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 manager, be recognized by the FSMA, be set up in the form of a statutory company (contractual basis is not possible), a minimum of 70% of the fund's assets must be invested in qualified investments (long-term investments with a focus on smart, sustainable and inclusive growth), the fund may not practice "short selling", and there are strict requirements regarding leveraging and 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 these aspects either.
Until recently, the conclusion 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 are also in principle taxed.
Only income (dividends, capital gains) derived from shares could possibly be neutralised 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, the income f.e. from debt financing or real estate revenues remained taxable at 25% corporate income tax.
Conclusion: not very interesting.
With the new draft law containing various tax provisions, the Belgian government 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 to waive withholding tax for non-resident investors.
In order to do so, the Belgian legislator provides for the explicit application of the regime of article 185bis I.T.C. 1992 for the ELTIF. This implies that the entity is subject to a regime which deviates from the normal corporate tax regime, which implies that, for example, income derived from shares (dividends, capital gains), income derived from debt financing and income from real estate are simply not part of the company's taxable base. In principle, therefore, one no longer pays taxes on such income, at least not at the level of the fund.
For the managers of the fund, in principle, nothing changes: they are still taxed on the fees they receive 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 (once taxed in the target company and once in the company-investor) when it is distributed to the company-investors, a deviation from the normal rules of the DRD-regime is foreseen so that income from so called "good" shares is eligible for DRD-deduction.
This is a similar regime 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 allows for a full accumulation of the investment income with the right to the Belgian DRD-deduction, 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 comes forth from real estate income that is taxed abroad.
However, special conditions and obligations apply to be able 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), withholding tax 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 also be provided for, for which this subscription tax can be reduced to 0.01%.
Finally, the Belgian legislator has taken the opportunity to authorise the King (the government) to draw up a specific accounting framework for the ELTIF by Royal Decree.
To date, there has been no official publication of the law containing various tax provisions that will legally introduce the tax aspects of the ELTIF. Considering that the draft text was adopted in plenary meeting on 13 January 2022, the publication and therefore the entry into force of this legal tax framework can be expected shortly.
With the ELTIF, the Belgian legislator rightly wanted to promote long-term investments and therefore provided for a highly interesting taxation framework.
Naturally, we are always prepared to assist in launching this new interesting investment fund.
Dirk Coveliers - Counsel (dirk.coveliers@tiberghien.com)
Yannick Cools - Associate (yannick.cools@tiberghien.com)
