Chambers Guide Investment Funds 2021 – Belgian Chapter
Vanessa Marquette, Nicolas Bertrand, Eveline Hellebuyck and Sara De Moor wrote the Belgian chapter of the Chambers Global Practice Guide on Investment Funds 2021.
In this contribution our team of experts provides an overview of the fundamental legal, tax and regulatory considerations relating to the establishment and operation of investment funds in Belgium. Amongst others they discuss the structures typically used by investment funds, the regulatory framework for those funds, any significant operational requirements, how the funds may be marketed and the tax treatment for both the fund itself and investors.
Our Dutch and Luxembourg colleagues contributed to the chapters for their respective jurisdictions.
If you have any questions on this publication or the establishment or operation of investment funds in Belgium, you are welcome to contact the authors.
Investment Funds Market Overview
The Belgian fund market is dominated by foreign undertakings for the collective investment in transferable securities (UCITS) and alternative investment funds (AIFs), marketed to Belgian professional and retail investors mainly by investments funds originated from Luxembourg.
During recent years, the Belgian fund market – to be understood as the net asset value of funds governed by Belgian and foreign law that are publicly distributed in Belgium – has generally followed an upward trend. Recent statistics published by the Belgian Asset Managers Association (the BEAMA) report that the net asset value of Belgian investment funds amounted to EUR219.6 trillion at the end of 2019.
As a consequence of the COVID-19 crisis, the first quarter of 2020 was marked by a 13% decrease in value, revealing a net asset value of EUR191.1 trillion at the end of March 2020. The second quarter, however, showed a cautious recovery of the market, with more than 60% of the Q1 decrease in value being recuperated.
Alternative Investment Funds
1. Fund Structures
A variety of AIFs exist under Belgian law. There are three main types, all of which have specific categories, depending on the assets the AIF wishes to invest in and the type of investor it wishes to target:
- public AIFs (collecting all or part of their capital from a public offer in Belgium);
- institutional AIFs (collecting their capital exclusively from (Belgian or foreign) institutional investors located in Belgium or abroad, and whose interests may be acquired only by “eligible” investors); and
- private AIFs (which do not collect any of their capital from a public offer in Belgium).
The Act of 19 April 2014 on alternative investment fund managers (AIFM Act) organises those categories of AIFs and is complemented by several specific Royal Decrees.
The AIFM Act was enacted following the introduction of the Alternative Investment Fund Managers Directive (Directive 2011/61/EC) (AIFMD), but its scope of application is broader. The following collective investment undertakings qualify as AIFs and are subject to the AIFM Act:
- those that raise capital from investors with a view to investing that capital in the interest of these investors in accordance with a certain investment policy; and
- those that do not qualify as an undertaking regulated under the UCITS Directive (Directive 2009/65/EG).
However, the following entities are excluded from the scope of the AIFMD:
- holding companies;
- institutions for occupational retirement provision; and
- securitisation special purpose vehicles.
In addition, to maintain the attractiveness and competitiveness of the Belgian legal system, a non-AIF regulated status is also available for companies investing in real estate (sociétés immobilières réglementées/gereglementeerde vastgoedvennootschappen – SIR/GVV), also referred to as a “BE-REIT”.
Unless the AIFM Act or one of the implementing Royal Decrees provides otherwise (see below), public, institutional and private AIFs may be established as either a common contractual fund (fonds commun de placement/gemeenschappelijk beleggingsfonds) (FCP) or an investment company (société d’investissement/beleggingsvenootschap).
FCPs are similar to a unit trust in the UK or a mutual fund in the USA: they do not have any legal personality, so each of the investors qualifies as a (co-)owner. In exchange for their commitment, investors receive participation rights in the FCP.
Most AIFs incorporated under Belgian law take the form of an investment company. Investment companies that have variable capital are commonly referred to as BEVEKs/SICAVs, meaning that the share capital changes automatically as a result of the investors’ subscriptions and redemptions. On the other hand, investment companies that have fixed capital, called BEVAKs/SICAFs, do not allow their investors to exit the fund at any time, so the share capital is less subject to fluctuation. In exchange for their investment, investors receive shares in the investment company.
In addition, there are many AIFs without a specific regulated structure (venture funds capital, hedge funds, etc).
This contribution focuses on the following types of AIFs that are commonly present on the Belgian investment fund market and are regulated by specific Royal Decrees (please see 2.3.1 Regulatory Regime for Alternative Funds):
- public AIFs investing in financial instruments and liquidity (the majority of which are BEVEKs/SICAVs);
- institutional AIFs, in particular:
(a)institutional BEVEKs/SICAVs investing in financial instruments and liquidity; and
(b)specialised Real Estate Funds (SREIFs), a type of institutional BEVAK/SICAF; and
- private privaks/pricafs (ie, a specific type of private BEVAK/SICAF).
Authorisation of the AIF
Public AIFs investing in financial instruments and liquidity are subject to direct supervision by the Financial Markets and Services Authority (the FSMA), which must grant its authorisation before these AIFs start their activities. To that end, the FSMA must receive, inter alia, the AIF’s articles of association (for an investment company) or management regulations (for an FCP), and the details of the depository and the management company. In respect of a Belgian public AIF, the management company must be established in Belgium.
As an investment company, the AIF will also have to submit information on its governing body, senior management and the persons responsible for the independent controlling functions (which must all be “fit and proper”) to the FSMA.
An official list of authorised public AIFs is published on the FSMA’s website. The FSMA usually considers applications for authorisation within three months.
Institutional AIFs and private privaks/pricafs are not supervised by the FSMA. Because of the favourable tax regime attached to these types of AIFs, they must be registered with and are subject to the supervision of the Federal Public Service Finance (FPSF). The FPSF usually considers applications for registration within 30 days.
Authorisation of the AIFM
Unless the structure of the AIF allows internal management (self-managed AIFs), an AIF must in principle appoint an alternative investment fund manager (AIFM) that is authorised by the FSMA. Self-managed AIFs may also decide to delegate certain management duties to an external management company. The FSMA will authorise the AIFM if all legal and regulatory conditions are met. These conditions relate to, among others, the remuneration, conflicts of interest, risk management, liquidity management and depositary requirements. Applications are considered within three months of a complete file being submitted.
As is the case in other EEA Member States, less stringent rules exist for “sub-threshold” AIFMs that manage portfolios of AIFs that stay below the assets under management (AuM) size criteria provided for under the AIFMD. This option is available only if the sub-threshold AIFM does not publicly offer AIFs (otherwise, the majority of the rules arising from the AIFM Act do apply). Sub-threshold AIFMs cannot make use of the AIFMD passport regime but must register with the FSMA. If they wish to benefit from a European passport regime under the AIFMD, they can “opt in”, which triggers the application of the requirements under the AIFM Act.
2. Common Process for Setting up Investment Funds
The setting-up process for a Belgian investment vehicle depends on its legal structure.
Establishing an FCP implies a flexible, fast and cheap process. AIFs that take the form of an FCP are established by a private deed through the mere signing of the fund’s management regulation. An FCP has no legal personality.
To benefit from legal personality, an AIF must adopt a corporate form, in which case it will be an investment company.
The AIFM Act lists the types of company forms available to incorporate an investment company.
In principle, public and institutional AIFs can choose between two types of company forms:
- a public limited liability company (naamloze vennootschap / société anonyme – NV/SA); or
- a limited partnership by shares (commanditaire vennootschap op aandelen / société en commandite par actions).
SREIFs and private privaks can opt for a third form, which is the ordinary limited partnership (gewone commanditaire vennootschap/société en commandite simple).
However, the recently amended Belgian Code of Companies and Associations (BCCA) has downsized the number of available company forms under Belgian law: the limited partnerships by shares and the ordinary limited partnership have ceased to exist. In practice, adopting the corporate form of an NV/SA appears to be the only possible option for investment companies. AIFs that have not yet amended their articles of association to adopt this company form must do so by 1 January 2024 at the latest (if amending their articles of association before that date, the application of the new regime is triggered immediately).
The capital of an NV/SA is represented by shares, to which multiple voting rights can be attached. Prior to being incorporated as such before a Belgian notary, investment companies must open a blocked incorporation bank account with a bank in Belgium and transfer their initial share capital to this bank account.
An AIF incorporated as an investment company is, in principle, subject to the BCCA. The AIFM Act, however, deviates from the BCCA with respect to specific requirements, such as the denomination of the AIF or its initial capital and disapplies other provisions of the BCCA. For instance, public AIFs (BEVEKs/SICAVs) must have an initial capital of EUR1.2 million, and the life duration of a SREIF is limited to ten years by law.
Establishing an AIF in the form of an investment company will thus take more time and be more expensive than opting for an FCP. Of all AIFs, public AIFs are subject to the most demanding regime: in addition to the various operational requirements, stringent disclosure obligations also apply. Please see 2.1.4 Disclosure Requirements.
3. Limited Liability of Investors
AIFs established as FCPs are organised as co-ownerships; investors are only liable for the debts of the FCP up to the net assets of the fund and pro rata to their participation.
The creditors of the manager of the FCP or the investors do not have any recourse against the assets of the FCP, which serve only as security for debts, commitments and obligations that are borne by the FCP’s assets in accordance with the objectives set out in the FCP’s investment policy.
Pursuant to the BCCA, the liability of a shareholder of an AIF taking the form of an NV/SA is limited to its subscription or commitment. The corporate veil may be pierced in very limited circumstances involving commingling of the assets of the shareholder(s) and the company.
4. Disclosure Requirements
Disclosure by the AIF
When raising capital from investors, Belgian AIFs are required to disclose certain information to (potential) investors. The content depends on the type of fund and the targeted investors.
AIFs may only publicly offer their interests in Belgium or abroad to (professional and retail) investors on the condition of providing a prospectus and a key investor information document (KIID). The KIID finds its origin in Regulation No 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPS Regulation), on the basis of which it must be provided to retail investors. This document contains, inter alia, the investment objectives and policy of the fund, the risk profile, the costs and associated charges, past performance and practical information. In addition, investors must receive semi-annual and annual reports.
An offer is defined as any communication addressed by any means, provided that the most important features of the offer are described and that the price of the offer is determined or can be determined. A “public offering” in the sense of the AIFM Act means that interests are offered to at least 150 individuals or legal entities that do not qualify as “professional” investors.
The AIFM Act organises a private placement regime (“safe harbour”), pursuant to which the following offers do not have a public character and therefore constitute a private placement of funds:
- offerings to professional investors only (the AIFM Act refers to the notion of “qualified investors” under the Prospectus Regulation which in turn refers to the notion of professional clients under Annex II of MiFID II (see 2.2.3 Restrictions on Investors));
- offerings to fewer than 150 natural or legal persons, other than professional investors;
- offerings that require at least EUR100,000 per investor and per security (closed-ended vehicles);
- offerings that require at least EUR250,000 per investor and per security (open-ended vehicles);
- offers of securities, other than units of open-ended undertakings for collective investment, with a denomination per unit of at least EUR100,000; and
- offers of securities for a total consideration within the EEA of less than EUR100,000 calculated over a period of 12 months.
It must be emphasised that even offers under the private placement regime can attract certain disclosure requirements. Such requirements do not arise from the AIFM Act but find their origin in other European and national regulations; please see 2.3.7 Investor Protection Rules.
The prospectus and the KIID (and any significant changes to these documents) may only be published after obtaining the FSMA’s approval. Notices, advertisements and other documents relating to an offer or announcing/recommending the offer may only be published after they are approved by the FSMA, regardless of the method of publication. However, notices and other documents relating to the corporate life of the AIF are submitted to the FSMA prior to distribution, but without being subject to the prior approval.
Any communication on Belgian territory to more than 150 natural or legal persons other than professional investors with a view to providing information or advice, or to soliciting these persons in relation to interests of open-ended AIFs that are or will be the subject of an offer of sale or subscription, is prohibited when it is made by an AIF or by a person capable of transferring the securities in question, or when it is made on their behalf, except in the following circumstances:
- if the offer involves at least EUR250,000 per investor and per security, or a total consideration within the EEA of less than EUR100,000 calculated over a period of 12 months; or
- if a prospectus and a KIID have been approved by the FSMA or an information note has been published.
In addition, persons intending to publicly offer interests in an open-ended AIF must notify the FSMA prior to such offer and submit all documentation required.
Many of the specific Royal Decrees applicable to the different types of AIF contain additional specific rules on mandatory disclosures to investors.
Reporting by the AIFM
Depending on the AuM, the AIFM must report to the FSMA annually, semi-annually if (it is not a small-scale manager and AuM are less than EUR1 billion) or quarterly (if the AuM of managed AIFs exceed EUR1 billion). Reporting concerns the AIFM itself, the AIF(s) it manages, the AIF that substantially uses leverage and any specific issue requested by the FSMA.
Institutional AIF/Private Privak/SREIF
Institutional AIFs, private privaks and SREIFs have certain reporting obligations towards the FPSF. In respect of SREIFs, the SREIF Decree prescribes an annual valuation of the net asset value as well as a valuation by an independent expert of the fair value of the immovable property and rights in rem on immovable property held by the SREIF or its subsidiaries.
In case of infringements of the AIFM Act or the specific regulations applicable to the AIFs that are not remedied, the FPSF can decide, after motivated notice, to strike them off the list, with the loss of the particular regulatory and tax regime as a consequence.
1. Types of Investors in Alternative Funds
Investors located in Belgium investing in AIFs are diverse (retail investors, pension funds, insurance companies, commercial banks, asset managers, regional public investment institutions, etc). Belgian-based family offices are also playing an increasing role, structuring their investment through AIFs.
2. Legal Structures Used by Fund Managers
Belgian AIFMs often adopt the legal form of an NV/SA. Until recently, managers also frequently used a limited partnership or a co-operative company (cooperatieve vennootschap/société coopérative) but the BCCA has recently abolished the limited partnership and restricted the use of the co-operative company. Where applicable, existing companies must amend their articles of association to adopt a new form, by 1 January 2024 at the latest (if amending their articles of association before that date, the application of the new regime is triggered immediately).
3. Restrictions on Investors
In accordance with European legislation, three categories of investors can generally be distinguished:
- retail investors;
- professional investors; and
- the so-called “eligible” investors.
Depending on the type of AIF, targeting certain types of investors is either allowed or prohibited.
Public AIFs are open to both professional and retail investors in Belgium. However, providing services under the AIFMD passporting regime is only possible for public AIFs that solely address professional investors. Under the AIFMD, a “professional investor” means an investor that is considered to be a professional client or that may, on request, be treated as a professional client within the meaning of Annex II to Directive 2014/65/EC. Foreign AIFs may only be marketed to retail (non-professional) investors in Belgium, provided that the private placement regime and the rules laid down in the AIFM Act are complied with.
Institutional AIFs and SREIFs are only open to “eligible investors”. There are two types of eligible investor:
- per se professional clients (ie, professional clients within the meaning of MiFID II, with the exclusion of clients that requested to be treated as professional clients, unless falling within the scope of the following category); and
- other investors that are legal entities and are included in the register of eligible investors maintained by the FSMA. Belgian resident individuals never qualify as eligible investors.
A specific category of “private investors” can invest in private privaks. Private investors are defined as investors that hold for their own account offers of securities issued by a private privak meeting certain conditions, such as requiring a total consideration of at least EUR25,000 per investor and per class of securities.
1. Regulatory Regime for Alternative Funds
All Belgian AIFs are regulated by and subject to the AIFM Act. The following Royal Decrees further implement the provisions of the AIFM Act in respect of specific types of AIFs, and also lay down investment limitations.
- Belgian public AIFs investing in financial instruments and liquidity are subject to the Royal Decree of 25 February 2017 on certain alternative investment funds and their management companies.
As this type of fund can also be offered to retail investors, the rules imposed on such public AIFs are modelled after and similar to the rules laid down in the UCITS Act. Please see 3.3.1 Retail Funds Regulatory Regime.
- Institutional AIFs investing in financial instruments and liquidity must adhere to the rules arising from the Royal Decree of 7 December 2007, which provides specific rules for institutional open-ended AIFs.
The list of financial instruments in which this type of institutional AIF can invest is defined by the Financial Sector Act of 2 August 2002. The list also includes financial instruments that are related to another financial instrument in one of the following ways:
(a) it is convertible into the financial instrument concerned or exchangeable for it;
(b) it gives the holder the right to acquire or subscribe to the financial instrument concerned;
(c) it is issued or guaranteed by the issuer or a guarantor of the financial instrument concerned, where there is a significant correlation between the prices of the two instruments;
(d) it is a certificate representing or constituting the equivalent value of the financial instrument concerned; or
(e) it provides a return specifically linked, by virtue of the terms and conditions of issue, to the price movement of the financial instrument concerned.
SREIFs must comply with the Program Law II of 3 August 2016 (SREIF Law) and the Royal Decree of 9 November 2016 relating to specialised real estate investment funds (SREIF Decree).
SREIFs can only invest in specific types of real estate, as listed in the SREIF Decree. With respect to Belgian real estate, the SREIF is also allowed to invest in shares in a Belgian real estate company if it either absorbs this company or converts it into an SREIF or an (institutional) BE-REIT within 24 months. Promotion – understood as a main or ancillary activity implying a forward sale or a sale within five years of construction – is strictly prohibited.
No compulsory diversification requirement or leverage limits apply to the SREIF, but the SREIF may freely decide to apply these types of limitations as part of its investment policy as defined in its articles of association.
- Private privaks are regulated by the Law of 22 April 2003 on financial transactions and markets with a view to setting up a new category of collective investment undertakings, to be known as private privaks, and containing various tax provisions. The rules applicable to this vehicle are detailed further by a Royal Decree of 23 May 2007.
The sole purpose of private privaks is the collective investment in authorised financial instruments issued by non-listed companies.
In addition, AIFs (and Belgian-regulated service providers) must take account of and/or comply with the FSMA’s guidelines and circulars (please see 2.3.8 Approach of the Regulator).
2. Requirements for Non-local Service Providers
Under the AIFMD and the AIFM Act, the depository can be a credit institution, a MiFID investment undertaking or an institution subject to regulatory and prudential supervision and authorised to act as a depository for UCITS (see 3. Retail Funds). An AIFM may not act as a depositary for the AIFs it manages.
Each AIF must also appoint an auditor, which is to be chosen from the FSMA’s list of recognised auditors and auditing companies.
3. Local Regulatory Requirements for Non-local Managers
The AIFM Act applies to AIFMs domiciled in Belgium or managing AIFs governed by Belgian law or marketing foreign AIFs in Belgium.
An AIFM that is authorised under the AIFM Directive and active in any other EEA Member State may manage an EEA-governed fund in Belgium on a cross-border basis by making use of the harmonised AIFMD passport regime. Similarly, a manager holding a European passport may market a Belgian fund on a cross-border basis, following a simple notification procedure.
A “third-country” AIFM that is active in a non-EEA Member State may market a foreign AIF under one of the safe harbours set out in the AIFM Act, provided that it first submits a notification to the FSMA. Marketing may only start once the FSMA has issued its confirmation.
4.Regulatory Approval Process
Please see 2.1.1 Fund Structures.
5. Rules Concerning Marketing of Alternative Funds
Please see 2.2.3 Restrictions on Investors.
As mentioned, a public offering of an AIF’s interests entails certain disclosure requirements, such as publishing a prospectus and a KIID (please see 2.1.4 Disclosure Requirements). In addition, even if an AIF’s interests are offered under one of the safe harbours set out in the AIFM Act, marketing may still entail additional requirements; please see 2.3.7 Investor Protection Rules.
It is worth noting that, in respect of public AIFs, the AIFM Act imposes the obligation to publish a KIID and a prospectus regardless of whether its interests are marketed to retail or professional investors, hence the latter must also receive these documents.
Please also note that if an investment firm that does not qualify as an AIFM or as a manager under the UCITS law intends to distribute an AIF’s interests in Belgium, prior authorisation by the FSMA is required pursuant to the Law of 25 October 2016 on access to the business of investment services and on the supervision of portfolio management and investment advice companies.
6. Marketing of Alternative Funds
Please see 2.2.3 Restrictions on Investors.
7. Investor Protection Rules
Prior Approval of Advertising Material
In addition to the information a potential investor must receive by means of a prospectus, information memorandum or KIID (please see 2.1.4 Disclosure Requirements), the marketing of an AIF may trigger the applicability of the Royal Decree of 25 April 2014 on certain information requirements when commercialising financial products to non-professional (retail) clients (Transversal Royal Decree), even when conducted under the private placement regime set out in the AIFM Act (please see 2.1.4 Disclosure Requirements).
The notion of “financial products” is broader than the notion of “financial instruments” used in the context of MiFID II or the notion of “investment instruments” used in the context of the Prospectus Regulation. A “financial product” can be a savings product, an investment product or an insurance product (other than a savings/investment product).
Exceptions from the Royal Decree’s scope of application are made in terms of the countervalue, among other things: the rules do not apply if the purchase of a financial product requires an initial countervalue of at least EUR100,000.
The Transversal Royal Decree (and a complementing Circular of the FSMA) regulates the minimum content of any marketing material addressed to (even one) retail investor(s), and submits advertising for prior approval by the FSMA.
General good provisions
Marketing in Belgium by an EEA or foreign law-governed AIFM requires compliance with the so-called “provisions of general good”, which are listed on the FSMA’s website. The list is non-exhaustive but includes book VI of the Belgian Code of Economic Law in its entirety (and the Royal Decree No 71 of 30 November 1939 on door-to-door sales and peddling).
Book VI of the Belgian Code of Economic Law on consumer protection
Marketing to retail investors may trigger the applicability of Book VI of the Belgian Code of Economic Law, if such retail investors qualify as consumers.
A consumer is a natural person who acts for purposes that are outside his trade, business or profession.
Book VI of the Code of Economic Law lists, among other things, the contractual terms that are considered unfair and thus unauthorised.
Whether or not professional clients under Part II of Annex II to MiFID II (clients that request to be treated as professional clients – see 2.2.3 Restrictions on Investors) may still qualify as consumers for the purpose of Book VI of the Code of Economic Law is not clear. In any case, companies will not qualify as such, given that a consumer must always be a natural person.
The FSMA has published a communication containing an overview of conditions according to which clauses are considered acceptable.
A recent law on unfair clauses in B2B agreements has been enacted. An exemption applies for financial services, which can be construed broadly but should cover the marketing of AIFs in Belgium.
Door-to-door sales and peddling
Belgian law prohibits the peddling of securities and door-to-door sales of securities, merchandise and goods. Interests in an AIF qualify as securities in the meaning of that regulation. Peddling of securities according to Belgian law is defined as going to another person’s premises in order to buy, sell, exchange, offer to buy, sell or exchange securities with immediate delivery against payment or deferred payment.
Door-to-door sales of securities is authorised only if targeted at licensed financial intermediaries (ie, credit institutions and investment firms). Door-to-door sales are defined as habitually going to other persons to advise, offer or solicit the purchase, sale, subscription or exchange of securities, or to advise, offer or solicit participation in transactions in relation to these securities.
8. Approach of the Regulator
The FSMA regularly issues guidelines in order to further implement and detail the legal and regulatory framework. As such, the FSMA explains the legal and regulatory provisions applicable to the supervised entities and gives recommendations regarding financial services and activities. Although the FSMA’s guidelines are “soft law”, they provide useful and authoritative information on the applicable norms and the regulator’s expectations.
In addition, the FSMA has investigatory powers and can issue warnings and/or impose sanctions in case of non-compliance. In practice, the FSMA does not tend to issue fines immediately upon becoming aware of a breach or non-compliance with (minor) regulatory or legal requirements. The FSMA can perform onsite inspections and retrieve all information it deems necessary to assess and resolve a case.
In certain cases, face-to-face meetings with the regulator may be organised.
An AIF must invest the capital it raises in accordance with its investment policy as described in the prospectus and the KIID, and only in the interests of the investors.
Authorised AIFs must comply with the risk and borrowing restrictions, the valuation and pricing of the assets held by the AIFs and the transparency requirements set out in the AIFM Act, the specific Royal Decrees and the AIFMD, as applicable.
Belgian vehicles must further comply with Belgian laws, regulations and the FSMA’s guidelines concerning anti-money laundering (AML) and counter-terrorist financing (CTF), in particular the Act of 18 September 2017 relating to the fight against money laundering and the financing of terrorism, as amended from time to time, and the Royal Decree of 30 July 2018 regarding the register of ultimate beneficial owners.
Issuers whose securities are admitted to trading on the Belgian regulated market within the meaning of MiFID II are also subject to the obligations imposed by various EU directives that have been implemented under Belgian law, particularly the following:
- the Prospectus Regulation (Regulation No 2017/1129) and the related Commission Delegated Regulation (EU) No 2019/980 of 14 March 2019;
- the Transparency Directive (Directive 2004/109/EC) as implemented by the Act of 2 May 2007 on disclosure of major holdings in issuers whose shares are admitted to trading on a regulated market and laying down miscellaneous provisions (Transparency Act); and
- the Market Abuse Regulation (Regulation 596/2014).
Pursuant to the Short-selling Regulation (Regulation 236/2012), the FSMA should be notified of net short positions in shares, sovereign debt and uncovered credit default swaps.
Pursuant to the Royal Decree of 25 February 2017 concerning certain public AIFs and AIFMs, borrowing is allowed but must be limited to 10% of the fund’s net asset value on a temporary basis.
A recent report from the FSMA and the National Bank of Belgium (NBB) on asset management mentions that Belgian investment funds (both UCITS and AIFs) have no or hardly any financial leverage. It is therefore likely that the fund finance market is less developed compared to other EEA Member States. The lack of financial leverage also explains why the liquidity risk, which could realise itself in case of a mismatch between the liquidity of the assets and the fund’s redemption profile, is regarded as the most important risk.
An FSMA circular (FSMA Opinion 2017 01) defined the notion of leverage in the context of the AIFM Act as any method by which the AIFM increases the exposure of an AIF it manages, whether through borrowing cash or securities, through derivative positions or by any other means. In general, the FSMA considers loans that are an economic substitute for the AIF’s capital to constitute leverage in line with the European Commission’s position. Loans entered into by an AIF that are temporary in nature and fully covered by capital commitments by investors are therefore excluded from the leverage calculation.
The manager must demonstrate that the leverage limits applied with respect to each AIF it manages are reasonable, and that it complies with those limits at all times. The FSMA may impose restrictions on the leverage that a manager can use, or may impose any other restriction on the management of the AIFs it manages.
1. Tax Regime Applicable to AIFs
The applicable tax regime mainly depends on whether the AIF has a legal personality (investment company) or not (FCP) (please see 2.1.2 Common Process for Setting up Investment Funds).
As a rule, AIFs are subject to corporate income tax at the ordinary tax rate of 25%.
Upon request, AIFs may benefit from a deviating corporate tax regime, in which case their taxable basis is limited to disallowed expenses (other than impairment and capital losses on shares) and abnormal or gratuitous advantages received (Tax AIF). In such a case, the investment proceeds of Tax AIFs are usually not taxed at their level.
Considering that AIFs are formally subject to corporate income tax (although on a very limited basis for what concerns the Tax AIFs), in principle AIFs are eligible to treaty benefits from a Belgian perspective (assessment on a case-by-case basis).
As a rule, AIFs without legal personality are not subject to corporate income tax. Their income is immediately taxable in the hands of the investors according to a full and immediate tax transparency regime, irrespective of any distribution to the investors.
As an exception, taxation is postponed until effective distribution if and to the extent the AIF invests more than 10% of its assets in debt instruments (including convertible bonds and cash) (article 19bis of the Belgian Income Tax Code).
Besides, AIFs are subject to a yearly net asset tax at a flat rate of 0.0925% on the net amounts outstanding in Belgium on 31 December of the preceding year. Exceptions apply for certain AIFs (eg, private privak/pricaf).
2. Tax Regime Applicable to Investors
Belgian individual investor
The tax regime applicable to Belgian individual investors depends on the nature of the income earned from the AIF, as follows:
- dividends: withholding tax of 30%;
- interest (paid or capitalised): withholding tax of 30%;
- share capital reduction/reimbursement is in principle not taxable. As an exception, if the AIF has retained earnings/reserves, the reimbursement of share capital will be partially requalified as dividend distribution (taxable at 30%) (pro rata the amount of said retained earnings/reserves in the total of the AIF’s adjusted net equity);
- capital gains realised on shares are in principle not taxable, provided they are realised within the normal management of the private estate of the investor, except if and to the extent the AIF holds (directly or indirectly) more than 10% of its assets in debt instruments. In such a case, the interest component included in the capital gain is taxable as interest income (30% withholding tax); and
- liquidation and redemption bonuses paid by Tax AIFs are in principle not taxable, except if and to the extent the Tax AIF holds (directly or indirectly) more than 10% of its assets in debt instruments. In such a case, the interest component included in the liquidation/redemption bonus is taxable as interest income (30% withholding tax).
Belgian corporate investor
All income/proceeds earned by corporate investors subject to Belgian corporate income tax are taxable at the ordinary rate of 25%.
In principle, income received from a Tax AIF cannot benefit from the Belgian participation exemption regime (PER) (100% exemption), given its deviating tax regime. PER applies under the following conditions:
- if there is a minimum participation of at least 10% or an acquisition value of EUR2.5 million;
- if property is held in full for an uninterrupted period of at least 12 months (or if there is a commitment to hold should the 12-month period not be reached at the time of the distribution); and
- subject to tax requirement at the level of the distributing entity and each direct or indirect affiliate.
In accordance with the full tax transparency regime, compliance with these PER conditions should be appreciated at the level of each underlying company, as if the AIF did not exist.
The PER may apply to income received from AIFs subject to the ordinary corporate income tax regime; provided the AIF qualifies as an “investment company” from a Belgian tax perspective, the PER applies irrespective of the minimum participation requirement or the minimum holding period.
Please note that certain specific rules exist for certain Tax AIFs (eg, under certain conditions, Belgian corporate investors in a private privak may benefit from the PER on dividends and capital gains on shares received).
30% withholding tax is also due on dividends paid by AIFs, except if a minimum participation of at least 10% is held by the Belgian corporate investor in the AIF. The withholding tax suffered is not considered as a final tax but can be credited against the final corporate income tax due or refunded in case of excess. The withholding tax cost can therefore be considered as a mere pre-financing cost.
Belgian individual investor
According to the full tax transparency regime, investors are immediately taxed on the underlying income earned by the AIF (as if the latter did not exist), irrespective of any effective distribution to the investors, as follows:
- dividends (including liquidation and acquisition bonuses): flat rate of 30%;
- interest (paid or capitalised): flat rate of 30%;
- share capital reduction/reimbursement is in principle not taxable. As an exception, if the underlying company has retained earnings/reserves, the reimbursement of share capital will be partially requalified as dividend distribution (taxable at 30%) (pro rata the amount of said retained earnings/reserves in the total of the fund’s adjusted net equity); and
- capital gains: not taxable as far as they are realised within the normal management of the private estate of the investors.
An exception to the full tax transparency regime applies if the AIF invests more than 10% of its assets in debt instruments. The taxation of the interest income at the level of the individual investor is postponed until the sale/disposal, buyback or liquidation of the (shares of the) AIF. However, the tax transparency regime remains applicable to the other income earned by the AIF.
In practice, a full breakdown of the underlying income (ie, per date and type of income generated by each underlying asset) should be available in order for the investors to be able to apply the appropriate tax treatment to each underlying income.
Subsequent distributions of the above income to the investors are consequently not subject to tax.
If the investors are not able to obtain the full breakdown of the income generated by the underlying assets, the tax transparency regime cannot apply and taxation should be deferred until effective distribution, as follows:
- all distributions are taxable as interest income at 30% withholding tax; and
- in the absence of any legal basis, capital gains realised on the sale of the units of the AIF are in principle not taxable. The Belgian tax administration nevertheless takes the position that such capital gain is taxable as movable income (30%).
Belgian corporate investor
According to the tax transparency regime, investors subject to the Belgian corporate income tax regime are taxed on the underlying income earned by the AIF (as if it did not exist) at the corporate income tax rate of 25%, unless the PER regime applies.
Please note that the application of the full tax transparency regime also requires a full transparency approach from an accounting perspective (amongst others, the direct recording of the underlying investment lines of the AIF and the underlying P&L of the AIF, pro rata the corporate investor’s interest in the AIF).
If the full tax transparency regime cannot be applied (because no sufficient breakdown is available), taxation is postponed until effective distribution and all distributions made by the AIF or capital gains realised on the AIF’s shares are taxable at the ordinary corporate income tax rate (25%).
3. Special or Preferential Tax Regime
Belgian tax resident individuals are in principle not taxable on the liquidation and redemption bonuses received from Tax AIFs (with legal personality), except if and to the extent the Tax AIF holds (directly or indirectly) more than 10% of its assets in debt instruments.
Belgian tax resident individuals realising a loss upon liquidation of a private privak that has been incorporated after 2018 benefit from a tax credit corresponding to 25% of said loss. The tax credit is limited to EUR25,000 per year per individual.
Belgian corporate investors may benefit from the PER on dividends and capital gains on AIFs subject to the ordinary corporate income tax regime, irrespective of the minimum participation requirement or the minimum holding period, provided the AIF qualifies as an “investment company” from a Belgian tax perspective.
Regarding the investments a UCITS can make, please see 3.3.1 Retail Funds Regulatory Regime.
Regarding the appointment of a custodian, please see 3.3.2 Requirements for Non-local Service Providers.
In principle, a UCITS is prohibited from taking out loans. However, the Royal Decree of 12 November 2012 provides for two exceptions pursuant to which a UCITS can:
- take out loans denominated in foreign currency, to which loans of the same value and duration are linked for the sole purpose of purchasing foreign currency, provided that its net debt position remains or will remain unchanged as a result of these operations; or
- take out loans of up to 10% of its net assets, insofar as it concerns short-term loans.
Please also see 2.5 Alternative Investment Funds: Fund Finance Market.
Tax considerations listed under 2.6 Tax Regime apply mutatis mutandis to retail funds, subject to the fact that all retail funds benefit from the deviating corporate income tax regime.
Consequently, distributions made by retail funds can in principle not benefit from the PER at the level of Belgian corporate investors. Please note that exceptions may apply for certain retail funds (eg, under certain conditions, corporate investors in a Belgian SICAV/BEVEK may benefit from the PER on dividends and capital gains on shares received).
A tax on stock exchange transactions (TSET) applies on the trade of capitalisation shares (eg, the sale, purchase, repurchase and conversion) where these transactions are concluded or carried out in Belgium through a Belgian financial institution or (since 1 January 2017) through an intermediary established abroad (as far as the transaction order is directly or indirectly given by either an individual whose habitual residence is in Belgium, or a legal entity on behalf of its registered office or establishment in Belgium). The rate of TSET is 1.32% (with a maximum of EUR4,000 per transaction).
Legal, Regulatory or Tax Changes
EU Directive 2019/1160 and EU Regulation 2019/1156
The European Parliament and the Council introduced new rules to reduce the regulatory barriers currently hindering cross-border distribution of investment undertakings. EU Directive 2019/1160 and EU Regulation 2019/1156 introduce the following:
- a definition of pre-marketing;
- uniform requirements for marketing materials;
- the possibility of ex-ante notification of marketing materials (when marketing to retail investors);
- rules for de-notification;
- new rules aimed at transparent and proportionate fees and charges levied by national competent authorities; and
- a new central European Securities and Markets Authority database on the cross-border marketing of UCITS and AIFs.
Most of the new provisions shall apply from 2 August 2021. Prior to this date, the provisions under Directive 2019/1160 must be transposed by Member States into national legislation. Given the approaching deadline, we keep a close watch on any Belgian legislative initiatives in this respect.
From 1 January 2021, the UK is no longer part of the European Union. UK AIFMs can therefore no longer access the Belgian market by relying on the passporting regime, as the UK is regarded as a third country under the AIFM Law.
The Disclosure Regulation
The Disclosure Regulation (Regulation (EU) 2019/2088) aims to create a harmonised transparency regime to integrate environmental, social and governance (ESG) considerations into investment decision-making or advisory processes of AIFMs. To attain more transparency on how financial market participants integrate sustainability risks into their investment decisions, AIFMs will have to disclose certain ESG-related information. Most provisions will come into effect in March 2021.
Mandatory Disclosure Rules (MDR – daC6)
On 20 December 2019, the Belgian legislator transposed Directive 2018/822, commonly referred to as DAC6, into national legislation. DAC6 obliges certain intermediaries and relevant taxpayers to report information on cross-border arrangements that meet certain criteria to the FPSF.
Vanessa MarquettePartner Attorney at Law
Vanessa Marquette, attorney at law, is a partner in the Banking and Finance Practice Group of our Brussels office and a member of the firmwide Restructuring & Insolvency team. She is recognized for her expertise in Banking and Finance with a focus on international finance law, regulated financial services, sustainable finance and banking litigation.T: +32 2 773 23 25 E: firstname.lastname@example.org
Eveline HellebuyckCounsel Attorney at Law
Eveline Hellebuyck is a counsel in our Brussels office and a member of Loyens & Loeff’s Banking & Finance practice group in Belgium. She has extensive experience in banking and finance, and financial and regulatory matters.T: +32 2 743 43 99 E: email@example.com
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