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A move by Belgian lawmakers to make it impossible for residents to escape taxes on stock exchange transactions conducted through overseas accounts has created barriers for foreign banks and brokers—provisions that might be challenged before Europe’s highest court.
On Jan. 1, Belgium’s tax on stock exchange transactions was extended to transactions performed abroad on behalf of Belgian clients. The intention was to make it impossible for residents to circumvent the tax by opening securities accounts with foreign banks such as Banque Internationale Luxembourg and online brokers like Degiro, Keytrade and Lynx.
Belgian residents—who perform stock exchange transactions through intermediaries located abroad—are now required to submit monthly returns detailing the orders. They are also expected to compute and pay the tax, an arduous task, tax professionals say.
However, residents with local brokerage accounts can continue to benefit by this being done for them by Belgian financial institutions, who will continue to automatically calculate and withhold the tax due.
Considering the additional red tape for residents with brokerage accounts abroad, practitioners interviewed by Bloomberg BNA said the matter might successfully be contested as a violation of the free movement of capital and services enshrined under European Union law.
“If your foreign bank doesn’t take action, you will have to complete all these formalities relating to payment of the stock tax every month as a client,” said Kris Lievens, Brussels-based partner at KPMG.
“This might constitute a barrier for Belgian clients to keep investments in Switzerland or Luxemburg, and prompt them to repatriate this capital or these stocks and shares to Belgium.”
Lievens noted in a March 14 phone interview that the free movement of capital and services guaranteed under EU law aims to preclude not just plainly unequal treatment or discrimination, but also the putting up of disproportionate barriers that discourage consumers from enlisting the services of businesses and institutions located in another EU country.
If other countries followed Belgium’s example, he said, this might result in one Luxembourg bank, for instance, having to comply with a flurry of country-specific rules. It would then have to work out a procedure to withhold the taxes and make corresponding adjustments to its processes and systems for a small group of non-resident clients.
“That would be an enormous barrier and threat to the unity and freedom of trade in the European Union,” he said.
“A Luxembourg bank might say: ‘We’ve been hampered in our freedom of services because the barrier to provide services to our Belgian clients has suddenly become higher,’” he explained, adding that there was “certainly potential” for the expanded tax to be challenged before the EU high court on such grounds.
First introduced in 2007, the stock transactions tax affects retail investors who trade a lot by levying a 0.27 percent tax on sales and purchase of stocks, 0.09 percent on sales and purchases of bonds, and 1.32 percent on sales of capitalization funds, which are investments funds that do not distribute dividends.
The broadened tax, expected to raise 30 million euros ($31.9 million) by government estimates, is already having ripple effects.
Sven Sterckx, chair of the Flemish Federation of Investors (VFB) noted a two-fold impact—the volume of stock transactions had dropped and a modest number of Belgian clients had already repatriated their assets to Belgium, discouraged by the additional red tape. The decrease in stock transactions meant that the tax probably wouldn’t meet the budget goal set by the Belgian government, he said.
The revenue raised by the stock transactions tax would probably continue to decrease, he said, adding that “we wouldn’t have seen so many people going to foreign intermediaries, and the volume of stock transactions would have also remained higher” if the rates hadn’t been increased. The rates have increased 80 percent since 2007 but remain less than 2 percent.
Sterckx said it was difficult to predict at this stage whether additional clients would repatriate funds to Belgium in the future because this would depend on whether their Luxembourg, Swiss or Dutch banks opted to act as withholding agents.
“For those banks that won’t withhold the tax, I’m afraid those assets will return to Belgium because private clients” will themselves be responsible for meeting the payment and reporting obligations, he said.
Compliance with the tax requires retail investors to submit monthly returns that detail the taxable base and taxes due per transaction type and per tax rate. The latest stage permitted for payment of the corresponding amount in taxes to Belgium’s Federal Public Service Finance is two months after the transactions are completed.
Investors who submit incomplete or incorrect returns will face fines starting at 1,000 euros ($1,062) and penalty interests of 7 percent.
Until now the tax only applied to transactions performed by resident banks on behalf of Belgian tax residents, and following successive rate hikes in previous years, many Belgians flocked to Swiss, Luxembourg and Dutch banks, physical or online, to avoid the tax, resulting in criticisms that the tax disadvantaged Belgian brokers and banks.
Belgian tax authorities will be able to monitor compliance with the new regime since they will receive the relevant information on residents’ assets abroad under the Common Reporting Standard (CRS), which requires automatic information exchange of bank data for tax purposes.
Marc Van de Vloet and Patrizia Macaluso, respectively head of wealth structuring and estate planner at bank Degroof Petercam, emphasized that foreign banks were under no obligation to withhold the tax for their Belgian clients under the new regime.
In a March 14 email to Bloomberg BNA, they noted that the expanded tax instead imposed additional obligations on Belgian retail investors. “The broadening of the stock tax in itself does not contain any requirements for foreign brokers or financial institutions,” they said.
They noted that those Belgian residents who declared the transactions in the monthly returns also would have to submit order execution slips in accordance with the Belgian provisions. “It’s not certain that a foreign intermediary will supply such order execution slips. Foreign intermediaries are after all not required to do so,” Van de Vloet and Macaluso said.
The Belgian government, however, has pushed back the deadline for the first monthly returns and tax payments to June 30, 2017, for stock transactions completed between Jan. 1 and April 30. The move is meant to give foreign brokers and banks time to adjust their IT systems and appoint an administrator/agent in Belgium who can withhold the taxes and submit the monthly returns on behalf of their Belgian clients, should they so choose to.
Because the deadline for the first monthly tax returns has been pushed back, it’s not yet clear how many foreign banks will act as withholding agents for their clients and how many are leaving it up to clients to comply with the new Belgian regulations.
A spokesman for BinckBank N.V., which is active in several EU countries, noted that they observed Belgian tax legislation at Binck Belgium, just as they applied the French and Dutch rules for Binck France and Binck Netherlands. “A Belgian client is free to choose to become a client for Binck products offered abroad, but in that case the client has to declare the taxes themselves,” spokesman Harmen van der Schoor said in a statement emailed to Bloomberg BNA March 14.
Gijs Nagel, commercial director of Degiro, a fast-growing online broker, welcomed the expanded scope of the tax, noting that until now competitors had pointed to foreign intermediaries’ exemption from the stock tax to explain the bank’s popularity among Belgian retail investors.
“Now, there’s a level playing field,” he said in a March 14 phone interview, describing the until recently applicable regime as a “distortion of competition.”
Degiro allows clients to choose—either they meet the reporting and payment obligations themselves or Degiro can withhold the tax for them. Nagel said Degiro had put a team of developers to work to design software that could automatically track the relevant stock transactions and withhold the tax for Belgian clients, which he said was a project of a couple of weeks.
Degiro is active in 18 European counties with a market share of 10 percent in Belgium, Nagel said. He warned that Dutch banks with a mostly national clientele and just a few Belgian clients might face more difficulties.
“In that case, this would be a lot of extra work. You’d need a good tax adviser, and you’d also need people who are able to program all of this correctly.”
He pointed out that the Belgian tax administration notably did not include the ISIN identification codes of the different investment products on the government webpage detailing the applicable tax rates, which he described as standard industry practice.
“So brokers would have to themselves search for the ISIN codes of the different funds, and that’s so obsolete,” he said. “It seems to us like they tried pretty hard to make this as difficult as possible.”
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