ELTIF introduced mid-2021
In 2021, the regime of a European Long Term Investment Fund (hereinafter “ELTIF”) was introduced in the Belgian Act of 19 April 2014 on alternative undertakings for collective investment and their managers (Belgian Act of 27 June 2021, Belgian Official Gazette 9 July 2021). Although there was some initial confusion, the ELTIF can indeed exist as a separate entity (and not only as a “label”).
The ELTIF is intended to promote long-term investments in the real European economy (‘Europe 2020 strategy’). The main objective is to encourage investments in the public domain in order to stimulate job creation, infrastructure development, mobility projects, but also investments in certain unlisted companies or listed SMEs.
Eligible investments therefore include (i) infrastructure projects (transport, environmental and social infrastructure, public-private partnerships); (ii) financing projects for energy transition; (iii) digital transformation projects; (iv) real estate projects (retirement homes, schools, hospitals, prisons, social housing); (v) projects to support small and medium-sized enterprises.
An ELTIF may invest in a wide range of assets, provided that they are of a long-term nature and fit into the strategy of smart, sustainable and inclusive growth, as set out in the aforementioned Europe 2020 strategy.
Reasonable to say that the ELTIF will be able to play into the hype of so-called ESG funds. Moreover, the ELTIF will also be a suitable entity to compete for tenders by the Belgian Federal Transformation Fund (managed by the FPIM) in the context of the post-COVID recovery plan.
In order to qualify as an ELTIF, the fund must be managed by an AIFM, recognized by the FSMA and set up in the form of a statutory company (a fund in contractual form is not possible). A minimum of 70% of the fund’s assets must be invested in eligible investments, the fund may not practice “short selling”, and there are strict requirements regarding leverage and the use of derivatives.
Institutional and professional investors can get involved, but also certain qualifying private investors. This instrument is therefore intended to promote co-financing and partnerships between the public and private sectors.
ELTIF tax regime: an upgraded DRD-SICAV?
Although the ELTIF could thus start as a separate investment entity, until recently it was not very attractive since the Belgian legislator had not considered the taxation aspects of the entity. The EU Regulation does not regulate the taxation either.
Until recently, the analysis was that, as there were no special provisions regarding the corporate tax treatment, the ELTIF, as a domestic company, was subject to the normal corporate tax regime. This means a 25% taxation at fund level of both, in principle, the income derived from shares and the income derived from debt financing. Real estate revenues would in principle also be taxed.
Only income (dividends, capital gains) derived from shares could possibly be neutralized if the ELTIF could, under certain conditions, qualify as an investment company and thus benefit from a more flexible DRD-regime (“Dividends Received Deduction”). However, e.g. the income from debt financing or real estate revenue would remain taxable at 25% corporate income tax. These taxation aspects significantly diminished the attractiveness of a Belgian ELTIF.
With the law of 21 January 2022, the Belgian government reacts to the above analysis and wishes to promote various issues, including the introduction of a high-performance tax framework with regard to the Belgian ELTIF.
The new tax framework for the ELTIF aims to:
- make the investment entity neutral from a corporate tax perspective;
- eliminate economic double taxation for corporate investors; and
- waive WHT for non-resident investors.
In order to do so, the Belgian legislator provides for the explicit application to the ELTIF of the regime of article 185bis I.T.C. 1992. This implies that the ELTIF is subject to a regime which deviates from the normal corporate tax regime: for example, income derived from shares (dividends, capital gains), income derived from debt financing and income from real estate are not part of the ELTIF’s taxable base. In principle, therefore, no tax is due on such income, at least at the level of the ELTIF.
For the managers of the fund, in principle, nothing changes: they are taxed on the fees received for the management in accordance with the regime applicable to them.
In order to avoid that the income from underlying investment companies would be taxed a second time when distributed to a corporate investor (once taxed on the level of the ELTIF target company and again on the level of the ELTIF investor), a deviation from the normal rules of the DRD-regime is foreseen so that income from so-called “good” shares is eligible for the DRD-regime.
This is a regime similar to that of the well-known “DRD-Sicav”, but with the exception that an ELTIF is not required to provide an annual distribution of at least 90% of its net income. Considering that this lack of a mandatory distribution allows for a full accumulation of the investment income with the right to the Belgian DRD-regime, this tax treatment of the ELTIF makes it a very interesting new investment vehicle.
In addition, unlike an ordinary DRD-SICAV, the DRD-exemption can also apply to (the part of) the dividend that originates from real estate income that is taxed abroad.
However, special conditions and obligations must be met to apply / offer such a “DRD-regime” to the investor companies (e.g. a tailor-made break-down obligation is indispensable).
In order to make the fund fully attractive to EU investor companies (and because EU law obliges to do so), WHT is waived on those incomes derived from “good shares” of Belgian origin.
In principle, the Belgian ELTIF can also benefit from the wide network of double taxation treaties that Belgium has concluded, which will facilitate international investments and the entry of international investors.
Once registered with the FSMA, the fund will also be subject to the annual tax on collective investment undertakings of 0.0925% (the so-called “subscription tax”). Since an ELTIF can also create share classes, a separate share class for institutional and professional investors can be provided for, for which this subscription tax can be reduced to 0.01%.
Finally, the Belgian legislator has authorized the government to issue a specific accounting framework for the ELTIF by Royal Decree.
The tax aspects here discussed entered into force on 7 February 2022.
With the ELTIF, the Belgian legislator intends to promote long-term investments and therefore provides for a highly interesting taxation framework.
Naturally, we are prepared to assist in launching this new interesting investment fund.
If you wish to discuss this topic, please contact: Tiberghien, Antwerp
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