Attracting attention in Belgium

Selwyn Parker

Despite its political problems, Belgium is pushing ahead with a programme of tax reform and other measures as it streamlines its economy to compete with the rest of Europe. It is also seeking to become a haven for foreign direct investment before it is overtaken by new member nations of the EU

The interim government of Belgium is pushing ahead with the modernisation of the country’s tax regime and other structures as it continues to seek greater space within the EU economy. Concerns about the climate for trade in the year ahead cloud the outlook for Belgium’s economy, according to the National Bank of Belgium’s latest survey of business confidence. December’s survey, which usually provides a reliable guide to the economy’s short-term performance, “is now clearly pointing downwards,” notes the central bank. However the decline in business’s expectations was less marked in the building and manufacturing industries, which are important sectors in the overall economy.

However even in the trade sector the results are mixed. For instance, most respondents cited declining domestic sales for their reduced expectations while predicting improved orders from foreign suppliers.

In general manufacturing and construction were more positive about 2008. Manufacturers expected to compensate for a slowing domestic market by boosting production to meet rising export orders. And despite a smaller backlog of work, the construction industry including civil engineering and road works was preparing to hire more staff.

Belgian’s households do not in general share the commercial sector’s expectations of a downturn. The latest survey conducted by the central bank shows that consumer confidence is on the rebound. “Households are making a less pessimistic assessment of the likely development in the economic situation, their financial situation and their own saving capacity than [in November]” it noted. “Positive expectations regarding unemployment trends continue to gain ground.”

However a consensus of forecasts from Belgian and EU sources point to a slowing domestic economy through 2008, but an expanding export sector. Combined, they predict that domestic demand will fall by around two percent (from just over three percent last year) while the exports of goods and services should hold its compared with last year. Indeed OECD figures suggest exports should increase by 4.7 percent while Belgium’s gdp should match average euro-area growth of 1.9 percent.

Meantime the public finances also look to be in good health, according to the consensus of forecasts. The current account allows for a surplus approaching three percent, roughly the same as in the last four years. However inflation, which had declined steadily from a 2002 high of three percent to just above one percent at the end of 2004, has inched back up over the last two years. At the end of 2007 underlying inflation was approaching 2.5 percent, although still well with EU-wide norms.

Exports will clearly drive the economy in 2008. The main exporting industries are chemicals (€50.5bn in 2006), transport equipment (€30.7bn) machinery (€14.5bn) and food, drink and tobacco (€17.7bn). However the government hopes for a more dynamic mix of markets that have long been dominated by its neighbours Germany with 20 percent, France (17 percent), Netherlands (12.1 percent), UK (8 percent) and US (4.1 percent). As a reformed tax regime suggests, Belgium is anxious to do more business with the so-called BRIC nations.

Record number of foreign investment projects
Acutely aware of mounting competition from recent member nations of the EU, Belgium has accelerated its strategy of chasing foreign direct investment. It has been particularly successful in the distribution and logistics sector where the country’s central position, excellent inland and sea linkages, and flat terrain provides significant advantages over other nations. Indeed Belgium has been able to win investments in the distribution sector from the Netherlands, one of its main European rivals. In 2006, the latest available figures, Belgium booked a record 185 foreign investment projects. According to Ernst & Young’s EU-wide measure, Belgium has moved up to fifth place as a haven for FDI measured by the number of projects.

The most successful was Wallonia, which attracted a quarter of the new investments. Although export-oriented Flanders lost ground slightly, albeit from a remarkably successful 2005, it still booked nearly two thirds of all incoming investment. Antwerp alone won more than a quarter of new investments to cement its position as the engine of the Flemish economy on the back of its petrochemical, car assembly, diamond and metal-working industries. The Flemish government’s “creative economy” programme to make it a European leader in communications technology is gathering pace with technology clusters across a range of sectors.

The establishment of a local distribution centre is often seen as a prelude to the creation of a full-service regional headquarters. However the dearth of green fields projects remains of concern for the future, say observers. Most of the fresh money as gone into the expansion of foreign companies’ existing projects. Although that represents a vote of confidence in the original investment, it is new projects that create the most jobs.

For instance, points out Ernest & Young, “with an average of 48 new jobs per investment project, Belgium remains far below the European average of 101 jobs per project. Regional governments are under pressure to adopt a coordinated programme to solicit long-term investment from the fast-growing BRIC countries

According to professor of management, Leo Sleuwaegen, the way forward is to attract investment in new industries in a general reorientation of the economy. “Government authorities are still concentrating their efforts with respect to attracting investments too much on traditional projects,” he suggests. “A revolution is needed if we wish to continue to play a role in the knowledge economy.” It was important to develop a strategy of diversification to target growth sectors in the global economy.

Old-economy M&A
Some of the most recent action in the M&A market has been in the old economies. In December Turkey’s Ulker Group bought luxury chocolate-producer Godiva for 850m euro. And in January France’s state-controlled railway operator SNCF, working through its 45.5 percent-owned subsidiary Keolis, bought another 60 percent of Belgium’s Eurobus to lift its stake to over 70 percent. According French-language paper La Tribune, that makes SNCF the leading bus operator in Belgium. Meantime the government hopes that its more liberal tax regime will encourage increased cross-border investment flows.

Taxes
High levels of taxation have long proved a handicap to foreign as well as domestic investment, say observers. However a series of reforms introduced since 2006 have made Belgium a more attractive location, particularly for US companies. As tax lawyer Marc Quaghebeur points out: “Belgium has discovered that tax treaties can be an instrument to attract investments.”

For example, double tax treaties have been signed with the United States and with Hong Kong as part of a grand plan to put Belgium in the front of the queue for American investors into the fast-developing Far East and vice versa. The treaty with the United States will apply from early 2008, adding to a broad mix of treaties Belgium has signed so far. Countries included in these mutually beneficial arrangements include many high-income economies as well as an increasing number of emerging ones.

In short order the government has adopted several other far-reaching measures in its tax reform programme. It abolished the capital duty payable on shares issued when a company is incorporated. It also facilitated the collective payment of VAT by a group of companies (thus allowing for VAT-exempt transactions between them). This is seen as a highly practical measure that, explains Ernst & Young, offers “countless possibilities” to save on VAT. The holding company regime was further relaxed – Belgium’s thin capitalisation rules were already unrestrictive.

Most significant was the introduction of what is known as notional interest deductions (NID). Actually an arrangement allowing the deduction of risk capital, it has the effect of minimising overall corporate tax liability. In essence the measure, which De Loitte Touche Tohmatsu describes as “very good news for foreign companies”, allows companies to deduct a notional interest on their equity.

Meantime the four year-old system of providing advance tax rulings continues to be refined for the better. The system means corporates can be assured of a binding arrangement on tax obligations incurred on specific projects. While streamlining its tax regime, Belgium has also tightened up on loopholes under its Program Law. For example, further penalties have been applied on participants on so-called VAT carousels.

Real estate record
The volume of outside investment in Belgium’s commercial real estate market has accelerated for two years in a row. Although the final figures are not yet in for 2007, some consultancies expect them to show an increase of more than 200 percent in the most active sectors, notably for top-rated industrial property. According to King Sturge, total investment volume in Belgian commercial real estate could top 5bn euros for 2008. One of the attractions of Belgian real estate is its relatively low volatility in an historical risk-averse nation.

European players were particularly active in the industrial market, with Germany’s CommerzGrundbesitz buying a prime logistical hub from French supermarket Carrefour. At year’s end, reports King Struge, several major transactions still had to be signed off.

However Anglo-Saxon investors did about two thirds of the deals last year, continuing to invest even after the summer’s subprime-triggered credit crunch. Much of the action was outside the CBD, in properties on the edge of cities. Investors from other nations were also active, with the Netherlands’ developer Royal BAM group buying out Belgian developer Landsbeek.

Financial sector banks on wealth
As overall tax rates decline from punishing rates, individual wealth has climbed to the benefit of the wealth-management industry. Belgium’s private-banking industry has grown faster than those of Switzerland and Luxembourg for the last four years, albeit from lower levels. A survey by international consulting firm McKinsey shows that the market in private-banking sector has expanded at more than twice the rate for the rest of the EU. However, most of their clients are native-born Belgians rather than high net-worth individuals looking for a tax haven. As one commentator observed, “increasingly Belgium is attracting attention for the richness of its banks as well as for the sweetness of its pralines.”