Auditors Accountants Advisors. Newsletter No No. 5 worldwide. Revised corporate governance for unlisted companies: Buysse Code II

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1 INTEGRITY PROXIMITY PRAGMATIC APPROACH FLEXIBILITY STRONG INTERNATIONAL NETWORK Newsletter No Revised corporate governance for unlisted companies: Buysse Code II VAT package: is your company already on the starting blocks? The accounting processing of restructuring costs Temporary crisis measures to adjust the volume of labour Europe is the referee on the Belgian fiscal playing field Liberalisation of the law on financial assistance for acquisitions Liberalisation of the law on capital contributions in kind and quasi-contributions Short News from BDO Auditors Accountants Advisors BDO knows its business!

2 VAT SOCIAL LAW Revised corporate governance for unlisted companies: Buysse Code II Corporate governance stands for a set of rules and standards of conduct that specify how companies ought to be managed. The new version of the Lippens Code, or the 2009 Code, which applies to listed companies, was published on 12 March However, Belgium is one of the only countries where a code of conduct has been drawn up for unlisted companies (Buysse Code). This code was also revised this year as the Buysse Code II. Relevance of the Codes The Codes are for the time being a form of so-called soft law, which implies that they do not take the place of existing legislation and consequently are not binding. While company law is binding (e.g. recent changes regarding independent directors), the Codes are rather rules of conduct and recommendations. The Buysse Code (for unlisted companies) is more informal than the 2009 Code, which has adopted a socalled apply or explain approach. The vast majority of listed companies have indeed reported on corporate governance in accordance with the recommendations of the Code Code for listed companies We note in the revised Lippens Code the greater attention on the responsibility of the company towards society and for diversity, the greater emphasis on the supervisory role of the board of directors, the further development and evaluation of the audit, appointments and remuneration committees, the outline of a communications policy between the board of directors and (potential) shareholders, and the recommendations on the pay and departure payments of senior management. Revised Buysse Code: long-term value creation At the end of June 2009, a revised Buysse Code was presented that has been adjusted to the social events that have occurred since it came into being in The aim of the Buysse Code is to give company managers, in particular those of SMEs, practical guidelines and suggestions for managing a growing and profitable business in the current economic crisis. The principle of 2 the code is long-term value creation. The Buysse Code now has 10 chapters and its form has been adapted. In this respect, the Code displays considerable similarity to the Lippens Code. Main changes in the revised Buysse Code Corporate social responsibility Corporate social responsibility is a new chapter that has been added to the Code. The company is embedded in and dependent on its local environment and must keep this in mind. In this respect, account has to be taken of the needs, interests and expectations of all stakeholders (employees, customers, suppliers, authorities, relations, environment, etc). In practical terms, this means that the company must be aware of the social, economic and ecological impact of its production and service processes and improve its performance in these areas in consultation with the stakeholders. Ethical attitude of the directors An ethical attitude is expected from the director at all times. In his dealings, he must always put the interests of the company first. Before taking on a mandate, he must take a critical look at himself: does he have the necessary skills and time to properly fulfil his duties? Also during his mandate, the director is expected to actively participate in the meetings of the board of directors: prepare, attend and actively participate in the deliberations and decision-making. Shareholder obligations in the long term An innovative aspect in the Buysse Code II is the fact that it contains guidelines regarding the obligations of sharehold- ers. The principle is that they must be clear and specific regarding their longterm intentions with the company. On the other hand, the shareholders must respect the powers of the board of directors and management. Remuneration of senior management as a function of durable growth Here the Code deals with a subject that has recently and repeatedly made the news, practically always in a negative light. The Code states that senior management must be able to draw fitting remuneration, i.e. salaries and variable payments must be in line with the market and must form the basis for attracting the best experts. Variable payments can be an additional motive, but must constitute a payment for actual performance that brings in added value to stimulate durable and profitable growth for the company. In any case, the remuneration system must discourage the company from taking unnecessary and excessive risks. Moreover, the payments must be determined and approved by the supervisory bodies. Supervision and risk management increasingly important The chapter on supervision and risk management has been thoroughly expanded and is actually completely new. The principle is the continuity of the company. In practical terms, this means that risks have to be assessed correctly, from their identification up to their supervision. The board of directors must ensure that supervisory bodies and procedures are put in place for risk management. These bodies must regularly report to the board of directors. kris.rasschaert@bdo.be BDO Atrio Legal Advisors

3 VAT SOCIAL LAW Buysse Code II The economic crisis has raised many questions regarding the operations of companies. Many companies have been put in a negative light as a result of their remuneration policy (e.g. severance payments) or the way in which they acted on an economic level. The Buysse Code II will contribute to the social debate in these areas. Further information Corporate governance code for listed companies: Corporate governance code for unlisted companies: VAT package: is your company already on the starting blocks? On 1 January 2010, the VAT Package rules will be considered to come into effect in the European Union. The Belgian legislation in this respect has been a long time in the making. However, in our opinion, it is extremely important to take the necessary measures to make the changes in your ERP package in order to ensure correct invoicing and reporting. Importance of correct invoicing As announced in earlier editions of our newsletter, new rules will apply everywhere in the EU regarding the location of the rendering of services as of 1 January Between parties subject to VAT Between VAT taxable persons (B2B) in application of the main rule, a service will then be located where the service recipient is established. Save for certain exceptions (see also our newsletter of December 2008), this means that a Belgian company that provides services for a VAT taxable customer and established in another EU Member State may no longer charge Belgian VAT on such operations (the B2B rule ). Non-taxable customer In relation to a non-taxable customer (B2C relations), as of 2010, the services will still be located where the service provider is established, pursuant to the main rule. However, the exception proves the rule also here. In a number of new situations, the service provider may have to register abroad for VAT purposes when the service is deemed to be located there (see in this respect our newsletter of March 2009). One Stop Shopping The one stop shop rule is also new: when providing electronic services, telecommunications or radio and/or television broadcast services in B2C relations to a customer established in another EU Member State, the service provider is given the possibility to satisfy the VAT formalities in his own Member State. The practical effect of this rule has not yet been made known, but it will also have an impact on the business processes in the company. Even when the service provider is established abroad, the invoicing rules applicable in Belgium are important when the service is deemed to be located in Belgium. This was confirmed earlier this year by the Finance Minister in an answer to a parliamentary question on intellectual services. Although the nonobservance of Belgian invoicing formalities by a foreign entrepreneur could not normally give rise to big problems on the part of his Belgian customer (provided of course the latter pays the Belgian VAT through a reverse charge mechanism), this view will logically also apply as of 2010 to all services provided by a foreign service provider in application of the general rule in B2B relations. A few changes to the VAT declaration In a press release, the Belgian VAT Administration published a few outlines on the changes that these new rules will result in for the VAT return. The changes to the periodical VAT return are being introduced to ensure separate reporting of intracommunity services, which as of 1 January 2010 will be located in the place where the service recipient is located: Outgoing operations: box 44 of the periodical VAT return for invoices and box 48 for credit notes (only taxable base). 3

4 VAT SOCIAL LAW BDO IN THE PRESS Incoming operations: boxes 81, 82 or 83 (depending on the nature of the operation) and box 88 for credit notes, and boxes -81, -82 or -83, box 84 and box -88 for credit notes (taxable base). In addition, the VAT amount has to be declared in box 55 (and if applicable box 59 if there is a right to in put VAT deduction). Note however, only the operations that are subject to the new location rule, and which are actually subject to VAT via a reverse charge mechanism must be declared in these sections. This consequently means that the correct VAT treatment of the transaction concerned in the Member State of the service VAT taxable service recipient needs to be known, in order to enable correct reporting. A notable change that is actually separate from the introduction of the VAT Package is the requirement to include all exempt operations provided by Article 44 of the VAT Code (e.g. real estate lease, insurance, etc.), that are performed by mixed or partial VAT taxable persons, in Section 00 of the VAT return as of next year. Change of frequency The frequency for submitting VAT returns is also changed due to the fact that the current quarterly European Sales Listing will in principle have to be submitted on a monthly basis as of next year. Thus the current quarterly declarers who make exempt supplies of goods of an amount of more than EUR 400, in the course of the previous four calendar quarters, must in any case change to monthly returns as of the first day of the month following the quarter in which this limit is exceeded (the reference period only starts on 1 January 2010). Zero annual client listing no longer required 4 Finally, companies will no longer have to submit a zero annual client listing (applicable if no sales are performed for Belgian customers filing periodical VAT returns). As of 2010, the periodical VAT return will contain a new section that must be ticked in December or the fourth quarter in the event of a zero annual client listing. Changed quarterly statement The aforementioned intracommunity services that are actually subject to the VAT in the service recipient s Member State, in application of the general rule for B2B relations, must be included in the European Sales and Services Listing as of 1 January Belgium has chosen in this respect to extend the Eureopean Sales and Services Listing with a code S for services. This code is only used for reporting those operations that must be included in the new box 44 of the VAT return (and the corresponding credit notes specified in box 48). A code L or the (existing) code T must be added to the intracommunity supplies of goods, when the simplification measures for intra-community triangulation are applied. Such transactions remain in the periodical VAT returns via box 46 or 48, depending on whether nvoices or credit notes have to be reported. When both goods and services are supplied to the same EU customer, separate reporting must be ensured in the periodical VAT retruns and the listings. If required, as of 1 January 2010, the Eurepean Sales and Services Listing will also have to be submitted on a monthly basis: This is in any case compulsory for monthly declarers. Quarterly declarers can continue submitting this Listing on a quarterly basis, unless the total amount per quarter of the exempt supplies of goods exceeded the threshold of EUR 100,000 in each of the previous four quarters. What arrangements can your company already make? All the foregoing practical changes normally require the ERP or accounting package used to be adapted because new (additional) VAT codes will be required. These VAT codes will ensure that the right information is stated on the outgoing invoices, as well as correct reporting in the periodical VAT retruns and listings for cross-border transactions. The existing reporting modules will have to be adapted in order to be able to submit the various (changed) declarations on time. It is our experience that (automatic but also manual) business processes cannot just be adapted overnight. Although the date of effect of the new rules is still a few months away, an estimate has to be made now of their impact on the treatment of the activities as regards content and the formal obligations of your company. This may require cooperation between various interested parties in the company, but also with internal/external IT and business specialists and possibly tax advisers. In addition, there will be a need for mapping out the training requirements in order to adequately train employees who have to take the new rules into account on a daily basis. In the meantime we await the final Belgian legislation and any further practical directives from the Administration. Thus undoubtedly to be continued erwin.boumans@bdo.be cindy.debock@bdo.be BDO Atrio Tax Advisors Member of the VAT Center of Competence

5 VAT SOCIAL LAW How are they incorporated into the annual accounts? When a company reorganises its activities, the question arises how to impute the substantial resulting costs. Our Belgian accounting law contains no imperative provisions in this respect and leaves the choice open to the managing body. This means that when determining the accounting policies, the managing body decides whether these restructuring costs are immediately posted as an expense, or as an asset with a view to depreciation in later years. It is important to know that these rules of accounting law on the definition of restructuring costs and the booking of them (system of choice) are also accepted for tax purposes. Booking costs according to their nature The expenses relating to a restructuring (for example, exceptional depreciation, provisions for charges, personnel costs) qualify as operating costs or exceptional costs. That is why they must be booked to the operating results or exceptional results. In practice, most companies choose to immediately write off the costs of a reorganisation in the year they are incurred. Posting Entering costs as assets with depreciation If, however, the managing body chooses to post these expenses as an asset, The accounting processing of restructuring costs In the current economic conditions, companies are being confronted with all kinds of restructurings, irrecoverable receivables and company bankruptcies. The (tax) impact is often extensive. In order to ensure the tax deductibility of these restructuring costs, their correct accounting processing is crucial. then the costs concerned must be deducted via an account in the profit and loss account under the operating costs and/or exceptional costs respectively. In the assets, these costs are classified with the formation expenses. Appropriate depreciation is then applied to these formation expenses in annual instalments of at least twenty percent. Note, posting them as an asset in the accounts with corresponding depreciation may only be justified if the conditions contained in the definition (see box) are satisfied. This has to be formally stated in the notes to the annual accounts. Note that under the international accounting standards (IFRS), the concept of formation expenses is not recognised and consequently restructuring costs can never be posted as an asset. True and fair view of the annual accounts Even though posting reorganisation expenses as an asset is legally allowed, immediately imputing them to the profit and loss account is the most prudent policy-wise. Indeed, restructuring costs are rather fictitious assets that do not have an immediate realisation value. Thus banks in their financial analyses will attach little value to this item of the assets in the balance sheet. Note that the distributable profit will be limited for as long as the restructuring costs have not been fully amortised. dirk.vandendaele@bdo.be BDO Atrio Accountants What are restructuring costs? Generally considered, restructuring costs represent the financial effort to make improvements to the business operations. These costs can be of different nature and relate, for example, to relocation costs, the introduction of a contractual early retirement system, retraining costs, but also reorganisation costs that may give rise to severance payments and study costs. Of course not all study costs can be considered unconditionally as restructuring costs, but strictly speaking must be (Art. 58, 2nd par. Royal Decree 30/1/2001): well defined costs (i.e. accurately described) of an exceptional nature relating to a radical change to the structure or the organisation of the company. and the purpose of the costs is to favourably and durably affect the profitability of the company. Thus if a company wishes to respond to its dwindling cashflow figures in these barren times by making five employees redundant, the costs attached to this (severance payments, stopping company car leases, etc.) can be regarded as restructuring costs. 5

6 INTERIM VAT SOCIAL LAW MANAGEMENT BDO IN THE PRESS Temporary crisis measures to adjust the volume of labour The Law of 19 June 2009 containing various provisions on employment in times of crisis provides three measures to protect employment during the current crisis period. These measures apply to companies in the private sector and apply from 25 June 2009 (date of effect of the Law) to 31 December They can be extended once until 30 June 2010, after the advice of the National Labour Council and depending on the development of the economic situation, among other things. First measure: reduced working hours Temporary and for all employees A first measure covers the collective reduction of working hours. In contrast to the existing collective reduction of working hours for an indefinite duration, this crisis measure is only temporary and provides a special social security discount for employers who reduce the working hours by 1 5 or 1/4 through a collective labour agreement (company CLA). The reduction of working hours can relate to all employees (blue-collar and white-collar) in a company or to a specific category of employees in the company. An individual agreement with the employee is not required here. Employers in the private sector (and autonomous public undertakings), in difficulty or otherwise, can make use of this measure. Fixed reduction of social security contributions As of the quarter in which the reduced working hours are introduced (at the earliest as of 1 July 2009) until the quarter in which the reduced working hours are stopped, the employer benefits from a (fixed) reduction of his social security contributions. This target group reduction is respectively: EUR 600 per quarter and per employee for a 1 5 reduction EUR 750 per quarter and per employee for a 1/4 reduction These amounts are increased by EUR 400 if the above reduction of 1 5 or 1/4 is coupled to the introduction of a four-day working week (only for the reduction of working hours of fulltime employees). If the reduced working hours are linked to a loss of pay, 6 then the employee is entitled to wage compensation (this must be stipulated in the company CLA). This wage compensation is paid by the employer and must be at least 3/4 of the social security reductions. The wage of the employee, including the compensation, may never be more than 100% of the former full-time salary. This wage compensation is considered as pay on which social security contributions (for the employee and employer) and withholding tax are due. Second measure: crisis time credit Principle The crisis time credit or the individual and temporary reduction of working hours can be applied to one or more full-time employees (blue-collar or white-collar). The employer can propose to every fulltime employee that his working hours are reduced by 1 5 or 1/2 for a period that may not be less than one month and no more than six months. This duration may be extended if the company is still considered to be a company in difficulty at the time of the extension, without going beyond the date of 31 December The total duration of the crisis time credit may not, however, exceed the maximum duration of six months. This measure involves the voluntary changeover from full-time to part-time work. An individual agreement with the employee is thus required. Payment During the period covered by the crisis time credit, the employee receives a monthly payment, paid by the National Employment Office, to compensate for his loss of income. It is a fixed payment, the amount of which does not vary according to the pay. The employer may always make a supplementary payment. The amount of the gross pay (for the part-time job that continues to be worked), the crisis time credit (paid by the National Employment Office) and the supplementary payment paid by the employer, may not be greater than the gross pay that the employee was entitled to when he worked full time. Third measure: crisis suspension or economic unemployment for white-collar employees Principle The crisis suspension or economic unemployment only applies to whitecollar employees. This measure only applies to white-collar employees whose contract of employment can be entirely or partially (by at least two working days per week) suspended, in the absence of work for economic reasons. The suspension can be applied for a minimum of 1 week and a maximum of 16 weeks per calendar year for a full suspension of the contract of employment, and a maximum of 26 weeks for a partial suspension. An individual agreement with the employee is not required. The suspension is only possible after the employer has allocated all days off in lieu to the employee to which he is entitled. The employee and the National Employment Office must be informed of this (in writing) at least seven days before the application of the measure (not including the day of notification). Each notification must relate to one calendar week or a number of calendar weeks. Payment During the period of temporary suspension, the white-collar employee receives an unemployment

7 VAT SOCIAL LAW benefit/crisis benefit (70% - cohabitating partner - or 75% - single person or head of family - of the monthly wage limited to EUR 2, gross per month) plus a supplement to the charge of the employer (must be stipulated in a CLA or a company plan). This supplement must at least be equivalent to the supplement allocated to blue-collar workers of the same employer who benefit from unemployment benefit in the event of the suspension of the contract of employment for economic reasons. The amount of the monthly crisis benefit plus the extra allowances may not exceed 100% of the previous full-time pay. Professional withholding tax of 10.09% is deducted from the crisis benefit. The supplement to the charge of the employer is exempt from social security contributions and withholdings, but is subject to professional withholding tax. With a crisis suspension, the white-collar employees remain in service under the same conditions as before. The contract is suspended, but the employee reserves the rights attached to it. It is important to note that on the actual days of the crisis suspension, the white-collar employee is entitled to end his contract of employment without notice. frank.ruelens@bdo.be eveline.naudts@bdo.be BDO Atrio Legal Advisors The crisis time credit and crisis suspension The two other crisis measures, the crisis time credit and the crisis suspension, can only be applied if these measures are contained in a CLA (per sector, or a company CLA for companies with a union delegation) or a company plan approved by the Company Plans Committee, and the company must also be considered as a company in difficulty. What is a company in difficulty? A company is only considered to be a company in difficulty if there is as case of: A fall in turnover (according to the VAT declaration) or a fall in production of at least 20% in one of the four quarters before the application of the crisis measure. If the company also employs blue-collar workers, the company has at least 20% temporary unemployment of the workers (against the total number of hours declared to the National Office of Social Security (NOSS)). If a company is confronted with a fall in (all) orders of 20% in one of the four quarters before the request for the crisis measure (this criterion cannot be applied for the moment, as the Royal Decree in this respect has not yet been published). Economic unemployment for white-collar employees a success Since June, 258 companies have already been given permission to suspend the contracts of employment of their white-collar employees in order to face up to the crisis. This is shown by the figures of the federal government. Economic unemployment for white-collar employees, which has only existed since June, seems to be increasingly popular. To date, 389 companies have already submitted a request. This figure is rising by a third month by month. The reduced working hours are open to companies who have seen their turnover fall by 20 percent compared to the previous four quarters or who have at least 20 percent economic unemployment among their blue-collar workers. Most companies invoke the first criterion. Source: De Tijd of 21/08/2009 7

8 INTERIM VAT SOCIAL LAW MANAGEMENT BDO IN THE PRESS 8 Gift at ordinary rate: Gifts of personal property in a direct line and inter vivos are subject to a registration fee of 3% in the three regions of the country. In Wallonia, the application of this fixed rate of 3% is nonetheless subject to the supplementary condition that the financial instruments that are the subject of the gift relate to a company, the actual seat of management of which is situated in a Member State of the European Union and which principally carries on an industrial, commercial, artisanal, agricultural or forestry activity, a liberal profession, a practice or an office. If, on the other hand, the shares relate to an asset management company or a pure holding, the rate applicable in Wallonia will be the ordinary progressive rate of between 3 and 30% depending on the value of the shares gifted. Gift at reduced rate: I want to give my company s shares to my children - what will I have to pay? There are three different possibilities for gifting shares at beneficial rates: For what type of company? There also exists in the three regions a more favourable registration fee for gifts of shares in a company, the actual seat of management of which is situated in a Member State of the European Union and which carries on an industrial, commercial, artisanal, agricultural or forestry activity, a liberal profession, a practice or an office. Conversely, this preferential treatment does not apply to pure asset management companies or to holding companies. At what rate? This specific rate is 0% in Wallonia, 2% in Flanders and 3% in Brussels. To benefit from it, the gift must be made by means of an authentic instrument. The rate applied will be determined by the tax domicile of the donor in the five years preceding the gift. The family tie, or absence thereof, between donor and recipient does not affect the rate applied. What are the conditions for benefiting from this? As mentioned above, the gift must be made by an authentic instrument, which must include certain notes and annexes with a view to benefiting from the specific rate. The deed of gift must certify that the transfer involves at least 10% of the voting rights. In Wallonia, benefiting from the reduced rate is subject to conditions linked to the durability of the enterprise, notably the pursuit of an activity, the maintenance of at least 75% employment and a ban on reductions in the share capital following a withdrawal or distribution for five years after the gift. At the end of the five-year period following the gift, the successors must file a declaration certifying that the conditions outlined above are still met. In Brussels, the recipient must hold on to the shares for at least five years and must each year provide the registry with evidence that he/she still holds them for these five years. Entitlement to the beneficial rate is also lost if the company s actual seat of management is transferred to a non-member State of the European Union. It should be noted that, as the texts currently stand, there is nothing to be gained by using this procedure in a direct line, as an ordinary gift of property is also subject to a fee of 3% without having to submit to specific conditions. In Flanders, benefiting from the reduced rate is subject to the condition that the company s activity is carried on for five years following the gift and that the headquarters may not be transferred outside the European Union during this five-year period. The recipient must provide the registry with evidence that these conditions are satisfied at the end of the five-year period. What happens if the conditions cease to be satisfied before the end of the five-year period? Except in case of force majeure, the ordinary registration duty will be due (less any fees already paid where Flanders is concerned) plus the statutory interest calculated from the date on which the initial deed of gift was registered.

9 Gift not subject to registration fee: If the shares are bearer shares, it is possible to make a classic manual gift that will not be subject to the formality of registration. In this case, however, care must be taken to retain proof of the date of the gift; to this end it is customary for donor and recipient to exchange registered letters. It is also possible to make the gift before a Dutch notary, in which case the deed will have a certain date and will not be subject to the formality of registration in Belgium, and only the notary s fees will require payment. However, if the donor dies within three years of the deed of gift, the administration will deem the gifted shares to form part of the deceased s estate and they will therefore be subject to inheritance tax at the marginal rate in the hands of the children who inherited them. The example below illustrates the risk run in such cases. First hypothesis: A father holds shares estimated at EUR 500,000, the rest of his estate is valued at EUR 1,000,000. The father gives half his shares to each of his two children, the gift is made by an authentic instrument before a Belgian notary and is registered at a rate of 3%. The fees due at the time of the gift therefore amount to EUR 15,000 excluding notary s fees. The father dies two years later, his estate is split fifty-fifty between his two children and is estimated at EUR 1,000,000 net. Each of the two children will have to pay death duties on EUR 500,000, being around EUR 86,625 in Wallonia, EUR 85,750 in Brussels and EUR 87,000 in Flanders (according to the deceased s last domicile). As the gift has already been subject to registration duties, it is not taken into account when determining the death duties (Articles 7 and 66bis of the Inheritance Tax Code). Second hypothesis: The father gives half his shares to each of his two children before a Dutch notary, and no registration fee is due on the day of the deed. The father dies two years later, and each child must therefore pay death duties on a sum of EUR 750,000, being the EUR 500,000 inherited from the estate plus the shares gifted less than three years ago and estimated at EUR 250,000. Each child will therefore have to pay duties of around EUR 161,625 in Wallonia, EUR 160,750 in Brussels and EUR 154,500 in Flanders. It will therefore be noted that the fiscal cost of the operation is practically double if the gift is not registered and the donor dies unexpectedly within the next three years. How can such a risk be avoided? To face up to this risk, it may prove appropriate for each child to take out temporary life insurance for his/her own benefit on the life of his/her father. The term of this life insurance policy will be three years from the time of the gift and the amount of the intervention will be fixed so as to cover the estimated amount of the death duties that would be due on the value of the gifted shares. In the second example given above, each child would be well advised to seek out an insurance policy that guaranteed him/her a sum of around EUR 74,000 in the event of his/her father s death within three years of the gift. Nevertheless, the final conclusion will depend on the age of the father and on what the market can offer. VAT SOCIAL LAW jean-philippe.weicker@bdo.be fabrice.grognard@bdo.be BDO Atrio Tax Advisors Do you also have a question for this section? Feel free to send your request to newsletter@bdo.be 9

10 VAT SOCIAL LAW Europe is the referee on the Belgian fiscal playing field Everybody regards tax law as an extremely complex matter that we are all reminded of every year when it is time to send in our tax return. The profusion of tax rules, exceptional measures, changes, etc. have ensured that most taxpayers have been unable to see the forest for the trees for a long time. From the tangle of Belgian tax law... Moreover, taxation is situated on a number of levels, as in addition to the Belgian federal taxes (e.g. personal and corporate tax, VAT, gift taxes, etc.), there are also areas for which the communities and regions, provinces and municipalities are responsible. Although this Belgian tax law is already more than complicated enough, it cannot be separated from a wider international dimension. Belgium as a small country is an important link in international business, on both a European and international level. Toward European taxation? Europe is omnipresent. A study of our eastern neighbours showed, for example, that a good 85% of German legislation actually originates from Europe. As part of this integration, further harmonisation with regard to tax laws is also being pursued on a European level, as applies to nationals (private individuals and companies) of the Member States. While in various other domains this uniform approach has largely been realised, it is much less the case with regard to taxation. VAT is already more European VAT, on the other hand, is a tax with a European structure. All Member States of the European Union must base their national VAT legislation on the European Council Directive 2006/112/EC, and are also required to pass on part of their VAT proceeds to Europe. When Finance Minister Reynders announced that in Belgium bicycle repairers and shoemakers could apply a VAT rate of 6% (and not the standard rate of 21%), it was not a Belgian favourable measure, but a requirement imposed by Europe on all Member States. 10 Many VAT consultants will, however, be able to confirm that the interpretation of Council Directive 2006/112/ EC by the various Member States when transposing it into their national legislation still gives rise to different applications of the VAT rules to the same type of transaction. than direct taxes However, what applies to VAT is much less the case for direct taxes. This has everything to do with the fact that up until now, on a political level, the European Council could only push through decisions that were taken unanimously. All Member States of the EU must agree to a proposal before it can be introduced. There is consequently no question of a single European corporate tax for example. The rates in the European Union vary from 10% (e.g. Bulgaria and Cyprus) to 37% (Italy), although the tax base differs from country to country such that the abovementioned nominal rates are not a reflection of the actual tax burden. It is clear that an expanding European Union (now with 27 Member States) is finding it increasingly difficult to reach this required unanimity. That many Member States also want to maintain this unanimity is also due to the fact that they do not want to transfer their control over personal tax and corporate tax to the EU, but prefer to control and manage this important budget instrument nationally. Directives as a political solution The fact that Europe itself does not levy any taxes as such cannot prevent its influence on the tax laws of the various Member States from increasing. This aim for a more integrated European tax policy has for example resulted in various directives that must be transposed by the Member States into their own legislation. We can think of the Parent-Subsidiary Directive that enables dividend payments between related companies within the EU to be free of tax. A similar directive was introduced more recently (in 2004) for interest and royalties. A year later, the Savings Directive was initiated to bring an end to tax competition between Member States over interest income. In order to make restructuring operations in the EU tax neutral, the so-called Mergers Directive was also introduced in the last century. Although this directive had to be implemented almost 20 years ago and the vast majority of Member States did so a long time ago, Belgium had failed to do so up until the end of Despite a number of European judgements against it (see further), such cross-border reorganisations (in which a Belgian company is taken over by a French company, for example) have only been tax neutral since early The European Court as a true European referee While the above political initiatives (directives) are rather limited, the impact of the case law of the European Court of Justice has become increasingly important in the meantime. This Court, based in Luxembourg, is the most important guardian of European Community law and consequently ensures that Member States do not just get a free hand with regard to taxation. It can also be said that the European Court is by far the institution that has brought about the most European harmonisation with regard to income tax over the last few years. The European Court ensures that the four basic freedoms of the European Treaty (free movement of goods, services, capital and people) are not violated. Consequently, Member States cannot make any unjustified distinctions between residents and non-residents, even if in-

11 VAT SOCIAL LAW come tax is a matter that is subject to the sovereignty of the Member States. The Court does not shrink from blowing the whistle on Member States if their national legislation does not comply with the abovementioned objective of the European Treaty. The number of judgements compelling Member States to adjust their national legislation, sometimes with a substantial budgetary impact, has increased enormously and will probably increase further in the future. The increased awareness among disadvantaged parties of the effectiveness of this European instrument and the publicity dedicated to it in the media are of course not unrelated to this. Unless Member States take spontaneous initiatives and adapt their legislation without a prior judgement by the Court. In this respect, it remains to be regrettable and short-sighted that Member States (Belgium is also guilty of this) still introduce legislation that may well not stand up to the test of the European Treaty. Belgium is a poor European pupil Belgium, often in the sights of Europe, is certainly not the best of European pupils. Not only has our country been judged against more often on account of the incorrect or late introduction of imperative European measures (see previous paragraph on the Mergers Directive), but our legislation is also not always in line with European Community law. Belgian courts are consequently putting preliminary questions to the European Court at an increasing rate to test Belgian tax law against European law. The most recent judgement against Belgium was in the Cobelfret case. When a Belgian company receives a dividend, it can exempt 95% of the dividend received in the form of a devidend received deduction (DRD deduction). However, the Belgian tax authorities have always refused to allow the DRD deduction for years in which a company is loss-making. This means that companies without operating profits cannot fully utilise this DRD deduction. This is in flagrant breach of the abovementioned Parent-Subsidiary Directive, the very purpose of which is to ensure that intra-group dividends within the EU can be paid tax-free by the subsidiary to the parent company. Many Belgian groups have been and are still confronted by this incorrect restriction of the DRD deduction applied by the tax authorities. Now, on the basis of this judgement, every taxpayer concerned has the means (e.g. objection) to oppose this. A careful estimate puts the budgetary impact over time at around EUR 1 billion (although a trifle compared to the more than EUR 100 billion that the Italian treasury has to cough up on account of an Italian tax measure being found unlawful). Consulting the European Court does not of course necessarily result in a negative judgement. For example, the Court quite recently judged that the fact that no withholding tax is due on interest payments between Belgian companies is not discriminatory, even though advance tax can be withheld from interest payments to foreign EU companies. The great importance of Europe for Belgian taxation It is clear that Europe is becoming an increasingly important referee on the Belgian fiscal playing field. The case law of the European Court of Justice in particular is leading the way in this respect. A judgement against by the Court prompts the tax authorities to change their legislation when it goes against Community Law and often creates tax-planning possibilities for taxpayers. For a long time, it has not been enough for a taxpayer, and above all his adviser, to have a thorough knowledge of Belgian tax law, as the developments from Europe also have to be taken into account. It is thus very important to adopt a proactive approach here rather than a wait-and-see attitude. werner.lapage@bdo.be BDO Atrio Tax Advisors For illustration: a few recent judgements of the European Court The former reclassification of interest payments to a foreign EU company (that was a director of the interest-paying Belgian company) as dividends was rejected by the Court on account of the fact that such a reclassification does not apply to similar interest payments to a Belgian company-director. The former taxation of the capital gain realised by a Belgian private shareholder, in the event of a transfer of a substantial holding in a Belgian company to a foreign company, is not allowed when such a transfer is to a company established in the EEA. When a loss-making Belgian company has a profit-making permanent establishment, the treaty-exempt permanent establishment profits may not be deducted from the Belgian losses in any case, so that these losses can remain intact. 11

12 VAT SOCIAL LAW Liberalisation of the law on financial assistance for acquisitions The Royal Decree of 8 October 2008 made radical changes to the system of so-called financial assistance. Until recently in Belgium, there was a basic ban on companies advancing funds, granting loans or standing security for the purpose of these third parties acquiring its own shares. There were two exceptions to this ban: on the one hand for credit institutions and on the other for management buyouts, in which the management (or staff ) of the company acquired the shares of the company themselves. In such cases, financial assistance by the company (the leveraged buyout ) was allowed (under certain conditions). As, in practice, this ban often stood in the way of the acquisition of shares and the existing rules were no longer appropriate to economic reality, the European Directive of 6 September 2006, revising the Second Companies Directive, requires Member States of the European Union to lift such bans. Although in principle this Directive only applies to the nv (public limited company), Belgium immediately chose to relax the rules on financial assistance also for the bvba (private limited company) and cvba (limited cooperative company). Financial assistance allowed With effect from 1 January 2009, a company being taken over is allowed to take on part of the financing of the acquisition price or to provide security in the favour of the acquirer. The financial assistance is indeed subject to a number of strict conditions, which are elaborated upon below. Responsibility of the managing body The financial assistance is granted under the responsibility of the managing body (board of directors for the nv, management committee for the bvba). The managing body must ensure that the financial assistance is in line with market conditions, both with regard to the interest that the company receives and the security that the company stands for third parties. Moreover, the 12 managing body must carefully examine the creditworthiness of the third party (parties). The managing body must draw up a report and present it to the general meeting. The report must set out the reasons for the operation, the risks of the operation for the solvency and liquidity of the company, and the price at and conditions under which the operation and the acquisition of the shares are to be done. Conflict of interests? For completeness, we should note that in the event of a conflict of interests, the existing provisions in this respect must be observed. For the nv and bvba, one additional rule has been introduced: if the third party to whom support is being granted is the parent company or an officer of the parent company, a report must be drawn up by the managing body of the support-providing company setting out the reasons for the support and the consequences of the financial assistance on the supportproviding company. Approval of the general meeting required Even if the allocation of financial assistance explicitly comes under the responsibility of the board of directors, it is nevertheless a requirement for the general meeting to give its prior approval. It does this by the majority required for an amendment to the articles of association (presence of 50% and a majority of 75% of the votes cast). Financial assistance within certain limits The amount that can be spent on financial assistance is not unlimited. The law expressly stipulates that the amount used for financial assistance to third parties is limited to the amount that is open to distribution (i.e. that can be paid out as a dividend) in accordance with Article 617 of the Companies Code. In other words, financial assistance may not lead to the net assets of the company (as a result of the payment) falling below the amount of the paid-up or, if this is higher, the called-for capital (plus all reserves that may not be paid out according to the law or the articles of association). In the accounts, the company must post a reserve on the liabilities side of its balance sheet that is not available for distribution, equal to the amount of the financial assistance. What about a management buyout? The Royal Decree also clarifies that the existing possibility for staff members or management of a company to acquire shares with the financial assistance of the company in the framework of a management buyout itself remains unchanged. In addition to staff or management of the company itself, since 1 January a management buyout also applies to the employees or management of a related companies, as well as a management buyout through a holding company formed for this purpose. The only condition that this form of financial assistance must satisfy is the criterion of Article 617 of the Companies Code ( amounts open to payment ). The other conditions of the abovementioned Royal Decree do not apply. karen.keuleers@bdo.be tim.fransen@bdo.be BDO Atrio Legal Advisors

13 VAT SOCIAL LAW Highlights The lifting of the ban on financial assistance is definitely a good thing. We nevertheless note that a number of aspects of the new rules could create difficulties. The responsibility for the financial assistance lies with the managing body As mentioned above, it not only has to examine the market compliance of the operation, but also the creditworthiness of the third parties. In the light of its own liability, it would be best to do this thoroughly. The question is to what extent is the managing body able to do this in practice, as normally it can only consult the publicly available information. In practice, it may be considered making the third party responsible for presenting the required information and providing the required guarantees in this respect ( representations and warranties ). The report of the managing body is published in full in the Belgian Official Gazette Another point that could discourage companies from applying the financial assistance procedure is the fact that the report of the managing body must be published in full in the appendices of the Belgian Official Gazette, such that the details of the operation are disclosed to the world Liberalisation of the law on capital contributions in kind and quasi-contributions The Royal Decree of 8 October 2008, amending the Companies Code, liberalises the law on capital contributions in kind and quasi-contributions as of 1 January The aforementioned Royal Decree applies to companies in the form of a bvba (private limited company), cvba (limited cooperative company ), nv (public limited company), Comm. VA (limited partnership) and SE (European company). The amendments relate to the supervision of capital formed by contributions in kind, both upon incorporation and for capital increases, and for quasi-contributions. Capital contributions in kind and quasicontributions: rules before 1 January 2009 Under the legislation on capital contributions in kind, a contribution in kind to a company as a rule only qualifies for consideration in shares representing the share capital when the contribution in kind consists of assets that could be valued against economic criteria. The valuation concerned is done by the founders and/or the managing body of the company, with a check by the auditor of the company benefiting from the contribution, or in the absence of an auditor, by an external company auditor appointed by the founders or the managing body. The purpose of the procedure is to counteract the risk of an overvaluation of the contributed assets. After all, the aim of the law is to guarantee the reality of the capital. The supervisory procedure consists of the audit report by the auditor/external company auditor and a special report by the founders or the managing body. The deed of incorporation or the minutes of the extraordinary general meeting pursuant to a capital increase have to include the conclusions of the audit report by the auditor/external company auditor. The aforementioned deed and reports has to be filed in the company dossier in accordance with Article 75 of the Companies Code. A similar rule to the one set out above for the contribution in kind also applies to a quasi-contribution. However, an authentic instrument is not always required for a quasi-contribution. Capital contributions in kind and quasicontributions: new rules as of 1 January 2009 An audit report is no longer required if there is a clear reference point The new rules provide the possibility to implement a contribution in kind or quasi-contribution without an audit report by the auditor or external company auditor in cases where there is already a clear reference point for the valuation of the contribution in kind or quasi-contribution. For a contribution in kind, the special report of the founders 13

14 VAT SOCIAL LAW or the managing body does not have to be produced either. For a quasi-contribution, however, the prior approval of the operation by the general meeting and a special report by the managing body are indeed required. Contribution of securities or money market instruments If the contribution involves securities or money market instruments that are valued at the weighted average price at which they have been quoted on one or more regulated markets, then an audit report by the auditor/external company auditor is not required. The liability for the description, valuation and determination of the consideration then lies with the founders/managing body. Nevertheless, an audit report is required if. the price has been affected by exceptional circumstances that lead to a substantial change of the fair value of the securities or money market instruments on the actual date of the contribution (this covers, for example, the situation in which the market for these securities or money market instruments is no longer liquid), such that the securities or money market instruments are revalued on the initiative and under the responsibility of the founders or managing body. Contribution of other previously valued assets If the contribution involves other assets that have already been valued by a company auditor, then an audit report by the auditor/external company auditor is not required. However, the following conditions must be satisfied: The fair value was determined by the company auditor on a date no more than six months prior to the actual date of the contribution. The valuation was done with observance of the generally accepted standards and principles for the valuation of the category of assets making up the contribution. Nevertheless, an audit report is required if new special circumstances lead to a substantial change of the fair value of the asset on the actual date of the contribution, such that the asset is revalued on 14 the initiative and under the responsibility of the founders or managing body. Protection of minority shareholders If there is no revaluation, one or more shareholders, who jointly hold at least 5% of the subscribed capital on the date that it is decided to increase the capital or make a quasi-contribution, may demand a valuation by an external company auditor according to the ordinary system for capital contributions in kind/ quasi-contributions. For the formation of a company, this protection of the minority shareholders cannot apply because there is no shareholder/member who holds 5% of the shares on the date of the deed of incorporation. Contribution of other previously valued assets incorporated into annual accounts audited by an auditor If the contribution involves other assets whose fair value has been derived from audited and approved annual accounts of the previous year, then an audit report by the auditor/external company auditor is not required. The following conditions must be satisfied: The annual accounts have been audited by an auditor (Belgian company) or by a person authorised to audit the annual accounts (foreign company). The opinion of the auditor in the audit report is without reservations. Nevertheless, an audit report is required if new special circumstances lead to a substantial change of the fair value of the asset on the actual date of the contribution, such that the asset is revalued on the initiative and under the responsibility of the founders or managing body, then an audit report must be drawn up by the auditor/company auditor and a special report must be drawn up by the founders/managing body (when making a capital contribution in kind). Additional formalities if the contribution is made without an audit report Drawing up and submitting a declaration to the Commercial Court Within a month of the actual date of the contribution of the asset, a declaration must be drawn up and submitted to the registry of the Commercial Court and published in the Appendices of the Belgian Official Gazette. Both the declaration and the certificates are drawn up by the founders/managing body. Capital contribution in kind within the authorised capital For a contribution in kind within the authorised capital, the authority to increase the capital is in principle delegated to the managing body. Before the contribution in kind is realised, an announcement must be submitted to the registry of the Commercial Court and published in the Appendices of the Belgian Official Gazette. Within a month of the actual date of the capital contribution in kind, the managing body must again submit a declaration to the registry of the Commercial Court and have it published in the Appendices of the Belgian Official Gazette. This declaration only relates to the fact that no new special circumstances have arisen since the publication of the announcement mentioned earlier (prior to the capital increase). stefan.molenaers@bdo.be BDO Atrio Auditors In practice the audit report of the auditor/external company auditor is not required in three cases: Securities or money market instruments listed on a regulated market. Assets that have already been subject to a recent valuation by an external company auditor. Assets for which the fair value of each asset is derived from annual accounts of the previous year that have been audited by an auditor, with the auditor s opinion being without reservations.

15 SHORTNEWS Short News from BDO BDO collaborators write a book Frank Ruelens of BDO Atrio Legal Advisors has written a book about Outplacement in times of crisis. This book is a complete reworking of the contribution Outplacement after the generation pact, which was published in Ruud Bourmanne of BDO Atrio Public Advisors wrote a book that is aimed at the local public administrations. A practical guide for integrated management helps local public administrations in making their internal operations and service provision more professional. For more information on these books and how to order them, please visit the BDO website and click Publications, External publications, Books. New corporate visual identity On 1 January 2010, all member firms of the BDO network will receive a new visual identity. A new, fresh colour palette and an updated logo will be implemented around the world. This change is aimed at increasing the global recognisability of the BDO brand. André Kilesse appointed member of the Consultative Advisory Board of the International Accounting Education Standards Board The chairman of the BDO Supervisory Board, André Kilesse, has been appointed a member of the Consultative Advisory Board (CAG) of the International Accounting Education Standards Board (IAESB). The IAESB lays down the International Education Standards with regard to: Education (internships) Ongoing training courses The CAG is made up of a group of 15 people from, among others, the USA, Europe, Canada and Japan. It is the policy body that supervises the IAESB s work. The majority of the members of the CAG are people who are employed externally. The external members are, for example, people in senior positions for regulators, banks, the IOSCO and universities. This is the first time that this honour has fallen upon a person from the Belgian accounting world. New Regulation regarding social security On 16 September 2009 the implementing Regulation of the new EU social security Regulation 883/2004 on the coordination of social security systems has been signed. It determines a.o. in which country one is deemed to pay social security contributions in case of simultaneous employment in several EU-Member States. In a number of situations, the coordination rules differ substantially from the provisions in the existing Regulation, so that a profound analysis of existing and future crossborder employment would be appropriate. The legislation is deemed to come into force on 1 May Extensive reporting regarding this subject will follow in our next Newsletter. News from the network BDO International launches IFRS news page Would you like to stay up-to-date on the most recent developments in IFRS? From now on, you can visit the IFRS news page on the BDO International website. Surf to: and click News, IFRS News. Diary On 15 October 2009, BDO is hosting 2 workshops at the Ondernemen in Vlaanderen (Conducting enterprise in Flanders) trade fair. The first workshop will cover how to avoid pitfalls in a takeover process. The second workshop will cover the value drivers during the valuation of a company. BDO will also be present at the trade fair with a stand. In the months of October and November 2009, you can follow the financial analysis for lawyers training course in Bruges. BDO is providing one of the instructors. On 29 October 2009, BDO is organising the third local public sector study day. In the autumn of 2009, BDO is organising a breakfast seminar series at our Hasselt office. More information can be found on the Events page on the BDO website. 15 VAT SOCIAL LAW

16 Auditors Accountants Advisors BDO Atrio Antwerpen Uitbreidingstraat 66/13 B-2600 Antwerpen T. +32 (0) F. +32 (0) bdoantwerpen@bdo.be BDO Atrio Brussels The Corporate Village, Da Vincilaan 9 - Box E.6, Elsinore Building B-1935 Zaventem T. +32 (0) F. +32 (0) bdobrussel@bdo.be BDO Atrio Gent Axxes Business Park, Guldensporenpark blok K B-9820 Merelbeke T. +32 (0) F. +32 (0) bdogent@bdo.be BDO Atrio Hasselt Prins Bisschopssingel 36/3 B-3500 Hasselt T. +32 (0) F. +32 (0) bdohasselt@bdo.be BDO Atrio DFSA Lasne Chaussée de Louvain 428 B-1380 Lasne T. +32 (0) F. +32 (0) delvaux@dfsa.be BDO Atrio Liège Rue Waucomont 51 B-4651 Battice T. +32 (0) F. +32 (0) bdobattice@bdo.be BDO Atrio Namur Parc Scientifique Crealys, Rue Camille Hubert 1 B-5032 Les Isnes T. +32 (0) F. +32 (0) bdonamur@bdo.be BDO Atrio Roeselare Clintonpark, Ter Reigerie 7/3 B-8800 Roeselare T. +32 (0) F. +32 (0) bdoroeselare@bdo.be BDO Atrio Wavre Ferme des Quatre Sapins, Chaussée de Huy 120A B-1300 Wavre T. +32 (0) F. +32 (0) bdowavre@bdo.be The information contained in this Newsletter is of an informative and general nature and is not intended as professional advice. Our advisors are at your disposal for more in-depth advice and to take appropriate action. Should you want us to send our Newsletter electronically, please then contact us at newsletter@ bdo.be. Our Newsletter can also be consulted at Our Newsletter is also available in Dutch, French or German. R.E. Werner Lapage, p/a The Corporate Village Da Vincilaan 9 Box E.6 - Elsinore Building Zaventem. BDO international is a worldwide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number ) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located