Registered diamond-trading companies benefit from a particular corporate tax regime. This new regime has been enshrined in law by the Belgian federal government, and is applicable to all registered diamond traders as from tax year 2017. The corporate tax is levied on a lump sum amount, defined as a percentage of the turnover of the company. The Carat Tax increases predictability and stability, as diamond trading companies will be able to forecast their total corporate tax due based on their diamond sales. As a secondary effect, the Carat Tax will strengthen the capital base of diamond trading companies, improving their access to finance. You can find an extended Q&A about the Carat Tex here.
The Carat Tax Explained
The Carat Tax is a clear-cut and predictable fiscal regime that applies to diamond trading companies. The regular corporate tax rate – or income tax rate for natural persons – will be levied on taxable income that is calculated on the basis of a lump sum margin instead of on the actual margin that is realized.
How does it work?
The total Cost of Goods Sold (COGS) is defined as a lump sum of 97.9% of the turnover of a diamond-trading company generated by genuine and habitual diamond trade. As a result, the gross margin used for taxation purposes is 2.1% of that turnover.
Subsequently, expenses and tax deductions may be deducted from that gross margin. The net taxable income after deductions however cannot be lower than 0.55% of turnover. A slightly higher floor rate of 0.65% will be applicable only during the first year of implementation of the Carat Tax.
The turnover generated by genuine and habitual diamond trade is the sum of all diamonds sold during a given tax period, as reported on the invoices issued by the diamond-trading company. This significantly increases the clarity and predictability of the total taxes due.
Like in the current fiscal regime, taxable income from diamond trade implies that at least one director receives remuneration that is no lower than a certain threshold. This threshold varies according to the total turnover of the company and will be specified in the Law.
When and to whom does it apply?
The Carat Tax will be applicable as from fiscal year 2016 (tax year 2017).
The regime is compulsory for diamond-trading companies that are registered in Belgium, but its scope is restricted to the turnover generated by genuine and habitual diamond trade. Turnover generated by other activities, such as services provided, are taxed separately as they are not in the scope of the Carat Tax.
The Carat Tax is not compulsory for mining companies and their sales offices. These companies may choose to apply the Carat Tax instead of the normal corporate tax regime.
The Carat Tax does not apply to other companies active in the diamond industry that do not sell diamonds out of an inventory for their own account, such as service providers (brokers, forwarders, diamond laboratories, etc.).
What are the benefits of the Carat Tax?
The complex and burdensome discussions on the control and valuation of the stock of diamond traders, an annually recurring grievance for many diamond-trading companies, will no longer occur as a result of the Carat Tax. The stock is entirely taken out of the equation for fiscal purposes, hence increases and decreases in the value of the inventory are tax neutral. Under the Carat Tax, diamond-traders will be able to monitor their total corporate taxes due throughout the year, as these taxes are based solely on the turnover generated by the sale of diamonds. This significantly increases simplicity, predictability, stability and clarity.
The effects of the Carat Tax, however, are not limited to the ease of doing business. It will have compelling secondary effects on the activities of diamond-trading companies, in particular on their access to banking services. The capital base of companies will be stronger, increasing their health and appeal to banks. Moreover, the Carat Tax will be an incentive for companies to perform independent valuation of their stocks, which will increase their transparency and credibility towards the banks.
The Carat Tax will be enshrined in law, which is the best way to increase legal certainty and create a stable business climate. The Belgian Parliament will discuss and likely adopt the law before the end of the year.
The major hurdle that delayed the approval of the Carat Tax was the mandatory opinion of the European Commission. The European Commission must review any fiscal measure that applies to a specific group of economic actors to determine whether or not said measure constitutes State aid. After an investigation that took approximately one year, the European Commission decided on July 29 2016 that the Carat Tax does not constitute State aid.
The Antwerp World Diamond Centre (AWDC) organized three general briefings for the diamond traders and two in-depth technical briefings for the accounting firms. The accounting firms will be the primary resource for additional information, and will assist the diamond traders with questions related to the technical operability of the carat tax.
All persons carrying out an economic activity on a regular and independent basis, and providing goods or services which are not fully exempt from VAT by law, must charge value added tax (VAT) and must therefore register for a unique VAT number. VAT is calculated on the tax base at a rate, which depends on the nature of the transition, which can be:
- 6 % mainly for basic products and social services;
- 12% for certain goods and services which are economically or socially important;
- 21% for all transactions of goods or services which do not fall under the other two categories.
Special regulations apply for the Belgian diamond industry. According to article 40 §1 and 42 § 4 of VAT-legislation (Wetboek van de Belasting op Toegevoegde Waarde) the following transactions with regard to diamonds are exempt VAT:
- Supply of unmounted diamonds to Belgian registered diamond traders (including diamond manufacturers) exclusively trading in unmounted diamonds;
- Import of unmounted diamonds by Belgian registered diamond traders (including diamond manufacturers) exclusively trading in unmounted diamonds;
- Services with regard to unmounted diamonds provided to Belgian registered diamond traders (including diamond manufacturers) exclusively trading in unmounted diamonds.
The export of goods – including diamonds – performed by (or for the account of) the trader (in this case the Belgian diamond trader) is always exempt VAT (art. 39 VAT-Legislation).
Belgian diamond traders also acting as diamond jewellers can not profit from the VAT exemption in article 40§1 and 42§4.
No other import or export duties are due for Belgian diamond traders.
For more information, it is advisable to contact an accountant. Please find several suggestions in the list of contacts.
All companies based in Belgium are liable for corporate income tax (vennootschapsbelasting) if they have their official headquarters, their principal establishment, their management headquarters or administrative headquarters in Belgium and if they are engaged in a profit-making activity. Belgium has a corporate income tax rate of 33.99% (including crisis contribution of 0.99%).Companies are obliged to make quarterly advance tax payments:
- for the first quarter, no later than April 10
- for the second quarter, no later than July 10
- for the third quarter, no later than October 10
- for the fourth quarter, no later than December 20
See section below, new Diamond Regime