Belgian funds prepare for tax windfall
Although Belgium was not the first to implement the directive on the activities and supervision of institutions for occupational retirement provision (2003/41/EC), the law of 27 October 2006 has made up for this with an appropriate legal, and prudential framework. The Belgian prime minister, Guy Verhofstadt, has often said that: "Brussels should become the capital for pan-European pension funds." This law puts into action overall and comprehensive legislation to meet this goal.
The law introduces a separate legal entity ‘Organism for the Financing of Pensions (OFP)' that is tailored to the needs of pension institutions.
The OFP aims to have a flexible legal structure that takes into account the long- term liabilities of pensions.
The controlling authorities are currently finalising a directive to transform this prudential skeleton into a flexible internal governance structure with emphasis on continuity, communication, control and compliance. Each pension institution will have the freedom to apply this framework with respect to its scale, complexity and risk profile.
On top of this tailored framework, Belgium has implemented a favourable tax system to support its aim of attracting pan-European pension funds (law of 27 December 2006).
Until 2007, complementary pensions could only be managed by insurers or by pension funds (established as non-profit organisations).
As a result of the new law, all existing pension funds should be converted into OFPs before 2012.
Nothwithstanding the fact that OFPs are subject to the normal Belgian corporate income tax regime, the taxable basis of an OFP will be determined in a similar way to Belgian mutual funds (beveks/sicavs).
Therefore, an OFP will only be taxable on the total sum of abnormal or benevolent advantages received and the non-deductible expenses.
Non-deductible expenses are such things as car expenses, restaurant expenses, social advantages, etc. An example of a benevolent advantage could be an administrator of an OFP who is on the payroll of the sponsoring company.
With respect to moveable income, withholding taxes withheld by distributing companies (foreign tax credits excluded) can be deducted by the OFP from the income tax due or can be refunded (in case no income taxes are due) to the OFP. The Belgium prime minister has already agreed to enhance the legislation so that prefunding of the withholding taxes will no longer be necessary.
In the past, Belgian pension institutions established as non-profit organisations were subject to a tax of 0.17% a year and calculated on the total assets held by the pension fund.
Because this tax is only applicable to non-profit organisations, the OFPs will no longer be subject to this ‘wealth tax' of 0.17%.
In addition to the exemption of 0.17%, OFPs are also exempt from the 0.08% annual tax on collective investment companies, insurance companies and financial institutions.
Until now, most pension funds invested almost 80% of their equity in collective investment vehicles subject to the 0.08% tax.
Thanks to the conversion into OFP's, pension funds could now realise an effective increase of the return on investment amounting to 0.08% provided the investments are managed by the OFPs themselves and not via collective investment companies.
The Belgian VAT code provides for a general exemption of Belgian VAT applicable to all services performed by collective investment funds.
As from 2007, the Belgian government extended the scope of this exemption to the portfolio management of OFPs and the management of the OFPs themselves. This implies that the OFP won't have to pay VAT when daily management has been outsourced to an external actuary or consultant.
The EC considered several regulations in the Belgian pension system as discriminatory and brought these discriminatory rules before the European Court of Justice.
ne of the main problems concerned the fact that only contributions to Belgian pension institutions could be deducted for corporate tax purposes. Whether the contribution was made by an employer (deductible business expense) or an employee (long terms tax saving reduction) did not matter.
The Belgian government did not await the decision of the European Court before amending the Belgian tax regulation.
As of 2007, contributions to pension institutions in the EU (Norway, Iceland and Liechtenstein included) will be tax deductible on behalf of the employer-contributor or give right to a long-term tax-saving reduction on behalf of the employee-contributor. This exemption finally opens the path to pan-European pensions.
Belgian pension funds are on average highly invested in mutual funds (beveks/sicavs).
In 2004, according to the figures of the Belgian Association of Pension Institutions, 76.8% of pension assets the country were invested in mutual funds. The main reason for this over-investment in SICAVs is fiscal, in addition to diversification and administrative benefits.
The OFP law will probably change this picture in the future.
By equalising the fiscal treatment of OFPs and mutual funds in Belgium, pension funds will have a higher degree of flexibility in creating an investment structure that matches their liabilities, without having to consider non-investment related criteria like tax law.
This will most likely lead to a sell off of open ended investment companies and a shift in the direction of direct investments.
The typical disadvantages of mutual funds are the higher cost structure (a number of hidden costs like administration costs, custodian, auditor, administrator, etc), standardisation (off-the-shelf products, one size fits all) and the dilution of stock returns (mutual funds level out both profits and losses and are therefore unlikely to capture the heights of some individual stock returns).
Although the above arguments are valid, they do not always hold and the first two depend on the size of the pension fund.
As the Belgian market is mainly comprised of smaller pension funds, they do not always have the expertise in-house to deal with the complexity of direct investments and the administrative and accounting burden that accompanies them.
Via the OFP, the Belgium government is seeking to accommodate companies looking to consolidate their schemes on a pan-European basis by developing an attractive framework and trying to compete with other favourable regimes like Ireland and Luxembourg.
Part of this framework are the international agreements the government has concluded with foreign countries to avoid double taxation (ie most recently with the US).
The advantage that Belgium has in trying to achieve this goal is that a number of European headquarters of large multinationals are already located in Brussels.
The positive fiscal initiatives might provide the final impetus they need to choose Belgium as the preferred destination for their consolidated pension scheme.
Also part of the new framework is the possibility to create mutual funds purely for institutional investors, which will allow asset pooling of cross-border pension funds. This could be a first step towards pan-European pension funds.
The implementation of the laws on the OFP and its tax structure have raised hopes in Belgium, especially among politicians but also among those involved in the management of pension fund assets.
Whether expectations will be met, we'll have to wait and see. What we can say is that with the initiatives taken, Belgium is very much on the right track.
This article has been prepared by a team of multi-disciplinary pension experts within Deloitte in Belgium: Michael Moh (tax); Sven Potvin (tax); Ivan Eulaers (employee benefits) and Patricia Goddet (employee benefits)