In Belgium, capital gains on stocks are not taxed for individuals but are indeed subject to taxation for companies. To bypass this hurdle, the Definitively Taxed Income regime (RDT in French, DBI in Dutch) allows businesses, under specific conditions, to avoid taxes on investment incomes – meaning dividends and potential capital gains. However, while this concept may seem appealing, its practical implications tell a different story. Let's dive into the details.
DTI stands for "Definitively Taxed Income" regime. It is an exemption system designed for companies that invest in individual shares of other companies, initially created to avoid double taxation when a "parent company" receives dividends from a "subsidiary company". Later, this system was extended to small and medium-sized enterprises (SMEs) that invest through what are known as "DTI SICAVs."
The capital gains realized by the company on individual stocks are subject to taxation at a rate of 20% for SMEs and 25% for large companies. However, this tax on capital gains is eliminated if the investment meets the following conditions:
Investing 2,5 million euros or taking a 10% stake in another company is clearly not feasible for all companies. To enable SMEs to benefit from this system, DTI SICAVs (Variable Capital Investment Companies, similar to mutual funds) take care of meeting the conditions mentioned above. SMEs can invest in these SICAVs without conditions and thus enjoy the tax exemption regime. In this case, the withholding tax paid on dividends distributed by the DTI SICAV is deductible, and any potential capital gains realized when selling SICAV shares are not taxed.
These apparent advantages hide several significant drawbacks. Firstly, the fees associated with DTI SICAVs are generally quite high, with entrance fees that can go up to 3% and management fees sometimes in the same range. As we often emphasize in this blog, over the long term, a few extra percentage points in fees can have a massive impact on returns. An impact that far outweighs the tax benefits provided. Furthermore, these tax benefits only materialize in the case of a capital gain realized by the SICAV. In the event of a loss, these fees would have been incurred for nothing – a "double penalty" that can be painful.
Unlike a directly held securities account within a company, the management fees charged by the SICAV are not deductible for the company, and the VAT on these fees cannot be reclaimed. These fees are directly deducted from the SICAV and offset against the capital gains (or added to the losses). They are not invoiced separately to the company, as in the case of a standard securities account.
Beyond the fees, and despite being composed entirely of stocks, DTI SICAVs display lower performances compared to their benchmark indices for several reasons. Firstly, the tax condition imposed on the underlying companies, by definition, excludes a range of firms benefiting from tax exemptions, particularly many multinationals that are often appealing from a stock market perspective. Additionally, DTI SICAVs tend to be overexposed to Europe, making them less competitive than the global market.
To conclude, as part of the extensive tax reform announced by Minister Van Peteghem aimed at eliminating tax loopholes, there is a plan to eliminate the tax advantage linked to DTI SICAVs. While the reform has not yet been passed, this measure faces little resistance, and the risk of seeing this mechanism abolished in the near future is significant for SMEs.
For various reasons – cost, performance, and legal risk – it seems much wiser to invest surplus corporate funds through Exchange-Traded Funds (ETFs) without relying on any tax loopholes. As for whether it's better to withdraw this cash in the form of dividends and invest it personally or leave it within the company in a liquidation reserve, it all depends on your specific situation. Easyvest has developed a free tool to simulate your individual scenario and make the best investment decision for your company's funds. Feel free to reach out to our managers for more information on this matter.