”).
  - Interpretation: large share of FDI comprises purely financial flows running through Belgium rather than greenfield investments.
- Recent revisions: Belgium has revised some incentives, such as the excess profit ruling, in response to international scrutiny.

### Anti-avoidance provisions and limitations
- Transfer pricing regulations consistent with OECD guidelines.
- General anti-avoidance rule to challenge aggressive tax planning.
- Compared to other countries, provisions relatively modest:
  - Relatively weak interest-deductibility limitations (interest deduction can be disallowed if ratio of intragroup loans to equity exceeds 5:1).
  - Very limited controlled foreign corporation (CFC) rules.
- 2015 introduction of the “Cayman tax” — a limited form of CFC rule deeming certain fiduciary agreements or foreign entities not subject to CIT as tax transparent.

### NID / ACE: conceptual role and empirical effects
- Belgian NID resembles Allowance for Corporate Equity (ACE), providing a notional deduction for normal return on equity and thereby eliminating debt bias.
- Empirical evaluations show Belgium NID effective in lowering corporate leverage ratios.
  - Box 2 synthetic control method: average bank debt ratio in Belgium would have been 13.7 percentage points higher in the absence of the NID.
  - Supporting studies: Burggrave et al. 2008; Kestens et al. 2012; Princen 2012; Panier et al. 2015; Schepens (2016); Hebous and Ruf (forthcoming).
- Macroeconomic simulations (De Mooij and Devereux 2011):
  - NID financed revenue-neutrally by either (i) an increase in the VAT, or (ii) a higher statutory CIT rate:
    - Investment in EU countries rises by 6 percent if the VAT is used to finance the NID.
    - Investment rises by 4 percent if the statutory CIT rate is increased.
    - Employment would also rise under both scenarios.
    - GDP expands by 2 percent if VAT-financed; by 1 percent if CIT-rate-financed.
  - Conclusion: NID is more important for growth than the CIT rate.

### NID and international tax planning; SPVs and transit flows
- Mechanism of abuse:
  - MNCs can finance a Belgian SPV with equity; SPV lends to a subsidiary in country 2 charging interest equivalent to the Belgian NID rate, producing deductible interest in country 2 and exempt dividends in country 1 — effectively escaping tax in all three countries.
- Evidence:
  - Duprez and Van Nieuwenhuyzen (2016): “FDI in Belgium comprises a large proportion of ‘capital in transit’… When that capital enters Belgium, it often takes the form of equity, for tax reasons: when it leaves Belgium, it does so in the form of an (intra-group) loan.”
- Magnitude:
  - Around 40 percent of all NID deductions in Belgium can be attributed to these SPVs (High Council of Finance 2016).
  - National Bank of Belgium data: operations of these SPVs are almost entirely disconnected from the Belgian banking system.
  - Low NID rate of 0.237 percent (2017) reduces attractiveness of this scheme.

### Fiscal cost and net revenue effects of the NID
- 2014 figures:
  - Sum of all NIDs multiplied by the CIT rate was around €4.5 billion, equivalent to 35 percent of actual CIT revenue.
- Caveats:
  - Approximately 40 percent of the NID is used by SPVs that would likely disappear if the regime were repealed; NID provisions for SPVs are offset by addition to the tax base due to taxable foreign interest income — net revenue impact for SPVs is zero. Therefore, 40 percent of the gross fiscal cost should be subtracted.
  - For ordinary firms, evidence suggests introduction of the NID has raised the equity/asset ratio from 40 to 60 percent (Hebous and Ruf, forthcoming), reducing interest deductions. IMF (2016c) estimates this element leads to an overstatement of the revenue loss by 50 percent.
- Net estimate:
  - After adjustments, the net revenue effect would likely be less than one third of the gross €4.5 billion figure — i.e., close to 10 percent of CIT revenue.
  - IMF (2016c) estimates the average cost of an ACE in an OECD country between 10 and 12 percent of CIT revenue.
- Short-term outlook:
  - For coming years, revenue cost of the NID likely much smaller than 10 percent because NID rates fell:
    - NID rate for 2017 is set at 1.131 percent.
    - NID rate for 2018 will be 0.237 percent.
    - These rates are much lower than the 2.63 percent in 2014; the NID in 2018 would effectively have negligible revenue implications for that year.

### Forces shaping corporate tax reform in Belgium — international developments
- OECD/G20 BEPS initiative (concluded November 2015):
  - Agreed on non-binding common guidelines and minimum standards; Belgium committed to adopt at least the four minimum standards.
  - Led to amendments in Belgian innovation box in February, 2017.
  - Multilateral instrument to modify bilateral tax treaties expected to be signed in June 2017; will add at least a general anti-treaty abuse rule.
- EU state aid and EC decisions:
  - EU state aid rules targeted special regimes; in Belgium, required abolition of the excess profit tax ruling regime (repeal imposed with retroactive effect). 35 MNCs had benefited; repeal imposed with retroactive effect.
- EU Anti-Tax Avoidance Directive (ATAD) adopted June 2016:
  - Five measures: (i) interest deduction limitation; (ii) limitation to exemptions of foreign source income (CFC rule); (iii) exit taxation; (iv) general anti-abuse rule; (v) solutions for hybrid mismatches.
  - ATAD implementation deadline: 1 January 2019, except the interest limitation rule, which may be postponed until 2024.
  - Implementation of ATAD’s measures (especially interest limitation, CFC rule, exit tax) will imply considerable change and expand the Belgian CIT base.

### The Common Consolidated Corporate Tax Base (CCCTB) proposal (Box 3)
- Proposal elements:
  - Two sequential elements: (i) Common Corporate Tax Base (CCTB) — common rules on depreciation, deductible costs, incentives; (ii) consolidation of multinational accounts across countries and apportionment of consolidated base.
  - Apportionment formula: 1/3 tangible assets, 1/3 labor (half payroll, half number of employees), 1/3 sales by destination.
  - Mandatory for multinational groups with consolidated revenue exceeding €750 million per year; other firms may opt in.
- Specific features:
  - Super-deduction for R&D: 150 percent of R&D expenditures deductible for up to €20 million (smaller deduction beyond that; more generous for start-ups without associates).
  - Allowance for Growth and Investment (AGI) resembling Belgian NID: applied to incremental equity relative to a base year and granted only for a 10-year period; AGI rate linked to government bond rate plus a 2 percent risk premium.
- Implications for Belgium:
  - Would require scrapping some tax incentives and introducing others.
  - Consolidation implies cross-border loss offset, narrowing the European-wide corporate tax base (including Belgium).
  - Formula allocation will re-allocate tax bases across countries; EC impact assessment expects a small gain for Belgium.
  - CCCTB may put further pressure on Belgium to lower its statutory CIT rate, leaving rate competition as a primary instrument to attract investment.

### International tax competition and recent trends
- European countries use targeted preferential regimes and headline CIT rates to compete for mobile tax bases of MNCs.
- Empirical literature indicates strategic complementarity in CIT rates.
- Trends since 2001:
  - Euro area mean CIT rate dropped from 32.1 to 22.5 percent.
  - Belgium CIT rate fell from 40.2 to 34 percent.
  - Euro Area AETR declined from 24.5 percent to 22.9 percent.
  - Belgium AETR declined from 29.5 percent to 27.8 percent.
- Recent years: pace of tax cuts in Europe has somewhat stalled, but several countries have recently announced further reductions.

### Risks from Belgium’s relatively high CIT rate
- BEPS risk:
  - High statutory CIT rate increases vulnerability of Belgian tax base to BEPS behaviors.
  - Incentive for profit shifting governed by statutory tax rate differentials; empirical studies show robust relationship between tax rate differentials and reported profitability.
- Relocation risk:
  - High CIT contributes to relatively high AETR in Belgium, making Belgium less attractive for greenfield FDI.
- Additional context:
  - Overall tax burden on capital income in Belgium was 10.6 percent of GDP in 2014, compared to 8.2 percent on average in the Eurozone.

### Balancing growth and fiscal considerations — identified distortions
- Distortions in Belgium’s business and investment income taxation:
  - High CIT rate plus lenient anti-avoidance provisions increase profit shifting risk by MNCs and may reduce inward FDI.
  - Special exemptions and deductions are often poorly targeted and may disfavor growth; progressive CIT may disincentivize firm growth.
  - Innovation box appears inefficient relative to direct tax incentives for R&D.
  - Restrictive loss offset provisions discourage entrepreneurial risk taking.
  - High PIT rates combined with no capital gains taxes induce tax arbitrage via incorporation of small businesses.
  - NID regime has encouraged proliferation of SPVs for tax planning, with limited domestic benefits.
- Fiscal constraint: large reduction in CIT without offsets would create significant revenue losses.

### Revenue implications of large CIT cuts (HCF 2016 scenarios)
- CIT rate cuts considered to either 25 or 20 percent.
- With a CIT revenue productivity of 0.1 percent of GDP and without compensating measures, static revenue loss would be:
  - 0.9 percent of GDP for a cut to 25 percent.
  - 1.4 percent of GDP for a cut to 20 percent.
- Dynamic scoring and elasticities:
  - De Mooij and Saito (2014) consensus elasticity of corporate taxable income: -0.2 (percentage change in tax base due to one percentage point change in CIT rate).
  - Implication: every € tax relief granted through a lower CIT rate will ultimately cost the government 80 cents.
  - Long-run approximate costs (accounting for elasticity):
    - Rate cut to 25 percent would cost approximately 0.7 percent of GDP.
    - Rate cut to 20 percent would cost approximately 1.1 percent of GDP.
- Caution: base broadening measures adopted to compensate may themselves induce opposing dynamic effects by exacerbating CIT distortionary impacts.

### Options for CIT base broadening and rate reduction (BB&RR)
- Promising base-broadening measures for Belgium:
  - Implement new measures against tax avoidance to comply with European ATAD: interest deduction limitations, CFC rules and exit taxes—expands CIT base and boosts revenue, primarily from large MNCs.
  - Repeal special CIT rates for SMEs in favor of a proportional CIT to reduce disincentives to grow larger and avoid organizational inefficiencies from splitting businesses.
  - Curtail some exemptions and deductions (e.g., internships, cars, gifts, restaurants) — HCF (2016) finds combined effect could broaden the CIT base allowing a CIT rate reduction by several percentage points.
  - Reform the innovation box regime—evidence suggests Belgian innovation box had no significant effect on R&D; direct instruments reducing R&D cost may be more effective.
- Less promising or already restrictive areas:
  - Making depreciation allowances less generous yields temporary revenue but no structural effect; interacts with NID and present value neutrality.
  - R&D tax incentives, when well designed, can have sizable productivity impacts; Belgian evidence finds tax relief for wages of researchers increases R&D investment.
  - Loss offset provisions are already restrictive; further tightening would likely harm investment. Belgium could consider expanding loss offset provisions, e.g., by adopting a consolidation regime.

### Restoring balance between business income forms and limiting arbitrage
- Possible measures if CIT rate is reduced:
  - Increase dividend withholding tax (current dividend tax rate is 30 percent) to restore neutrality between salary and dividend payments.
  - Introduce a capital gains tax to address imbalance between distributions and retained earnings; would require wider review of business and investment income taxation.
  - Strengthen allocation rules for domestic businesses (example: Nordic imputed return approaches), recognizing enforcement complexity.
  - If small corporations are pass-through entities, tax owners on all assigned income at the progressive PIT.

### Reforming the NID to enhance growth and limit spillovers
- Belgian NID deviates from model ACE design; aspects to reconsider:
  - NID rate linkage:
    - Belgian NID rate is linked to government bond rate; appropriate rate should include corporate risk.
    - Annex argues a risk premium of 2 or 3 percentage points could be added to the long-term government bond rate.
    - Adding this premium supports investment and growth but increases NID revenue cost; mitigation option: implement the premium incrementally only for equity increases relative to the year of introduction to avoid windfall gains on existing equity.
  - Restore carry forward of unused NID to strengthen investment incentives and absorb macroeconomic shocks.
  - Curtail NID use by SPVs via anti-avoidance rules that deny NID in specific circumstances (Zangari, 2014); may cause SPVs to depart Belgium but possibly limited real-economy impact.
  - Address negative NID base outcomes:
    - When participations on a firm’s balance sheet exceed equity (e.g., holding financed with debt), NID base can be negative; Belgium caps NID base at zero, enabling duplication of NID relief.
    - Options: eliminate zero lower bound on NID base or introduce anti-avoidance provisions (e.g., disallow interest deductions for debt used solely to finance equity participations).

### Comprehensive reform of taxation of business and investment income — overview and recommendations
- Comprehensive reform described as both promising and challenging.
- Challenge: need for fiscal consolidation and limited scope for shifting tax burden away from the CIT.
- Opportunity: broader reform could neutralize distortions and promote economic growth while safeguarding overall revenues.
- Identified distortions to address:
  - exemptions and deductions creating unlevel playing field;
  - absence of capital gains taxation undermining tax neutrality;
  - tax incentives creating negative international spillovers.
- Suggested reform package elements:
  - reduction in the CIT rate;
  - strengthening the NID;
  - reforms to remove a range of distortions and broaden the tax base.
- Overall assessment: scope exists for broader reform that could raise Belgium’s growth potential without undermining fiscal revenues.

### Annex — Design principles for a Notional Interest Deduction (NID)
- NID base:
  - Base can be entire equity stock, or increment of equity relative to some base year.
  - Incremental example: if last year’s equity is used as the base year, NID base is new equity issues plus retention of after-tax profits, relative to last year.
  - Equity participations in other firms should be subtracted from the equity base to avoid duplication.
  - If firm has negative balance of equity minus value of participations in other firms, NID can involve an addition to the CIT base rather than a deduction — ensures tax neutrality for holding companies.
  - Participations in foreign companies should be excluded from the NID base.
- NID rate determination:
  - NID rate must equal rate at which shareholders discount tax savings to obtain full tax neutrality; depends on degree of riskiness attached to tax savings.
  - Under full loss offset and fixed CIT, discount rate would be risk-free rate (government bond rate).
  - Belgian constraints (losses cannot be carried with interest; unutilized losses on exit cannot be offset; unused NID cannot be carried forward since 2013) imply risk attaches to NID; appropriate rate should reflect corporate risk.
  - Practical single-rate benchmarks:
    - average interest rate on corporate bonds; or
    - government bond rate plus a risk premium.
- Design recommendations:
  - Exclude foreign participations from NID base.
  - Subtract equity participations in other firms from NID base to prevent double counting.
  - Address loss-offset limitations and carry-forward rules to reduce firm-specific risk attached to NID benefits.
  - Choose administrable NID rate using benchmarks: risk-free rate, average corporate bond interest rate, or government bond rate plus a risk premium.
  - Design NID rules so holding companies do not gain tax incentives to finance acquisitions with debt rather than equity.

*Source: IMF staff analysis in cr1770 — chapter "Group Taxation Regimes in Europe."*

### 1. Group Taxation Regimes in Europe ____________________________________________________ 6

### 1. Group Taxation Regimes in Europe

### Overview and context
- Corporate tax reform has been under consideration by the Belgian coalition government; the topic is increasingly relevant given international initiatives (e.g., the new anti-tax avoidance Directive in the EU) and concerns about intensive tax competition.
- The paper explores key features of Belgium’s CIT regime to identify potential reform options that would be growth enhancing, while safeguarding revenues and limiting distortions.
- Belgium faces tight fiscal constraints, limiting scope for reducing overall revenue from business and investment income; shifting the tax burden to other activities is difficult because the labor tax wedge is still high.

### Corporate tax in Belgium — scale and productivity
- In 2014, the CIT raised 3.2 percent of GDP in Belgium, above the EU average of 2.3 percent of GDP.
- CIT revenue productivity (CIT revenue-to-GDP ratio divided by the statutory CIT rate) is close to 0.1 percent of GDP (approximately €400 million per point of CIT) in Belgium, slightly below the European average of 0.11.
- The relatively high CIT revenue may partly reflect a relatively high share of SMEs organized as legal corporate entities and may be partly offset by lower PIT revenue.

### Statutory and effective CIT rates
- The statutory standard CIT rate is 33 percent; a 3 percent austerity surcharge (imposed since 1991) makes the overall applicable CIT rate 33.99 percent.
- Comparative averages: EU average CIT rate 22.5 percent; Euro area 24.3 percent; OECD 24.7 percent.
- Belgium employs a progressive structure for corporate profits below €322,500:
  - 24.98 percent applied to incomes up to €25,000
  - 31.93 percent for income between €25,000 and €90,000
  - 35.54 percent between €90,000 and €322,500

### Effective tax rates and investment distortions
- Measures used:
  - Marginal effective tax rate (METR): derived from user cost of capital; tax burden on an investment that just meets required rate of return.
  - Average effective tax rate (AETR): matters for inframarginal investment and indicative of fiscal revenue collected.
- For 2015 (reported):
  - AETR in Belgium: 26.7 percent (lower than the statutory CIT rate of 33.99 percent).
  - EU average AETR: 21 percent.
  - METR in Belgium: 12.5 percent (among the lowest in the EU and similar to Ireland).
- Interpretation:
  - The relatively high AETR implies significant disincentives to discrete FDI location decisions.
  - The relatively low METR implies relatively small marginal investment distortions for additional investment by firms already in Belgium.

### Corporate tax base, incentives, and revenue forgone
- Deductibility and depreciation:
  - Legitimate business expenses are deductible.
  - Accelerated straight line depreciation available at 33 percent per year for some machinery.
  - Straight line depreciation for industrial buildings at 5 percent per year.
  - Depreciation for intangible assets is in line with other countries.
- Innovation incentives:
  - R&D tax credit subsidizes R&D costs by between 5 and 8 percent.
  - Exemption from payroll withholding tax for qualified researchers reduces labor component of R&D costs by between 15 and 20 percent.
  - Innovation box: income from qualified intellectual property receives an 85 percent exemption from the CIT; only the remaining 15 percent is taxable at the statutory CIT rate of 34 percent, producing an effective rate on this income of 5.1 percent.
  - Virtually all benefits of the innovation box accrue to large enterprises in the manufacturing sector.
- Loss offset and group treatment:
  - Losses can be carried forward indefinitely, but without interest.
  - No loss carry backward.
  - Belgium does not allow group taxation; tax results of companies in a group cannot be consolidated.
- Magnitude of tax expenditures (2012 data, Federal Public Service Finance 2016):
  - Overall corporate tax expenditures in Belgium are 12.8 percent of CIT revenue.
  - Approximately one quarter of this is due to R&D tax incentives.
  - Approximately 14 percent is due to the innovation box.
  - The remainder is associated with special investment tax incentives and exemptions for certain entities (e.g., inter-municipal associations and firms in the audio-visual arts sector).

### Notional Interest Deduction (NID)
- Since 2006, Belgium allows for a notional interest deduction (NID) intended to neutralize CIT treatment of debt and equity by providing a deduction equal to the book value of equity times a notional interest rate.
- The NID rate for 2017 is 0.237 percent; it is 0.5 percentage points higher for small companies.
- Since 2013, unused NID can no longer be carried forward.
- The NID’s implications for revenue, financial stability, and economic growth are discussed further elsewhere in the paper.

### Group taxation regimes in Europe (Box 1 findings)
- Many European countries apply some form of group taxation, consolidating losses and profits within corporate groups under the assumption a group is a single economic unit.
- Participation thresholds defining consolidated group members usually range between 50 and 95 percent.
- Consolidation approaches:
  - Full consolidation: tax base calculated on entire basis, disregarding shares held by minority shareholders.
  - Proportional aggregation: e.g., international tax consolidation in France.
  - Some countries extend consolidation across borders under strict conditions (Netherlands, Denmark, Italy, Luxembourg, Ireland).
- Countries not allowing full consolidation but allowing intra-group profit/loss sharing within a tax period: Austria, Cyprus, Iceland, Finland, Sweden, Ireland, Latvia, Lithuania, Malta, United Kingdom.
- Other models: German model requires subordinated members to transfer profit/loss by formal commercial agreement to the parent company, which assumes tax liabilities.
- Countries that do not have group tax treatment (treat members as independent taxpayers, do not allow transfer of losses nor eliminate transfer-pricing issues): Belgium, Bulgaria, Croatia, the Czech Republic, Estonia, Greece, Hungary, Romania, Slovakia, Slovenia, Switzerland.
  - In these countries, economic inefficiencies can be overcome using branches (which do not have legal personality) instead of subsidiaries.

### Tax neutrality across business and investment income; distributional effects
- The CIT functions as a backstop for the PIT for the majority of firms (about 98 percent of firms are purely domestic and employ more than 70 percent of Belgian employees), limiting tax avoidance between corporate and non-corporate forms.
- Under the PIT, business income from non-corporate SMEs is taxed under progressive rates ranging from 25 to 50 percent.
- Owner-directors of closely-held corporations must pay a minimum director’s remuneration of €36,000 (deductible for CIT but taxed as labor income under the progressive PIT); remaining corporate income is subject to progressive CIT and distributed dividends face a dividend tax of 30 percent.
- Absence of personal tax on capital gains for realized retained earnings creates a lock-in effect, encouraging entrepreneurs to register as corporations and retain earnings rather than distribute dividends.
- Illustration (Figure 4): average and marginal tax burden for income between €10,000 and €500,000:
  - Non-corporate business (progressive PIT)
  - Corporate business that pays €36,000 minimum director’s remuneration and distributes remaining profit as dividends
  - Corporate business that pays €36,000 minimum director’s remuneration and retains profit, realizing it later as a capital gain
- Key insight: average and marginal tax burdens are similar for non-corporate businesses and corporate businesses that distribute dividends; corporate businesses that retain profit and realize income as capital gains are taxed much lighter, reflecting absence of a personal capital gains tax.
- Only four other European countries leave personal capital gains entirely untaxed: Malta, Cyprus, Czech Republic, and Luxembourg.

*Source: IMF staff analysis as presented in the chapter "Group Taxation Regimes in Europe."*

### 14.      This tax incentive may be responsible for the gradual but significant increase in the

### 14.      This tax incentive may be responsible for the gradual but significant increase in the

### Shift in business form and economic implications
- In 1983, less than 20 percent of all businesses were incorporated while more than 80 percent were run in the non-corporate form.
- In 2012, the share of businesses in the corporate form had risen to over 50 percent and was still increasing.
- Today, many professionals and self-employed people (lawyers, doctors, architects, engineers, contractors, journalists, interpreters, etc.) are organized as closely-held corporations.
- Economic implications:
  - Fiscal: potential lower PIT collection due to tax-induced form change.
  - Non-fiscal: organizational inefficiencies and misallocation of capital may arise from tax-induced business form changes.

### Treatment of multinational corporations (MNCs)
- Belgium’s CIT system features common international tax rules:
  - Companies receiving dividends or qualified capital gains from abroad benefit from a 95 percent participation exemption (with the remaining 5 percent taxable in Belgium).
  - Foreign subsidiaries and branches in Belgium are taxed on their source income through the CIT and possibly withholding taxes on dividends, interest and royalties.
  - 93 bilateral tax treaties exist that often govern withholding taxes; treaty terms are consistent with international conventions.
- Historical targeted incentives used to attract FDI:
  - Regime for coordination centers before 2006; the NID after 2006; the innovation box; specific rulings such as an excess profit tax ruling.
  - Inbound stock of FDI is approximately 100 percent of GDP in 2015 (per the IMF Coordinated Direct Investment Survey).
  - Outbound stock of FDI from Belgium is of equal size.
  - Around 35 percent of the outstanding inbound FDI is in special purpose vehicles (“captive financial institutions and money lenders” in the national accounts).
  - Interpretation: a large share of FDI comprises purely financial flows running through Belgium rather than greenfield investments, suggesting use in tax planning with negative spillovers on other countries’ tax bases.
- Recent revisions:
  - Belgium has revised some incentives, such as the excess profit ruling, in response to international scrutiny.

### Anti-avoidance provisions and limitations
- Belgium’s anti-avoidance provisions:
  - Transfer pricing regulations are consistent with OECD guidelines.
  - There is a general anti-avoidance rule to challenge aggressive tax planning.
  - Compared to other countries, provisions are relatively modest:
    - Relatively weak interest-deductibility limitations (interest deduction can be disallowed if the ratio of intragroup loans to equity exceeds 5:1).
    - Very limited controlled foreign corporation (CFC) rules.
  - In 2015, introduction of the “Cayman tax” — a limited form of CFC rule deeming certain fiduciary agreements or foreign entities not subject to CIT as tax transparent.

### The Notional Interest Deduction (NID) / Allowance for Corporate Equity (ACE)
- Conceptual role:
  - The Belgian NID resembles the Allowance for Corporate Equity (ACE), providing a notional deduction for the normal return on equity and thereby eliminating debt bias.
- Empirical effects:
  - Empirical evaluations show the Belgium NID has been effective in lowering corporate leverage ratios in financial and non-financial firms.
  - Box 2 (synthetic control method) finds the average bank debt ratio in Belgium would have been 13.7 percentage points higher in the absence of the NID.
  - Other studies: Burggrave et al. 2008; Kestens et al. 2012; Princen 2012; Panier et al. 2015; Schepens (2016); Hebous and Ruf (forthcoming).
- Macroeconomic simulations (De Mooij and Devereux 2011):
  - NID financed revenue-neutrally by either (i) an increase in the VAT, or (ii) a higher statutory CIT rate:
    - Investment in EU countries rises by 6 percent if the VAT is used to finance the NID.
    - Investment rises by 4 percent if the statutory CIT rate is increased.
    - Employment would also rise under both scenarios.
    - GDP expands by 2 percent if VAT-financed; by 1 percent if CIT-rate-financed.
  - Conclusion: NID is more important for growth than the CIT rate.

### NID and international tax planning; SPVs and transit flows
- Mechanism of abuse:
  - MNCs can finance a Belgian SPV with equity; the SPV lends to a subsidiary in country 2 charging interest equivalent to the Belgian NID rate, resulting in no Belgian tax on the SPV, deductible interest in country 2, and typically exempt dividends in country 1 — effectively escaping tax in all three countries.
- Evidence of transit flows:
  - Duprez and Van Nieuwenhuyzen (2016): “FDI in Belgium comprises a large proportion of ‘capital in transit’… When that capital enters Belgium, it often takes the form of equity, for tax reasons: when it leaves Belgium, it does so in the form of an (intra-group) loan.”
- Magnitude:
  - Around 40 percent of all NID deductions in Belgium can be attributed to these SPVs (High Council of Finance 2016).
  - National Bank of Belgium data: operations of these SPVs are almost entirely disconnected from the Belgian banking system, raising suspicion they bring little gain to the country.
  - The currently prevailing low NID rate of 0.237 percent reduces the attractiveness of this scheme.

### Fiscal cost and net revenue effects of the NID
- 2014 figures:
  - Sum of all NIDs multiplied by the CIT rate was around €4.5 billion, equivalent to 35 percent of actual CIT revenue.
- Caveats in interpreting gross figure:
  - Approximately 40 percent of the NID is used by SPVs that would likely disappear if the regime were repealed; NID provisions for SPVs are offset by addition to the tax base due to taxable foreign interest income — net revenue impact for SPVs is zero. Therefore, 40 percent of the gross fiscal cost should be subtracted.
  - For ordinary firms, evidence suggests the introduction of the NID has raised the equity/asset ratio from 40 to 60 percent (Hebous and Ruf, forthcoming), reducing interest deductions. IMF (2016c) estimates this element leads to an overstatement of the revenue loss by 50 percent.
- Net estimate:
  - After adjustments, the net revenue effect would likely be less than one third of the gross €4.5 billion figure — i.e., close to 10 percent of CIT revenue.
  - IMF (2016c) estimates the average cost of an ACE in an OECD country between 10 and 12 percent of CIT revenue.
- Short-term outlook:
  - For coming years, revenue cost of the NID likely much smaller than 10 percent because NID rates fell:
    - NID rate for 2017 is set at 1.131 percent.
    - NID rate for 2018 will be 0.237 percent.
    - These rates are much lower than the 2.63 percent in 2014; the NID in 2018 would effectively have negligible revenue implications for that year.

### Forces shaping corporate tax reform in Belgium — international developments
- OECD/G20 BEPS initiative (concluded November 2015):
  - Agreed on non-binding common guidelines and minimum standards to limit international tax avoidance; Belgium committed to adopt at least the four minimum standards.
  - Led to amendments in Belgian innovation box in February, 2017.
  - Multilateral instrument to modify bilateral tax treaties expected to be signed in June 2017; will add at least a general anti-treaty abuse rule to treaties covered.
- EU state aid and EC decisions:
  - EU state aid rules targeted special regimes; in Belgium, required abolition of the excess profit tax ruling regime (repeal imposed with retroactive effect). 35 MNCs had benefited; repeal imposed with retroactive effect.
- EU Anti-Tax Avoidance Directive (ATAD) adopted June 2016:
  - Five measures: (i) interest deduction limitation; (ii) limitation to exemptions of foreign source income (CFC rule); (iii) exit taxation; (iv) general anti-abuse rule; (v) solutions for hybrid mismatches.
  - ATAD will need to be implemented by 1 January 2019, except the interest limitation rule, which may be postponed until 2024.
  - Implementation of ATAD’s measures (especially interest limitation, CFC rule, exit tax) will imply considerable change and expand the Belgian CIT base.

### The Common Consolidated Corporate Tax Base (CCCTB) proposal (Box 3)
- Proposal elements:
  - Two sequential elements: (i) Common Corporate Tax Base (CCTB) — common rules on depreciation, deductible costs, incentives; (ii) consolidation of multinational accounts across countries and apportionment of consolidated base.
  - Apportionment formula: 1/3 tangible assets, 1/3 labor (half payroll, half number of employees), 1/3 sales by destination.
  - Mandatory for multinational groups with consolidated revenue exceeding €750 million per year; other firms may opt in.
- Specific features:
  - Super-deduction for R&D: 150 percent of R&D expenditures deductible for up to €20 million (smaller deduction beyond that; more generous for start-ups without associates).
  - Allowance for Growth and Investment (AGI) resembling Belgian NID: applied to incremental equity relative to a base year and granted only for a 10-year period; AGI rate linked to government bond rate plus a 2 percent risk premium.
- Implications for Belgium:
  - Would require scrapping some tax incentives and introducing others.
  - Consolidation implies cross-border loss offset, narrowing the European-wide corporate tax base (including Belgium).
  - Formula allocation will re-allocate tax bases across countries; EC impact assessment expects a small gain for Belgium.
  - CCCTB may put further pressure on Belgium to lower its statutory CIT rate, leaving rate competition as a primary instrument to attract investment.

*Italic: IMF staff summary of chapter content.*

### 23.      European countries compete for mobile capital by providing attractive fiscal terms for

### cr1770 - 23.      European countries compete for mobile capital by providing attractive fiscal terms for

### International tax competition and recent trends
- European countries use targeted preferential regimes (including innovation boxes) and headline CIT rates to compete for mobile tax bases of MNCs.
- Empirical literature indicates strategic complementarity in CIT rates: countries respond to reductions in CIT rate elsewhere by lowering their own.
- Trend summaries since 2001:
  - Euro area mean CIT rate dropped from 32.1 to 22.5 percent.
  - Belgium CIT rate fell from 40.2 to 34 percent.
  - Euro Area AETR declined from 24.5 percent to 22.9 percent.
  - Belgium AETR declined from 29.5 percent to 27.8 percent.
- Recent years: pace of tax cuts in Europe has somewhat stalled, but several countries have recently announced further reductions.

### Risks from Belgium’s relatively high CIT rate
- BEPS risk:
  - High statutory CIT rate increases vulnerability of Belgian tax base to BEPS behaviors.
  - Incentive for profit shifting is governed by statutory tax rate differentials; empirical studies show a robust relationship between tax rate differentials and reported profitability.
- Relocation risk:
  - High CIT contributes to relatively high AETR in Belgium, making Belgium less attractive for greenfield FDI.
- Additional context:
  - Overall tax burden on capital income in Belgium was 10.6 percent of GDP in 2014, compared to 8.2 percent on average in the Eurozone (noting this broader burden includes taxes beyond the CIT).

### Balancing growth and fiscal considerations
- Central goal: promote growth and job creation while safeguarding revenues and limiting distortions.
- Identified distortions in Belgium’s business and investment income taxation:
  - High CIT rate plus lenient anti-avoidance provisions increase profit shifting risk by MNCs and may reduce inward FDI.
  - Special exemptions and deductions are often poorly targeted and may disfavor growth; progressive CIT may disincentivize firm growth.
  - Innovation box appears inefficient relative to direct tax incentives for R&D.
  - Restrictive loss offset provisions discourage entrepreneurial risk taking.
  - High PIT rates combined with no capital gains taxes induce tax arbitrage via incorporation of small businesses.
  - NID regime has encouraged proliferation of SPVs for tax planning, with limited domestic benefits.
- Fiscal constraint: large reduction in CIT without offsets would create significant revenue losses.

### Revenue implications of large CIT cuts
- High Council of Finance (2016) scenarios:
  - CIT rate cuts considered to either 25 or 20 percent.
  - With a CIT revenue productivity of 0.1 percent of GDP and without compensating measures, static revenue loss would be:
    - 0.9 percent of GDP for a cut to 25 percent.
    - 1.4 percent of GDP for a cut to 20 percent.
- Dynamic scoring and elasticities:
  - De Mooij and Saito (2014) consensus elasticity of corporate taxable income: -0.2 (percentage change in tax base due to one percentage point change in CIT rate).
  - Implication: every € tax relief granted through a lower CIT rate will ultimately cost the government 80 cents.
  - Long-run approximate costs (accounting for elasticity):
    - Rate cut to 25 percent would cost approximately 0.7 percent of GDP.
    - Rate cut to 20 percent would cost approximately 1.1 percent of GDP.
- Caution: base broadening measures adopted to compensate may themselves induce opposing dynamic effects by exacerbating CIT distortionary impacts.

### Tax neutrality and non-neutrality concerns
- Transitioning from the current progressive CIT structure to a uniform 20 percent CIT (holding withholding taxes on dividends and PIT rates on non-corporate business income unchanged) would:
  - Move marginal and average tax burdens for distributed corporate profits well below those for non-corporate business income, increasing incentives to incorporate.
  - Reinforce tax preference for retained profits, increasing incentive to realize income as capital gains.
- Trade-offs:
  - Broader CIT base from incorporation could narrow PIT base and reduce social security contributions.
  - Need to limit distortions and tax arbitrage in designing reforms.

### Options for CIT base broadening and rate reduction (BB&RR)
- Empirical context:
  - Kawano and Slemrod (2016): 134 CIT rate cuts and 302 base broadening measures in 30 OECD countries between 1980–2004.
- Promising base-broadening measures for Belgium:
  - Implement new measures against tax avoidance to comply with European ATAD: interest deduction limitations, CFC rules and exit taxes—expands CIT base and boosts revenue, primarily from large MNCs.
  - Repeal special CIT rates for SMEs in favor of a proportional CIT to reduce disincentives to grow larger and avoid organizational inefficiencies from splitting businesses.
  - Curtail some exemptions and deductions (e.g., internships, cars, gifts, restaurants) — HCF (2016) finds combined effect could broaden the CIT base allowing a CIT rate reduction by several percentage points.
  - Reform the innovation box regime—evidence suggests Belgian innovation box had no significant effect on R&D; direct instruments reducing R&D cost may be more effective.
- Less promising or already restrictive areas:
  - Making depreciation allowances less generous yields temporary revenue but no structural effect; interacts with NID and present value neutrality.
  - R&D tax incentives, when well designed, can have sizable productivity impacts; Belgian evidence finds tax relief for wages of researchers increases R&D investment.
  - Loss offset provisions are already restrictive; further tightening would likely harm investment. Belgium could consider expanding loss offset provisions, e.g., by adopting a consolidation regime.

### Restoring balance between business income forms and limiting arbitrage
- Possible measures if CIT rate is reduced:
  - Increase dividend withholding tax (current dividend tax rate is 30 percent) to restore neutrality between salary and dividend payments.
  - Introduce a capital gains tax to address imbalance between distributions and retained earnings; would require wider review of business and investment income taxation.
  - Strengthen allocation rules for domestic businesses (example: Nordic imputed return approaches), recognizing enforcement complexity.
  - If small corporations are pass-through entities, tax owners on all assigned income at the progressive PIT.

### Reforming the NID to enhance growth and limit spillovers
- Belgian NID deviates from model ACE design, reducing effectiveness; aspects to reconsider:
  - NID rate linkage:
    - Belgian NID rate is linked to government bond rate; appropriate rate should include corporate risk.
    - Annex argues a risk premium of 2 or 3 percentage points could be added to the long-term government bond rate.
    - Adding this premium supports investment and growth but increases NID revenue cost; mitigation option: implement the premium incrementally only for equity increases relative to the year of introduction to avoid windfall gains on existing equity.
  - Restore carry forward of unused NID to strengthen investment incentives and absorb macroeconomic shocks.
  - Curtail NID use by SPVs via anti-avoidance rules that deny NID in specific circumstances (Zangari, 2014); may cause SPVs to depart Belgium but possibly limited real-economy impact.
  - Address negative NID base outcomes:
    - When participations on a firm’s balance sheet exceed equity (e.g., holding financed with debt), NID base can be negative; Belgium caps NID base at zero, enabling duplication of NID relief.
    - Options: eliminate zero lower bound on NID base or introduce anti-avoidance provisions (e.g., disallow interest deductions for debt used solely to finance equity participations).

*Source: IMF staff analysis in cr1770 - PDF chapter/section.*

### 34.      Comprehensive reform of the taxation of business and investment income in Belgium

### 34.      Comprehensive reform of the taxation of business and investment income in Belgium

### Overview
- Comprehensive reform of the taxation of business and investment income in Belgium is described as both promising and challenging.
- Challenge: the need for fiscal consolidation and the limited scope for shifting the tax burden away from the CIT to other taxes.
- Opportunity: a broader reform could neutralize distortions in the current system and promote economic growth while safeguarding overall revenues.
- Identified distortions include:
  - exemptions and deductions in the CIT that create an unlevel playing field among sectors and firms;
  - absence of capital gains taxation undermining tax neutrality between different forms of businesses, leading to organizational inefficiencies and misallocation of capital;
  - some tax incentives creating negative international spillovers.
- Suggested reform package elements: a reduction in the CIT rate, a strengthening of the NID, and reforms to remove a range of distortions and broaden the tax base.
- Overall assessment: there appears to be scope for broader reform that could raise Belgium’s growth potential without undermining fiscal revenues.

### Annex — Design of a Notional Interest Deduction (NID)
- Purpose: the textbook allowance for corporate equity (notional interest deduction) aims to fully neutralize distortions of the CIT to financial structure choices and marginal investment decisions.

NID base
- The NID base is either the entire equity stock, or the increment of equity relative to some base year.
- Incremental example: if last year’s equity is used as the base year, the NID base is new equity issues plus retention of after-tax profits, relative to last year.
- Equity participations in other firms should be subtracted from the equity base to avoid duplication, because these participations are included in the equity base of the company that issued the shares.
- If a firm has a negative balance of equity minus the value of participations in other firms (e.g., a holding company financed primarily with debt), the NID will involve an addition to the CIT base rather than a deduction.
  - This ensures tax neutrality between debt and equity for holding companies, offsetting the amount of interest the holding company is allowed to deduct.
  - It ensures holding companies have no tax incentive to finance acquisitions by debt rather than equity.
- Participations in foreign companies should be excluded from the NID base, since foreign equity returns are not subject to domestic tax.

NID rate determination
- The NID rate must equal the rate at which shareholders discount the tax savings from the company’s future NID to obtain full tax neutrality.
- The appropriate discount rate depends on the degree of riskiness attached to these tax savings.
- Under full loss offset (including carry forward of unused NID) and a fixed CIT rate over time, shareholders receive the tax benefit with full certainty and would discount the tax savings at the risk-free rate (Bond and Devereux 1995).
  - In that case, setting the notional rate of return equal to the risk-free rate (e.g., proxied by the interest rate on government bonds) would ensure tax neutrality.
- Belgian constraints affecting risk and the appropriate NID rate:
  - losses cannot be carried with interest;
  - unutilized losses when a firm goes out of business cannot be offset against other taxable income;
  - unused NID cannot be carried forward since 2013.
- Consequence: some risk is attached to NID deductions; the risk differs across companies depending on exposure to loss offset restrictions.
  - A substantial part of the risk likely stems from the probability of company bankruptcy, which is reflected in the firm’s borrowing interest rate.
  - Setting the NID rate equal to the interest on the company’s long term debt would presumably ensure rough neutrality for individual firms.
- Administrative practice and benchmarks:
  - For administrative reasons it is common to use a single NID rate for all companies rather than firm-specific rates.
  - The average interest rate on corporate bonds would be a natural benchmark for choosing the NID rate.
  - Alternatively, the NID might be based on the government bond rate and supplemented with a risk premium to reflect corporate risk.

### Key policy recommendations and design principles
- Reduce the CIT rate while:
  - strengthening the NID; and
  - reforming to remove a range of distortions and broaden the tax base.
- Exclude foreign participations from the NID base to reflect the non-taxation of foreign equity returns.
- Subtract equity participations in other firms from the NID base to prevent double counting.
- Address loss-offset limitations and carry-forward rules to reduce firm-specific risk attached to NID benefits (noting current constraints: losses cannot be carried with interest; unutilized losses on exit cannot be offset; unused NID cannot be carried forward since 2013).
- Choose an administrable NID rate using one of the benchmarks:
  - risk-free rate (government bond rate) if full certainty of tax benefit can be achieved;
  - average corporate bond interest rate as a practical single-rate benchmark; or
  - government bond rate plus a risk premium to reflect corporate risk.
- Design NID rules so holding companies do not gain tax incentives to finance acquisitions with debt rather than equity.

*Source: IMF country report chapter — Comprehensive reform of the taxation of business and investment income in Belgium.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1770.pdf_