New voluntary disclosure procedure kicks off
02/08/2016 - The law introducing a new permanent regime of voluntary disclosure for tax and social security dated 21 July 2016 was published in the Belgian State Gazette of 29 July 2016 entered into force on 1 August ... in theory. The new disclosure program is meant to be permanent, at least for the federal taxes, but every year it will get a bit more expensive. The practical implementation, including the form of the application, is still to be decided.
The new regularization procedure is largely inspired by the 2013 permanent regularization procedure but with some important changes. While it introduces a permanent system for regularizing taxes, taxpayers are only given one last chance at disclosing undeclared assets or income, even if they had already made regularized income in the past.
The distinction between minor tax offences and serious tax evasion is abandoned and a different form of proof is required. The disclosure program is also open for the insurance premium tax, and, for the first time explicitly, capital secreted away in legal arrangements, overseas life insurance policies and overseas bank accounts.
The new regularisation procedure also takes account of the division of fiscal competences between the federal and regional authorities. The law allows a regularisation for both federal taxes (such as income tax, VAT and social security contributions) and regional taxes (the inheritance and the registration duties), provided a cooperation agreement has been signed with the competent Region. However, the regularization of regional taxes is not covered by this law, and will require specific legislation of the regions.
Who can regularize?
Both individuals and legal entities can apply for a tax regularization, including companies that are not liable to companies' income tax, legal entities that are liable to the legal entities' tax, partnerships and unincorporated associations.
Taxpayers can regularize their own income, but also income or capital they do not own. That can be capital secreted away in a life insurance policy or income that accrues in a legal arrangement for which they have to pay the Cayman Tax.
The “Cayman tax” is a transparency tax that was introduced by the Program Law of 10 August 2015 which allows the Belgian tax authorities to look through legal arrangements (such as a trust, a foundation or an offshore company in a tax haven). In fact, it is the taxpayer who has to look through the legal arrangement that they have set up as the founder or settlor and to declare the income in the trust as if they have received it themselves. Alternatively, the beneficiary of such legal arrangement must declare the benefit he receives out of the legal arrangement.
How ?
The application must be filed with the 'Contact Point Regularizations' which is the successor of the same office that dealt with regularizations filed until 2013.
The application can be filed in person or via a representative. However, only professionals who have an obligation to monitor money laundering can be a representative: these are financial institutions (such as banks, insurance companies, investment companies, portfolio management companies, insurance brokers ...), notaries, chartered accountants, external accountants and tax advisors, as well as attorneys.
The disclosure must be voluntary and all-inclusive.
Once the taxpayer has been informed of specific investigative actions by certain public authorities, he is excluded from the voluntary disclosure programme. Finance Minister Van Overtveldt stated that he had given instructions to speed up the investigations of Belgians who had been named in the “Panama Papers” so that these taxpayers could not qualify for a last minute voluntary disclosure to come clean.
Moreover, the disclosure must be all-inclusive. The taxpayer must disclose all capital and income that can be regularized; he cannot limit the disclosure to the income from certain specific tax years.
The form of the application will be determined by Royal Decree. The information to be disclosed will include the identity of the applicant (and of his representative) the income, capital and VAT transactions that will the regularized and the date of submission. The taxpayer will have to attach a number of documents, in particular a brief outline of the fraud scheme used, evidence relating to the origin of capital for which the statute of limitation has passed (and that does not need to be regularized, except for the income), the personal or professional origin of the income, etc. Additional documents can be submitted for a period of six months after the application has been filed.
Scope ?
Tax regularization can be applied for in respect of undeclared income, but also for statute barred income and capital.
Statute barred income and capital is income and capital that the tax authorities cannot tax anymore because of the statute of limitation. E.g. for income tax the statute of limitations is seven years; in principle, the tax authorities must issue the tax assessment within three years starting on 1 January of the tax year, but that period is extended with four years in case there are indications that the taxpayer has omitted to declared his income, with fraudulent intent or with the intention to harm the interests of the treasury.
Although the tax authorities cannot tax such income anymore, the taxpayer still has an interest in regularizing such income: it will give him a regularization certificate that gives him immunity for criminal prosecution.
In principle, the taxpayer will have to declare the capital that was available on the first date the statute of limitation took effect. He can exclude income and capital that has been declared and taxed, but he has the burden of proof. By default, such capital is deemed to be tainted.
The law states explicitly that income that has been accumulated on an overseas bank account, in an overseas life insurance policy or in a legal arrangement (trust, foundation or offshore company) and that cannot be taxed anymore, can, under certain conditions be regularized by the ultimate beneficial owner. He will not pay tax, but a penalty of 36%.
Undeclared income is income that can still taxed. Income that is eligible for regularization includes undeclared VAT transactions, unpaid social security contributions due by self-employed, undeclared earnings or professional income and miscellaneous income, or passive or investment income.
The taxpayer will have to declare the income that he should have declared. The taxable basis for the regularization is determined in accordance with the provisions of the relevant tax code.
By default, undeclared income is deemed to be earned income until proven otherwise. The taxpayer has to evidence that the income he received in any given year was of a different nature than earned income.
The cost of the regularization ?
When regularizing undeclared income or VAT transactions, the tax due is the that at the normal tax rate that was applicable during the taxable period in which the income was earned or acquired. On top of that the taxpayer will pay a penalty of 20 percentage points, calculated on the income that is proposed for regularization.
For earnings, the tax rate will be the progressive tax rate, usually at a rate of 50%, which is the highest rate. On top of that the taxpayer will pay local tax which is determined by the municipal authorities at a rate varying between 4 and 9%; the total may be as high as 74.5%. For companies, the tax rate will normally be 33 percent plus the additional crisis tax of 3%, resulting in a company income tax rate of 33.99% plus a 20% penalty, in total 53.99%.
- VAT transactions are taxed at 21% plus 20% unless the VAT transaction was included in the earnings that are regularized.
- Miscellaneous income includes different types of income that are neither earnings or professional income, nor investment income, such as certain types of capital gains, prizes, maintenance and alimony, etc. The tax rate depends on the type of income, but is usually 33% or 16.5%, so that the taxpayer will be paying 53% or 36.5%.
- Dividends are taxed at 25% (27% from 2016).
- Interest was taxed at a rate of 15% until 2011, 21% (plus an additional 4% for taxpayers who had over €20,000 in interest income) in 2012, and 25% since 2013 in 2015 (27% from 2016). However, the taxpayer cannot set off the withholding tax retained under the EU Savings Directive, or any other withholding tax or advance tax payment, against the tax due on interest.
- Remarkable is that the insurance premium tax is 1.1%, 2% or 4.4%, plus 20%, resulting in a staggering regularization charge of 21.1%, 22% or 24.4%. When disclosing undeclared capital, either undeclared income that cannot be taxed anymore or an inheritance that has not been declared after the statute of limitations of ten years, ...) the taxpayer will not pay any tax, but a penalty of 36%.
The penalty due will gradually increase over the coming years. The following schedule summarizes the situation with the penalty depending on the year of filing.
Consequences of the regularization
If the application is accepted, the applicant will be asked to pay the regularization charge, that is the tax plus the penalty, within 15 days. The taxpayer cannot make any reservations with his payment. Upon receipt of payment, a 'regularization certificate' will be delivered. That certificate proves that the taxpayer has voluntarily disclosed the income and capital.
Practically speaking he cannot be exposed to any claims from the tax authorities anymore and he has full immunity for criminal prosecution. The application, the payment of the regularization charge or the certificate cannot be used against the taxpayer as an indication for further tax investigations.
As set out above, the taxpayer has a higher burden of proof than under previous voluntary disclosure procedure. He has to evidence which income or capital has been duly declared and/or taxed. Any income or capital for which he cannot justify they have been taxed must be regularized..
Moreover, the taxpayer has full responsibility for the accuracy of the amounts he discloses in his application for regularization. If it turns out that he had not completely declare the income or the capital, the certificate issued may be ineffective.
If, for any reason, the application procedure, is not successful and the taxpayer withdraws his application of the regularization commission cannot accept his application the commission cannot pass the information to other tax authorities or court officials.
Conclusion
There are still a number of unresolved issues, not in the least the practical implementation and the form that will be used.
The situation is clear for federal taxes (income tax, VAT and social security contributions), but not for the taxes which are of the competence of the regions (e.g. inheritance tax and registration taxes), or for the taxes for which both the federal and regional authorities have taxing powers and the federal authorities are in charge of collecting the taxes.
The distribution of taxing powers between the federal and regional authorities require cooperation agreements to determine how the regions will implement the voluntary disclosure program. The cooperation agreement with the Flemish Region is to be expected in the near future. A cooperation agreement with the Brussels Capital region and the Walloon region may take a bit longer.
2 August 2016
Marc Quaghebeur
De Broeck Van Laere & Partner