Belgian tax reform: what is in it for the private equity sector ?

Corporate LPs

The impact of the tax reform should be rather limited for most Corporate LPs, as the modifications announced to the Belgian participation exemption regime (“DRD regime”) should generally not affect their private equity (“PE”) investments.

Under the DRD regime, Corporate LPs benefit as a rule from a 100% corporate income tax exemption on dividends and capital gains on shares provided that the following conditions are met:

1. holding of (or commitment to hold) a participation in full ownership in the distributing company of at least 10% or with an acquisition value of at least EUR 2.5M for an
   uninterrupted period of at least one year;
2. the distributing company as well as any of its direct and indirect affiliates meet minimum taxation standards, and the transaction is not deemed abusive.

As an exception, Corporate LPs do not need to satisfy the condition under (i) if they invest in PE funds qualifying as “investment company”. 

In the absence of legal criteria, the Belgian Ruling Commission generally requires that the following conditions are fulfilled for a company to qualify as “investment company”:

• plurality of investors;
• plurality of investments; 
• the investment company has no intention to form a group with its portfolio companies (as opposed to a holding company) and is managed in the common interest of its investors.

PE funds structured as legal entities (i.e. with separate legal personality) generally qualify as “investment company”. 

As opposed to some information which circulated earlier, the government agreement does not plan to modify the notion of “investment company”, meaning that Corporate LPs should continue to benefit from the DRD regime for their qualifying PE investments, without any minimum participation/holding requirement.

The qualification as “investment company” does not apply to a.o. single-asset continuation funds, notably because of the absence of plurality of investments. The same is true for contractual PE funds (such as a Luxembourg SCSp, Dutch CV, French FPCI and SLPS), where Corporate LPs are fiscally deemed to hold the underlying portfolio companies/SPVs directly, by virtue of the applicable tax transparency regime.

For said non-qualifying PE investments, Corporate LPs need to satisfy the condition under (i) either at the level of the continuation fund or at the level of each underlying portfolio company/SPV in case of contractual fund (which, in the latter case, is very often not satisfied).

The new government will tighten the minimum participation requirement by (i) increasing the threshold of the acquisition value from EUR 2,5M to EUR 4M and by (ii) requiring that said acquisition value is booked as “fixed financial asset”. 

These modifications should however only apply to and between “large enterprises” (i.e. enterprises which a.o. employ on a consolidated basis at least 250 employees). 

The wording “to and between large enterprises” suggests that institutional investors (which would likely qualify as “large enterprises”) should nevertheless remain unaffected provided that the continuation fund or the underlying portfolio company/SPV does not also qualify as a “large enterprise”.

Individual LPs 

The most relevant impact of the tax reform for individual LPs would be the introduction of a capital gains tax of 10% on financial assets.

1. Individual LPs investing in PE funds structured as legal entities 
   
   Individual LPs should in principle not be affected as proceeds are usually distributed through dividend distributions or share redemptions / (partial) liquidations, in which case the redemption/liquidation gain is fiscally assimilated to a dividend income. Only transfers on the secondary market should therefore in principle be targeted. 
   
   The interaction of the capital gains tax with a.o. the so-called Reynders tax (targeting the “interest component” included in capital gains and redemption/liquidation gains on qualifying PE funds investing more than 10% of their assets in debt instruments) remains unclear.
   
   
2. Individual LPs investing in contractual PE funds
   
   According to the applicable tax transparency regime, individual LPs are deemed to hold the underlying portfolio companies/SPVs directly. The introduction of a 10% capital gains tax would impact said LPs when exits take the form of a sale of the shares of the underlying portfolio company/SPV. In such case, individual LPs would be taxable at 10% on their pro rata share in the capital gain they will be deemed to have directly realised, subject to a yearly exemption on the first EUR 10,000.
   
   Cornerstone investors (i.e. investors who might hold stakes of 20% or more) may benefit from (i) an additional exemption on the first EUR 1M and (ii) the following progressive tax rates: 

• • EUR 1M to EUR 2.5M: 1.25%
  • EUR 2.5M - EUR 5M: 2.5%
  • EUR 5M - EUR 10M: 5%
  • > EUR 10M: 10% 

It is currently unclear whether these advantages would also be granted to investors holding stakes below 20%.

The 10% capital gains tax would only apply to increases in value as from the entry into force of this measure. In other words, historical capital gains will in principle remain untaxed. 

Capital losses on financial assets would be deductible from capital gains realised during the same taxable period, with no possibility to carry forward exceeding capital losses. 

Finally, the tax credit applicable to capital losses realised upon a liquidation of a Private Privak / Pricaf Privée (up to EUR 25,000 per year) will be abolished. 

Private Privak / Pricaf privée

The new government intends to soften the regulatory framework applicable to the Private Privak / Pricaf Privée with respect to:

• The limited lifetime: the current lifetime is limited to a term of 12 years which can be extended twice for a period of 3 years.
• The minimum number of shareholders: currently a Private Privak / Pricaf Privée needs to have at least 6 (unrelated) investors at inception (although this is not an explicit condition, the minimum number of investors required to incorporate a Private Privak / Pricaf Privée serves as a benchmark to determine the minimum number of investors in a foreign PE fund to qualify as an “investment company” (cf. above)). This requirement to have a minimum number of investors at inception often creates issues in practice, which would partially be solved by reducing this threshold. This softening measure might also offer new possibilities for foreign multi-family investment platforms which currently do not meet this threshold. Attention should however be paid to a potential qualification as a so-called “fonds dédiés” under the Cayman Tax (i.e. funds or compartments held for at least 50% by one investor, together with related persons). 
• The “entry time”: although there are no further indications of what is meant by this change, providing for a temporary launching period where Private Privaks / Pricafs Privées would be allowed to start investing without having reached yet the minimum number of investors / before obtaining their status of Private Privak / Pricaf Privée would be welcome.
• The authorised investments: the Private Privaks / Pricafs Privées are only allowed to invest in financial instruments issued by non-listed companies, with only very few exceptions. The government agreement indicates that the authorised investments will be improved but does not indicate which types of new assets might qualify as authorised investments.

As the intention is that said modifications will be budget-neutral, no softening of the tax regime of the Private Privaks / Pricafs Privées (or of its investors) should be expected.

Carried interest  

The new government announces that it will introduce a specific competitive tax regime (compared to Belgium’s neighboring countries) for carried interest. The objective is to stimulate the activity of investment funds in Belgium. 

There is currently no specific tax regime for carried interest, generating uncertainty with respect to the tax qualification of such income. A new tax regime bringing clarity to this matter would therefore be more than welcome.

The new regime would foresee the taxation of carried interest as moveable income, subject to a “maximum rate of 30%”. It is not clear whether fund managers, holding their carried interest through their personal management company, will also be covered.  

According to the government’s agreement, existing plans should not be impacted. The question arises whether the grandfathering clause would, for instance, also apply to unvested carried interest at the time of the entry into force of the new regime.

VVPRbis – VVPRter (Liquidation reserve) regime

Fund managers, working via their personal management company will welcome the fact that the VVPRbis remains unchanged.

Under the VVPRbis regime, small or medium sized enterprises (SME) can distribute, under certain conditions, dividends subject to a reduced withholding tax of 15% (instead of 30%). 

The alternative VVPRter regime (also called liquidation reserve regime) would basically be aligned with the VVPRbis regime. Under the VVPRter/liquidation reserve mechanism, SMEs can a.o. distribute dividends at a reduced withholding tax rate of 5%, subject to the payment (by the SME) of a 10% flat tax on (part of) the yearly profits allocated to a so-called liquidation reserve (effective tax rate of 13,64%) and a waiting period of five years.

The government plans to reduce the waiting period from five years to three years. The reduced withholding tax rate would be increased from 5% to 6,5% for profits allocated to a liquidation reserve as from 1 January 2026, bringing the effective tax rate to 15%. 

Group contribution regime extended

PE funds pursuing a Buy & Build Strategy might benefit from the modification of the group contribution regime.

Currently, Belgian companies may apply the group contribution regime provided that a.o. (i) they have a direct 90% shareholding link (either parent-subsidiary or sister companies) and (ii) said companies are affiliated to each other for a period of at least 5 years.

In addition to the simplification of the administrative formalities, the government plans to broaden the scope of this regime to (i) indirect participations and (ii) newly acquired companies (by abolishing the waiting period of 5 years). 

These modifications would be welcome, especially for leveraged buy outs, where acquisition and financing costs are centralised at the level of the acquisition vehicle. 

Stock-option plans (SOP)

Management equity plans (MEP) may, under certain conditions, be allocated through a qualifying SOP.

Under the law of 26 March 1999, SOPs can benefit from a favorable tax regime where beneficiaries are taxable at grant on a benefit in kind (qualifying as professional income) corresponding to 18% to 23% (or 9% to 11,5% if certain conditions are met) of the value of the underlying shares.

The government agreement announces that benefits in kind may no longer exceed 20% of the gross annual remuneration of directors, which might in certain cases reduce the possibility to attribute MEPs through qualifying SOPs. 

Managers working via a personal management company might also be impacted by the modification of the liquidation reserve (see above).