November 12, 2012 10:02 pm

Taxation: A country with high taxes but many loopholes

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When the news emerged this summer that France’s richest man, Bernard Arnault, was seeking Belgian citizenship, it caught everyone completely by surprise.

Why was the head of LVMH, the luxury goods group behind brands such as Dior, Louis Vuitton and Dom Perignon champagne, seeking Belgian nationality?

Was it because of the great weather in Brussels, or because he has a sweet tooth for Belgian chocolate – or simply because the French billionaire was trying to escape the 75 per cent marginal tax rate on incomes of more than €1m introduced by France’s president François Hollande. The later seemed to be the most likely but not obvious.

Many international observers were surprised Mr Arnault had picked Belgium and not Monaco or Luxembourg, the classic destinations for the world’s wealthiest to lower their tax exposure.

Belgium’s income tax – which applies to Wallonia as well as Flanders – is among the highest in the world, with peaks for top earners close to 60 per cent, including social security.

For companies it is no better. Belgium’s standard corporate tax rate, at 34 per cent, is among the highest in the European Union – about 10 points above the the 27-country bloc’s average.

However, appearances can be deceiving.

Marcel Claes, chief executive of the American Chamber of Commerce in Belgium, says that the government provides a series of tax exemptions for rich individuals as well as companies that can reduce the tax bill to nearly zero.

“There are a lot of tax deductions, but often investors see Belgium as a country with high taxes because they are not aware of the potential tax exemptions they might be entitled to have,” says Mr Claes.

The list of tax incentives is endless, but for the super rich the most attractive ones are the zero levy on capital gains and rental income. Obviously there are conditions: capital gains are not taxed as long as the investment is held for more than one year and is not part of a professional portfolio.

Billionaires are not the only ones being treated kindly in Belgium. Innovative companies and startups hiring young and highly skilled talent can also be exempted from hefty taxes.

The “patent income deduction” reduces the tax rate on income derived from new patented products by 80 per cent, bringing the overall rate to about 7 per cent.

On top of that, a company that works closely with university staff can enjoy generous tax breaks, while a group employing researchers or masters degree graduates is allowed to exempt 80 per cent from the amount withheld from the worker’s remuneration. This is key to attracting fresh talent.

All this is aimed at attracting skilled workers and investors operating in high-tech sectors such as biotechnology, pharmaceuticals and research and development, says Wouter Caers, a tax advisor at KPMG.

“The patent rule was done precisely for the pharma and bio-tech industry, and it has been very successful as many pharma companies have opened shop in Wallonia,” says Mr Caers.

Such tax incentives have recently played a key factor in convincing Chinese group Whibi, which specialises in helping build tech startups, to sign a collaboration with the Louvain-la-Neuve science park, which is associated with the region’s top university Université catholique de Louvain (UCL).

The Chinese group, which will invest up to €250m in the project, acquired 8.5 hectares of land on the site and expects to generate at least 1,500 jobs. “UCL has had an excellent reputation for nearly 600 years,” Wei Gong, founder of Whibi told Le Soir, Belgium’s leading French-language newspaper. “UCL welcomes in its science park a lot of great high-tech companies.”

As well as tax breaks, international groups investing in Wallonia are eligible for subsidies provided by regional or national bodies, or even EU structural funds, which are designed to stimulate growth in what is still considered an economically backward area.

Jean-Claude Marcourt, the Walloon minister of economy and trade, says the Whibi investment was achieved partly because of the tax exemption offered by the federal as well as regional government in Wallonia. “The on-the-ground support provided by the local authorities was essential to seal this agreement.”

Other key tax exemptions are linked to the notional interest, which allows companies to deduct 3.45 per cent on their equity investment. This system is of great interest to new companies that have to invest heavily with small immediate returns. However, for high-margin companies the exemptions are reasonable.

However, Mr Claes of the head of AmCham, which represents more than 9,000 companies in Belgium, says such incentives would be useless unless exemptions were better promoted. He says the country should learn from Ireland, which sells itself as a low-tax-base country that adds taxes depending on sectors.

“In Belgium they tell the world, ‘We are going to tax you like crazy,’ but once a company arrives it discovers that actually the tax regime is not that bad ... Belgium has a lot to learn on this from Ireland,” he says.

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