Taxation of carried interest and management incentive plans part of proposed Belgian tax reform

As part of the governmental discussions on the 2023-2024 federal budget, the Minister of Finance has been instructed to prepare “the first phase of an ambitious tax reform”, in view of reaching an agreement at government level before year-end. Reportedly, changes to the tax treatment of share-based compensation structures could be part of this first phase. Pending publication of the detailed proposals, the vision paper on a tax reform (NL/FR) and recent press reports suggest a significant impact on carried interest structures and management incentive plans. It should be noted that currently no political agreement has been reached on these proposals, however, there seems to be a real chance that these proposals will be agreed at government level and become law in the coming months. 

Excess return linked to a professional activity: taxable professional income

The first and most important change would relate to financial instruments held by individuals in connection with their professional activity and which generate a disproportionate return compared to what a passive investor would obtain. This measure mainly targets carried interest structures of managers of private equity funds and “sweet equity” held by senior management of groups in which such PE funds invest. It is considered that such disproportionate return compensates professional activity and should therefore be taxed as a bonus and not as eg. a capital gain on shares.  

It remains to be seen how this proposal will be reflected in legal texts, but it is expected that they will be broadly drafted to avoid that the tax can be easily circumvented.

As considered in more detailed in this briefing, the proposal raises a number of basic questions, such as which part of the capital gain would be treated as professional income, at which rate it will be taxed and whether the new rules may have an impact on existing schemes.

Belgian stock option law: more limited scope

A second set of anticipated rules intend to bring the Belgian stock option tax regime (set out in the Law of 26 March 1999) more in line with the initial intention of the legislator:

• The regime would be limited to options on shares issued by the company with which a professional activity exists (or a parent company) 
• The interpretation under which the stock option holder can be compensated for the upfront taxes in case the stock option expires out-of-the-money, is abolished
• The regime would be limited to non-transferable and non-redeemable stock options

New share plan regime

The government also considers introducing a new manner of taxing employee share plans. Reportedly, shares acquired for free or below fair value would not be taxable at the time of acquisition, but at the time they are sold. It remains to be seen whether the entire capital gain would be taxable as professional income or only the benefit in kind on acquisition (with the remaining gain then being treated as a capital gain).

This new regime could be an interesting addition to the range of possible share scheme structures as it would allow the employee to become a shareholder and benefit from dividends without any initial investment, whilst paying taxes only if and when a capital gain is realised.

In our briefing here, we consider these issues in greater detail.

Even though the changes discussed in this briefing remain subject to political agreement and the legislative process, it may be a good time for concerned funds, groups and managers to consider the potential impact of such measures on their specific situation. If you would like to discuss these topics with us, please contact our Tax team or your usual Freshfields contact.