An Exchange Traded Fund (ETF) is a type of security that tracks an underlying index (sector, commodity, or other asset). This makes them similar to mutual funds, but they can easily be traded on an exchange like regular stock. Investors can access dozens or even hundreds of stocks or bonds in a single ETF. Because they are a type of investment that offers the best of both worlds to investors, ETFs have become increasingly popular.
ETFs do not require a minimum investment and they are a good way to diversify your portfolio. You can choose from a wide variety of ETFs and they can be used to gain exposure to almost any market or any industry sector in the world. Another benefit is that they are considered a low-cost investment. They may be subject to commission fees from brokers, but these are sometimes waived completely. ETFs are also more tax efficient than traditional mutual funds, but in some cases, there may be capital gain distributions to consider.
If you are a Belgian resident, you will obviously be interested to know the tax consequences of investing in ETFs. There are several taxes to consider in that case.
There is the stock exchange transaction tax (TST) that will be due every time you buy or sell ETFs. In general, that tax applies to both resident and non-resident taxpayers that trade Belgian or foreign financial instruments via a Belgian bank or broker. The transaction tax will be deducted at source in that scenario. Resident taxpayers that invest via a foreign broker will need to report the transactions and pay the tax spontaneously to the Belgian authorities.
The applicable tax rate will depend on the type of ETF and where the tracker is registered. For (distribution) ETFs that pay out a coupon/dividend and that are registered in Belgium, the tax rate amounts to 0.12% of the transaction amount. This rate also applies if the ETF is registered elsewhere in the European Economic Area (EEA). For ETFs that are registered in Belgium and whose proceeds are reinvested (capitalization), the rate is 1.32% instead. For ETFs that are not registered in the EEA, the tax rate amounts to 0.35%.
Furthermore, distribution ETFs will be subject to a 30% withholding tax at source in Belgium. For ETFs acquired through a foreign broker, the 30% dividend tax will need to be settled afterwards via your Belgian income tax filing. For this reason, investors can opt for capitalization funds instead. If dividends are not paid out and reinvested, the dividend tax can be avoided. The rule in Belgium is that any capital gains realized upon sale afterwards, remain completely tax-free.
An exception to this is the so-called ‘Reynders tax’, introduced back in 2006. Any type of fund that consist of at least 10% in bonds, will be subject to a 30% tax upon sale of the fund. Both interest and capital gains (‘Taxable Income per Share’) are taxable. Specific conditions apply.
If you are currently investing in ETFs or similar financial products, TAXPATRIA® can advise you on the Belgian tax implications and make sure you are fully compliant.