The first item is simple; considering the ever-difficult state of Belgian public finances, lower taxation of dividends is wishful thinking and any ‘tax favour’ has to be ‘compensated’ elsewhere. This is all the more true in a context of ‘tax shift’ in Belgium i.e. shift taxation from labour to other income classes such as, you guessed, dividends.
The second point, preserving the fiscal attractiveness of the Belgian REIT, is also important as Belgium is poised to compete with similar REIT structures in the neighbouring countries and preserve what is now a flourishing and tax-producing sector. Indeed, even if REITs do not pay corporate tax, they still generate significant income for the state coffers including withholding tax, exit tax (one-off tax when a company adopts the REIT regime) and other taxes (subscription tax, property taxes…).
Keep it simple please
Simple and efficient taxes are very important in order to minimize the cost of collecting taxes and headaches for the taxpayer. A good illustration thereof is the tax reform of 2012 rising the regular WHT rate to 21% but with an added 4% tax on investment income above EUR 20,020. In other words, the WHT was no longer purely made in full discharge and needed lots of administration in order to be implemented. Needless to say, this reform was short-lived and abandoned the next year (‘plain’ rise of the WHT rate to 25%). This also explains why the recent ‘speculation tax’ (on ‘normal’ equities, Belgian REITs are not subject to this tax) and new planned taxes on capital gains are much more complicated than simply rising the WHT rate and their fiscal efficiency uncertain.
Listed property can be social
Last but not least, taxes are routinely used by states for ‘societal’ issues such as promoting housing, meeting shortcomings in healthcare housing or whatever is deemed as a socially desirable. This is the point behind the above-mentioned ‘tax shift’ (encourage employment by taxing labour less) but also behind the long-time favourable WHT rate for REITs investing in residential property; the rationale of the State was to help REITs investing in residential property as they have to cope with low market yields, property taxes (by law cannot be passed on to the tenants) and well-protected tenants.
The latest reform of end 2015 rises the WHT (again) to 27% and abolishes the lower rate for residential REITs; as a result, dividends from residential REITs originally taxed at 0%, have witnessed a dramatically higher taxation in just 4 years. Hence, as a (partial) compensation, and in order to avoid some undesirable side effects (several municipalities paying substantially higher rents to listed REIT Care Property Invest), the current Finance Minister announced that WHT for ‘healthcare REITs’ will fall to 15% as from January 2017. Note that this is only a partial compensation as healthcare property (nursing homes, services flats…) was previously qualified as residential property but ‘plain’ residential property such as ‘normal’ flats do not qualify as healthcare property.
REITs concerned by the announced measure (but not yet officially published as law) would be Aedifica and Care Property Invest (CPI), both mainly invested in healthcare property, but not Home Invest Belgium (HIB) which benefitted till end 2015 of the reduced tariff as a ‘residential REIT’. CPI can contractually pass on the effects of a higher WHT to its ‘historic’ tenants and did already so in 2013 (WHT on residential REITs from 0% to 15%) In other words, the government tax hesitations will only be an administrative nuisance for Care Property but somewhat negative for CPI shareholders not subject to Belgian WHT. For Aedifica, this move is positive as the company could not pass on the effects of the higher withholding tax on its tenants. In other words, while we do not expect gross yield to be fundamentally affected, Aedifica shareholders subject to Belgian WHT will be relieved to see their net yield rise by ca. 16%. Alongside HIB, this new reform barely one year after the last one is quite negative for the image of Belgium and the stability of its tax regulations.
Higher WHT rates are unavoidable in the current Belgian fiscal and political context as this a simple & straightforward way to increase tax proceeds. New taxes on capital gains are both more complicated and less efficient but could be adopted anyway for political reasons. On a more positive tone, one cannot rule out that other forms of property enjoy (again) a lower WHT in the future such as affordable and social housing or property devoted to public services (schools, nurseries…).