Belgium Puts Corporate Tax Rate Under Review in Budget Deal

(Bloomberg) -- Belgium reached a budget deal as officials agreed to enact spending cuts in hospitals and administration and raise the tax on dividends and coupon payments as a conflict about a levy on investment gains put plans to cut the tax rate on corporate profits on hold.

“Supporting economic activity and employment is the best guarantee to finance our social protection in the long run,” Prime Minister Charles Michel told reporters at a briefing in Brussels on Saturday. “Hence no tax increases on consumption, on people who work, no cuts in unemployment benefits.”

A 3 billion-euro ($3.3 billion) effort to keep Belgium’s deficit reduction in line with European Union demands includes less than 600 million euros of additional taxation, according to Michel. Raising the withholding tax to 30% from 27%, a fourth consecutive increase from a rate as low as 15% a couple years ago, is the most eye-catching measure.

To deliver on a pledge of bringing down Europe’s highest labor taxes, Michel’s four-party government is seeking extra revenue from capital levies. Budget negotiations stalled last week as the Flemish Christian-Democratic party put a last-minute proposal on the table to introduce a capital gains tax of 30%, declining over time, on stock investments in personal incomes.

Small Investors

The levy would replace a similar tax on short-term gains made by small investors, which eventually led to less revenue for the government. Investors reacted by scaling back their stock-trading activity, cutting proceeds of Belgium’s existing transaction tax.

Both the Christian-Democratic proposal for a capital gains tax and Finance Minister Johan Van Overtveldt’s plans to reduce the corporate income tax rate have now been relegated to further review, with the short-term gains levy being abolished.

“You can’t let things like this depend on the outcome of a deal struck in early hours,” Deputy Prime Minister Alexander De Croo, a Flemish Liberal, said on Flemish public broadcaster VRT. “That’s why we decided to give ourselves more time and take a closer look at the impact on corporate financing and job creation.”

To be sure, the Belgian government agreed to double the maximum payable transaction tax on stock and bond trading and announced plans to collect that tax from investors trading through brokerages abroad. Employers will also face a reduction in the tax deductibility of fuel costs.

Corporate Profits

Van Overtveldt, a member of the Flemish nationalist N-VA party, sought to finance the lower tax rate on corporate profits by eliminating a myriad of possibilities Belgium-registered companies have to deduct expenses from their taxable profit, turning the initiative into a budget-neutral exercise rather than a tax cut.

His plans were inspired by the European Commission’s decision in January to outlaw some Belgian rulings that gave large companies with operations abroad overly generous tax breaks and by concerns that smaller enterprises lose out due to the complexity of Belgium’s taxation system.

Corporate income taxes brought in 13.9 billion euros for the federal government in 2015, according to data compiled by the National Bank of Belgium. To put things in perspective, that’s less than a quarter of social security contributions paid by both employers and employees and compares with total government revenue of 210.3 billion euros.

At 33 percent, Belgium has the third-highest statutory corporate income tax rate in the euro region after France and Malta, according to Eurostat, the EU’s statistics office in Luxembourg. The effective average tax rate is lower, somewhere between 26 percent and 27 percent.

Michel’s 3 billion-euro budget deal also includes 257 million euros of anti-terrorism-related spending, for which Belgium expects to get EU approval to exclude it from the budget.

Belgium also counts on a combined 100 million-euro boost to 2017 dividend income, including from its stake in BNP Paribas SA and state-owned Belfius Bank NV.

Prime Minister Michel, who had to cancel an appointment last Tuesday to present the 2017 budget in parliament, will defend his policy before lawmakers in an extraordinary session on Sunday.