The heavenly country of zero capital gain taxes
We’re not talking about an imaginaire heavenly country here. We’re talking about Belgium. Is it the investors Walhalla? Hmm, not so fast, let’s calculate that.
The Rules of the game in Belgium
- 1. There are no capital gain taxes for those investments which are considered as part of a normal savings pattern (vs speculation / investing for an income)
- 2. Wealth tax: If the sum of your net worth on all investment accounts is larger than 0.5 million € then you pay 0.15 % tax each year on the total sum.
- 3. Transaction tax: You pay 0.35 % ‘transaction tax’ for every stock transaction. Buy = 0.35 %, sell = 0.35 %. The taxes are not the broker fee, you pay a broker fee to your broker and taxes to the BE treasury.
- 4. There are various taxes for other things. ETF’s, options, … all have their taxes when buying and / or selling
- 5. Dividends are taxed at 30 %, although they changed this rule recently so that you receive the first 640 € in dividends with zero dividend tax (so typically the dividends on a capital of 23.000 €).
As always in this hopeless country instead of a clear simple cap gains rule, Belgium prefers a messy ruleset. This has to do with politics: a real cap gains tax has been on the (left – wing) agenda of various governments since decades, but because we do not have a simple dual-party system like US or UK, each negatiation ends up in a compromise, where the right-wing admits to some variant of a tax to be added, but not the real clear cap gains.
Zero tax rate?
Just look at rule 1: no cap gain taxes if the gains are part of normal savings. They don’t say where the borderline between abnormal and normal personal saving is.
What if you are investing in an ETF? It could be considered as abnormal management of your savings, if they think that it is too risky for a ‘normal good family man’, or if the gains are a larger part of you income.
What if you saved 30 years and are now living off the dividend? Then maybe (or maybe not?) the rule changes to cap gains = income, and you suddenly fall from zero tax into the world-champion BE income taxes (depending on each case, some 50 – 80 % of you gains disappear).
What if you still work and save, and you make an equal amount in dividend income and in work income? Our local taxman (fiscus, equivalent of IRS) could come after your money, or he could leave you alone. And if you disgree you can go to court, who can only apply subjective rulings because nobody ever said where the line is.
What if you make much money in trading futures and options? Again, our IRS or judge may or may not consider this as a normal saving pattern. Since both IRS and court don’t understand anything about the financial markets, they will probably find these instruments so akward that it falls under ‘income’. Saving for them is bringing your money to the bank, put it on a savings account and earn 0.5 % per year.
Compare BE – USA
Now to check the real numbers and compare Belgium ‘zero – taxes’ with a capital gains taxed country (take the USA), let’s consider a simplified case.
Let’s assume you purchase two stocks on January 1, each for 50 % of your budget. Let’s assume that you have a return on your investment which on average equals the average historical stock market gains, represented by the S & P 500 (5.9 %) and average dividend yield (2.8 %). Say your budget is 100.000 €. Stock 1 goes up 19 %, and you sell after one year. Stock 2 goes down 7.2 %, and you also sell after one year. Assume that both stocks return the average dividend return of stocks, 2.8 %. The average gain is (19 – 7.2 )/ 2 = 5.9 %.
|Capital 100.000 € or $||Belgium||USA|
|Gross Dividend (2.8 %)||2.800 €||2.800 $|
|Taxes on Dividends||821 €||420 $ (simplified to 15% on full amount but could be lower)|
Total taxes on Capital Gains + Dividends
|Taxes on 1.000.000 € or $||Belgium||USA|
|Taxes on trade 1 'WIN'||383||1425|
|Taxes on trade 2 'LOOSE'||337||-540|
|Wealth Tax (BE, in case total capital > 500.000 €)||150||0|
|Average tax rate||19 %||15 %|
There you have it. In the country of zero capital gain taxes, investors pay more taxes than in a country with a 15 % cap gain taxes.
The dangerous thing is that politicians have this prejudice in their head that wealthy individuals get away with “zero capital gain taxes”, and that law should be adapted to ADD capital gain taxes to what is already there. Obviously they wouldn’t then remove all the other taxes. We would then not only to be the highest income-tax country of the world except for France, but also to be the highest capital gain taxed country. Nice worldchampion!