Belgian Tax Law

[Tslynk67]

As requested by @neroden, here's a thread to discuss and bewail everything to do with Belgian tax law/rules.

I'm not at all an expert, that's why I pay for an accountant, but I can tell you it's bas news, pretty much all round, the only exception being zero capital-gains tax on equities profits for personal trading, which is quite relevant in this forum

 

[neroden]

So what is this stuff about transferring stock between business accounts and personal accounts?!? (That's wildly illegal in the US.)

 

[Tslynk67]

So what is this stuff about transferring stock between business accounts and personal accounts?!? (That's wildly illegal in the US.)

The way I'm operating, and I think it's fairly normal practice, is that I don't pay myself a salary as such, but I just take cash from the company as I wish as "drawings", then combined with any purchases, or other expenses I may have made that might be considered personal, all this get booked against my company's "director account", i.e. money I owe the company. Then, at the end of the year, my accountant allocates a certain amount of this as "salary", but given the high personal tax and social security rates, the sweet spot for this is a measly €36k per year. Needless to say that I tend to take more cash than this, so I've built-up a bit of a liability to my company - this, I'm assured is relatively normal.

Now how come the tax authorities allow this? Well because they levy a (roughly) 9% interest per year, which as you would imagine, will quickly escalate if you don't repay things pretty soon. Now this amount is a pure snapshot as of 31/12 each year, so if you can find some money to transfer around that time, then you can reduce the interest.

So my accountant recommended I do this will my $TSLA investment. As it happens, both my personal and trading accounts are in the same bank/broker, so it's a relatively simple matter of completing a form, emailing it and paying a €15 fee. What I can't control is the exact timing of it, in this case it took the 24 hours to complete the instruction, so they took Wednesday's close - would have been better if it had taken a day longer, but there you go.

How does this work for accounting? It counts as a cash transfer to the company of the value of the shares and an accompanying purchase as that price. So good, I've decreased my liability AND my 2018 accounts will show a healthy "cash" balance too.

I will transfer them back with an instruction right at the beginning of January which will then count as a sale of the shares and a cash transfer out, the liability will go back up, but then I can do the same end of next year.

The risk now is if the SP changes. If it decreases then it will be booked as a non-tax-deductible loss on the company. Not a big deal as I'm very profitable. More worrisome is if the SP rises as any profit between the two transactions will be taw as company profits, so 30% - a small change and the accountant can "deal with it", anything dramatic would be a disaster. However, looks like the SP will stay in the current boundaries until at least the Q4 delivery report, more likely Q4EC.

Note that capital gains in private trading accounts are not currently taxed, there's just a small taw paid when buying and selling, so it's in my advantage to have these in my personal account, plus if you image this time next year, $TSLA could be trading at $500, $600, then when I do the same transfer my company liability will be even less.

If all that lakes sense...

 

[neroden]

Fascinating. That type of intermingling of personal and business accounts is severely discouraged in the US, to the point of being subject to criminal liability.

 

[adiggs]

I notice that in @Lycanthrope 's description of how all of this works, his accountant plays a prominent and recurring role in the story

I imagine that this tax law in practice, strongly encourages individuals to own their own businesses rather than work for others. Do businesses then look more like partnerships and/or businesses that hire many contractors (who individually work for themselves)?

 

[Tslynk67]

Fascinating. That type of intermingling of personal and business accounts is severely discouraged in the US, to the point of being subject to criminal liability.

So in the US you can't just take cash out of your company?

I notice that in @Lycanthrope 's description of how all of this works, his accountant plays a prominent and recurring role in the story

I imagine that this tax law in practice, strongly encourages individuals to own their own businesses rather than work for others. Do businesses then look more like partnerships and/or businesses that hire many contractors (who individually work for themselves)?

Belgian tax law is complicated and quite open to interpretation at times. It's very normal for all self-employed to have a professional accountant to sort everything our for you, obviously without breaking any laws, but with the intention to minimise your tax liability.

That being said, there are many dodgy schemes going on - very easy, for instance, to have your company registered in another European country, but work in another - very easy for money to go missing between the two. I'd never do that myself though, I prefer to do everything by the book, I want sleep at nights!

There are indeed many partnership type businesses, but I don't know whether that's a direct consequence of anything in particular. I have a very simple company structure, with my wife as a silent partner holding one share, I hold 99. Indeed I could subcontract, this is actually quite tax effective, but as I'm mostly selling my personal services, I didn't go down that route yet, although it could be useful to outsource some documentation at times.

 

[neroden]

So in the US you can't just take cash out of your company?

Not like you do!

If your company has a legal form other than sole proprietor (LLC, corporation, partnership), you have five options that I know of (but I'm not an accountant, there may be a few others):
(1) Collecting wage or salary income from the company. (Must pay Social Security tax, etc.)

(2) Withdraw cash from your company as "dividends" or other forms of "profits", and pay taxes on that as income. Putting the money back in doesn't get you any deductions!

(3) Withdraw cash from your company "return of paid-in capital", but only up to the amount you originally put in, and there are further accounting restrictions on that.

(4) Borrow money from your company. (Which is essentially what you're doing.) This is SEVERELY discouraged. You are expected to draw up an actual lending contract, with lawyers, interest, terms, etc., the way you'd write an arms-length lending contract with a bank or investor. If you don't do this, the IRS (tax service) will decide it wasn't a loan, declare that it was a withdrawal of profits, and tax you on it like #2. (Or sometimes #1 or #3.) It is also sometimes declared to be defrauding the company!

(5) A bona fide purchase or sale between the company and yourself; it must be similar to an arms-length transaction, and if it isn't, the IRS will recharacterize it as #1, #2, or #3.

If you're self-employed as a sole proprietor, your company "is you".You have company expenses and company revenues (which must all be documented), and the difference is taxable profit. You can comingle your business and personal accounts, but the accountants' advice is STILL to set up separate bank accounts for the company. And if you comingle them it both doesn't benefit you and usually hurts your ability to prove that something was a business expense (thus making it nondeductible).

If you have an LLC or a corporation or a partnership, you MUST NOT comingle personal and business property, and can actually get put in prison for it. People do it all the time, but you're *really* not supposed to. Each transfer between the partnership account and the personal account should be marked at the time with its specific identity, whether it's salary, profit-taking, return of originally invested capital, investment of additional capital, a loan, a purchase, or whatever. The IRS frowns on loans and asset purchases, so their terms must be similar to those of an "arms-length" deal and have to be really well-documented.

There are indeed many partnership type businesses, but I don't know whether that's a direct consequence of anything in particular. I have a very simple company structure, with my wife as a silent partner holding one share, I hold 99.

Right. So in the US, you'd have to have separate company (partnership) bank accounts and personal bank accounts. Transfers between the accounts would have to be marked with their nature immediately -- you couldn't just withdraw a bunch of money and later decide that it was a loan and pay it back. It would be presumed to be profit-taking. Transferring the stock into the partnership and then transferring it back after the end of the year would also likely be considered a "sham transaction" and disallowed. In the US you *can* loan as much money to your company as you like, even at zero interest -- but the other way around, the company loaning money to YOU, is not kosher.

I guess in Belgium they have a tax on the amount the company loaned to you, which is what you're messing around with. In the US such a loan is typically simply prohibited (unless you can prove that it's a proper arms-length commercial loan) and recharacterized as profit-taking.

In the US, claiming that you were "borrowing" from your controlled company without proper documentation is one of the best ways to get in big, big trouble with the IRS. Which is why this surprised me.

 

[Tslynk67]

Well I kind of agree with all you say, but my accountant seems to think this way of operating is totally legit. I've discussed it with him many times as I worry about it a bit, but he's quite adamant about it. In other things I've tried to "get away with" he's been quite clear it's not acceptable, so it's not like he's tot ally rogue or anything.

And indeed, although there's no tax, there is a 9% interests levied on the outstanding amount, which in theory must be paid from myself to the company, but in reality just gets added to the amount.

 

[cpa]

(1) Collecting wage or salary income from the company. (Must pay Social Security tax, etc.)

Correct, but only if incorporated. Other entity types forbid salaries and wages.

(2) Withdraw cash from your company as "dividends" or other forms of "profits", and pay taxes on that as income. Putting the money back in doesn't get you any deductions!

Again, correct if operating as a standard, C corporation. It starts to get murky if an election to be taxed as an S Corporation. As long as the corporation has positive equity, amounts withdrawn by shareholders that are not in excess of the equity balance is tax-free. If these distributions are in excess of the accumulated profits, then the shareholder gets a return of his stock basis, then everything beyond that would be capital gain. (There is an exception, but we are getting too deep into the weeds.) Partnerships and LLCs have similar rules but are more generous because the partners or managing members are responsible for their prorata share of partnership liabilities. As long as distributions do not exceed the partner's tax basis (again getting into the weeds) they are generally income tax free. I am ignoring the passive rules in this discussion. Putting money back in merely increases a shareholder's or partner basis for tax purposes.

(3) Withdraw cash from your company "return of paid-in capital", but only up to the amount you originally put in, and there are further accounting restrictions on that.

Not sure what you are referring to, Neroden. Generally, corporations are subject to state law in their state of incorporation. If this technique is permitted by statute, and it is documented in the minutes, then I suppose that this is OK. S corporations shareholders can avail themselves of this once they exhaust their allocated profits. There is no such animal for partnerships/LLCs/LPs.

(4) Borrow money from your company. (Which is essentially what you're doing.) This is SEVERELY discouraged. You are expected to draw up an actual lending contract, with lawyers, interest, terms, etc., the way you'd write an arms-length lending contract with a bank or investor. If you don't do this, the IRS (tax service) will decide it wasn't a loan, declare that it was a withdrawal of profits, and tax you on it like #2. (Or sometimes #1 or #3.) It is also sometimes declared to be defrauding the company!

You are absolutely correct. Moreover, if there is a pattern of loans, repayments, new loans, that appear to be sham transactions, the Service will just blow it all up and reflect the amounts as dividends or salary (depending on how pissed of the agent is) from the corporation.

(5) A bona fide purchase or sale between the company and yourself; it must be similar to an arms-length transaction, and if it isn't, the IRS will recharacterize it as #1, #2, or #3.

This is also correct.

Right. So in the US, you'd have to have separate company (partnership) bank accounts and personal bank accounts. Transfers between the accounts would have to be marked with their nature immediately -- you couldn't just withdraw a bunch of money and later decide that it was a loan and pay it back. It would be presumed to be profit-taking. Transferring the stock into the partnership and then transferring it back after the end of the year would also likely be considered a "sham transaction" and disallowed. In the US you *can* loan as much money to your company as you like, even at zero interest -- but the other way around, the company loaning money to YOU, is not kosher.

Subchapter K (partnerships) is really a small chapter of the Code. However, it is likely the most complex subchapter of them all. There are so many restrictions with partner contributions, distributions, special allocations, inter alia, that Congress has seen fit to make these things very expensive for those who attempt to reduce taxes with certain techniques. Marketable securities generally do not run afoul of these rules. It has been 30 years since I was up to snuff on marketable securities and partnerships. I think that if A contributes one share of stock with a cost basis of $100 (market value $150), his inside basis is $150, but his outside basis is $100. Two years later this share is distributed to partner B with a market value of $300, while A receives $300 in cash. AB has a capital gain of $150 while A has a capital gain of $50. (But I gotta reread the Code, and that ain't happening for a Tesla forum! LOL)

 

[neroden]

Thanks, cpa.

Not sure what you are referring to, Neroden.

In that bit I was referring to these two rules:
(1) If you've taken out your entire equity in a partnership, you have to pay tax on anything further you take out. (As capital gain.)
(2) If a corporation has issued dividends in excess of its entire accumulated earnings, further dividends reduce your cost basis (originally paid-in capital), and once that's reduced to zero, you pay tax on anything further you take out. (As capital gain.)

You are absolutely correct. Moreover, if there is a pattern of loans, repayments, new loans, that appear to be sham transactions, the Service will just blow it all up and reflect the amounts as dividends or salary (depending on how pissed of the agent is) from the corporation.

This is the main point I was making when contrasting US tax law with Belgian tax law.

I happen to know the IRS will do the same thing with partnerships too -- if it looks like there is a pattern of shenanigans with loans/repayments/new loans, they'll blow it up and recharacterize it.

In fact, IIRC, there's a special IRS rule to mess up what Lycanthrope is doing in Belgium. So, legitimate contribution of stock -- fine. Legitimate distribution of stock -- fine. Contributing ant then redistributing -- special anti-tax-evasion rules apply, to make sure you lose out.

 

[cpa]

If you've taken out your entire equity in a partnership, you have to pay tax on anything further you take out. (As capital gain.)

Sorry for the nitpick, neroden. The overriding tax principle with regards to partnership taxation revolves around basis, not equity. Basis includes the following: Your capital account balance on the books of the partnership. Your prorata share of partnership liabilities allocated to you. (Limited partners and non member-managers of LLCs will ordinarily not have any debt allocated to them.) Any outside basis adjustments that are not on the partnership books, like Section 743b/754 elections, or property contributed in-kind with a built-in loss.

Most partnerships, especially real estate partnerships, will have negative capital accounts for the partners, but the liabilities on the books will more than cover this negative equity, so there is no capital gain treatment for distributions.

When a partner sells or redeems his partnership interest, he usually is relieved of his share of the partnership liabilities. Accordingly, the sales price is the cash/assets received plus liability relief. Then, gain or loss is calculated asset-by-asset (including hot assets) to determine the taxable gain or loss. These gains and losses adjust his outside basis for the final capital gain or loss on the sale/redemption.

Loans by partners to partnerships are considered specifically allocated liabilities to that particular partner. (It is just a bookkeeping entry to keep the capital accounts in balance and to reflect a preferential distribution under certain circumstances.) In the few occasions where we might have issues with loans to partners, we have memorialized an agreement whereby the partner makes an annual interest payment to the partnership for these advances until they are paid in full, or captured by offsetting any future distribution.

I am curious as to your personal knowledge of the IRS making a lot of noise with the partnership you mentioned above! If you could PM me when convenient, I would love to hear the facts! Cheers!

 

[NicoV]

My view on the topic, being a Belgian in the same situation as @Lycanthrope , i.e. self employed via a corporation with a small number of shareholders (not that that matters for the current topic).
In Belgium, it is totally legitimate to have a director’s account that either owes some money to the corporation or that should receive some money from the corporation. As long as the corporation doesn’t go bankrupt, there is no issue here, and Belgian law states a specific interest rate (adapted yearly corresponding to market evolution) to be paid to the company/to be received from the company depending on the balance.
This is where it gets difficult. Most accountants just calculate the base amount for the interest calculation based on the situation at the beginning of the year versus the end of the year. This is accepted by the Belgian IRS assuming that this is representative for the movements within the year. However, with @Lycanthrope moving money from his personal account to his company account for a short period of time just over the boundary between one bookyear and the following bookyear, he risks getting this calculation being rejected during an audit. In this case, the Belgian IRS may want a detailed interest calculation over a monthly or daily balance, rather than just over the balance at the begin/end of the bookyear, i.e. a calculation just like a bank would do it. In his case, it would mean having to pay 9% on the negative balance over most of the year. It is possible that the Belgian IRS wouldn’t consider this a clerical error, but a delibarate way to evade the interest due to his corporation, which is fined at 300%.
In other words, I wouldn’t do it. I don’t like paying 9% on anything, so my company always owes me money, and I earn a small amount of interest from that.

 

[NicoV]

My view on the topic, being a Belgian in the same situation as @Lycanthrope , i.e. self employed via a corporation with a small number of shareholders (not that that matters for the current topic).
In Belgium, it is totally legitimate to have a director’s account that either owes some money to the corporation or that should receive some money from the corporation. As long as the corporation doesn’t go bankrupt, there is no issue here, and Belgian law states a specific interest rate (adapted yearly corresponding to market evolution) to be paid to the company/to be received from the company depending on the balance.
This is where it gets difficult. Most accountants just calculate the base amount for the interest calculation based on the situation at the beginning of the year versus the end of the year. This is accepted by the Belgian IRS assuming that this is representative for the movements within the year. However, with @Lycanthrope moving money from his personal account to his company account for a short period of time just over the boundary between one bookyear and the following bookyear, he risks getting this calculation being rejected during an audit. In this case, the Belgian IRS may want a detailed interest calculation over a monthly or daily balance, rather than just over the balance at the begin/end of the bookyear, i.e. a calculation just like a bank would do it. In his case, it would mean having to pay 9% on the negative balance over most of the year. It is possible that the Belgian IRS wouldn’t consider this a clerical error, but a delibarate way to evade the interest due to his corporation, which is fined at 300%.
In other words, I wouldn’t do it. I don’t like paying 9% on anything, so my company always owes me money, and I earn a small amount of interest from that.

Edit: this is how I understand it from how my accountant explained it to me, I am not a lawyer.

 

[neroden]

Sorry for the nitpick, neroden. The overriding tax principle with regards to partnership taxation revolves around basis, not equity. Basis includes the following: Your capital account balance on the books of the partnership. Your prorata share of partnership liabilities allocated to you. (Limited partners and non member-managers of LLCs will ordinarily not have any debt allocated to them.) Any outside basis adjustments that are not on the partnership books, like Section 743b/754 elections, or property contributed in-kind with a built-in loss.

Most partnerships, especially real estate partnerships, will have negative capital accounts for the partners, but the liabilities on the books will more than cover this negative equity, so there is no capital gain treatment for distributions.

Ah, I've stayed away from real estate; I'm used to investment or business partnerships with small liabilities and positive capital accounts. Interesting.

I am curious as to your personal knowledge of the IRS making a lot of noise with the partnership you mentioned above! If you could PM me when convenient, I would love to hear the facts! Cheers!

It's a secondhand story from long ago, so I am not going to get it right. The person involved was just pulling money in and out of the partnership willy-nilly, basically using the partnership account as his personal checking account, and then tried to claim afterwards that it was all "loans" and "repayments". The IRS was not happy. The key point was that none of them were memorialized with any sort of signed paperwork documenting them as loans or repayments. I don't remember what the IRS did to him.

 

[cpa]

Ah, I've stayed away from real estate; I'm used to investment or business partnerships with small liabilities and positive capital accounts. Interesting.

Some of my business (not real estate) partnerships are rather large operations. They started with $2 million in partner capital, and then borrowed another $5 million for manufacturing equipment for a packing facility. They turned their first profit after three years, but was quite small in comparison to the first two years' losses. Farming partnerships are notorious for being heavily upside down--land rich and cash poor. Plus farmers can use the cash basis and defer income for many years while loading up on expenses.

It's a secondhand story from long ago, so I am not going to get it right. The person involved was just pulling money in and out of the partnership willy-nilly, basically using the partnership account as his personal checking account, and then tried to claim afterwards that it was all "loans" and "repayments". The IRS was not happy. The key point was that none of them were memorialized with any sort of signed paperwork documenting them as loans or repayments. I don't remember what the IRS did to him.

That was not a smart move on this person's part. I can guess what the agent did: He recharacterized the distributions as partner salary (box 4 on his K-1), subject to ordinary income tax plus SE tax. Partner salary (guaranteed payments) do not affect basis. Any "repayments" were then recharacterized as contributions to capital, increasing his basis for tax purposes. What surprised me with this is that none of his copartners raised a stink about his capital account. I stress and the lawyers that I know stress to keep the partner capital accounts in sync. Makes things clear to all partners, especially if the partners are a diverse bunch, related or not. Chez moi, I would withdraw from preparing a return if a partner did this without the express written consent and indemnification of his fellow partners.

 

[neroden]

Yeah, and the interesting thing is, it seems that under Belgian tax law he would have been fine.

 

[NicoV]

Yeah, and the interesting thing is, it seems that under Belgian tax law he would have been fine.

It seems so (our directors account system is only for the director, not for any random person affiliated to the company, and every transactionn needs to be properly accounted). We have lots of practices and rules that would be illegal in the usa and vice versa I guess. This is not specific to Belgium, I think it’s more of a Europe versus USA thing.

As an example, according to what I hear from a friend who moved to the USA, in the USA it would be unthinkable that any employee would get a company car, choose the type and options according his own wishes (as long as it fits within the allocated budget by the company), and use it also for personal/family uses, with all expenses (including fuel) paid for by the company. Or get a smartphone paid by the company, including subscription, and use it as much personally as he likes. These things are not free however, as there are fiscal rules that determine the financial advantage you get from those, and typically that advantage is added to income, meaning you get taxed on that income.
From my point of view, it seems like the USA prefers to forbid things, and Europe allows these things under the condition that it is properly accounted and taxed.

Edit: the taxing mechanism of company cars is THE reason why there are so many Tesla’s in the Netherlands.

 

[cpa]

As an example, according to what I hear from a friend who moved to the USA, in the USA it would be unthinkable that any employee would get a company car, choose the type and options according his own wishes (as long as it fits within the allocated budget by the company), and use it also for personal/family uses, with all expenses (including fuel) paid for by the company. Or get a smartphone paid by the company, including subscription, and use it as much personally as he likes. These things are not free however, as there are fiscal rules that determine the financial advantage you get from those, and typically that advantage is added to income, meaning you get taxed on that income.
From my point of view, it seems like the USA prefers to forbid things, and Europe allows these things under the condition that it is properly accounted and taxed.

Personal use of company vehicles is not prohibited. However, the employer and employee have two remedies available: The first remedy would be for the employer to estimate the personal portion of the use of the vehicle and tack it onto the employee's W-2 as additional income subject to income tax but not Social Security and Medicare tax. The second way would be for the employee to estimate the personal usage and write a check to the employer to pay for the personal portion. Both methods pass muster with the Service. One thing about US tax law and vehicles is that commuting to and from work is a personal, not a business expense. Right off the bat, the employee with a company car will have personal use unless he walks or rides a bicycle to work.

Smartphones generally will fall under the de minimis rules. If the personal benefit is insignificant, and the smartphone is necessary for employment purposes, there is no additional income tax due on the personal portion. Of course, there are anti-abuse rules in place so that the owner/employee of a corporation cannot have his wife, four kids, eight grandkids, and a cousin from Peoria all on the company-paid plan.

 

[NicoV]

Personal use of company vehicles is not prohibited

Are we talking about a car that is exclusively used by that employee? And is that practice widespread?

In Belgium, there are 11 million people, 5.7 million cars, of which more than one million cars are estimated to be cars owned by a company (that includes trucks and utility vehicles). It is estimated that 670K of those are ‘salary cars’, i.e. considered part of the salary and not necessarily needed for company purposes.

 

[adiggs]

Are we talking about a car that is exclusively used by that employee? And is that practice widespread?

In Belgium, there are 11 million people, 5.7 million cars, of which more than one million cars are estimated to be cars owned by a company (that includes trucks and utility vehicles). It is estimated that 670K of those are ‘salary cars’, i.e. considered part of the salary and not necessarily needed for company purposes.

Something like your salary car is virtually unheard of here. Were I betting on the over/under, I'd bet the US has fewer "salary cars" than Belgium (using your 670k number). I work in high tech, and I've never met somebody that I knew of that had that sort of a benefit.