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taxation.be

Friday
Jan 18th
Home arrow Money arrow General introduction: What is investing ?

General introduction: What is investing ?

We all have savings. Money that we don’t need immediately, that we keep for later. In a month’s time, in five year’s time or much, much later. In the meantime that money can work for us. That is investing.

When you compare different forms of investment, you need to look at the return, the risk and the liquidity. The costs and the taxes are important too.

The most important criterion is the return you will get on your investment.  The return is everything you will get from your investment. That is in the first place the income: interest on a savings account, dividend, coupons, bonus shares etc… But some investments gain value over the years … and unfortunately sometimes they lose value. For most investments the return is unpredictable. It depends on the success of the company or the investment strategy of the investment fund.  You only know your return at the end of the ride.

Why? That is because there are many events that you cannot predict both good and bad. Financial analysts call these ‘risk’. Risk comes in many forms: macro economic risk (the economic conjuncture, recession…), political risk (e.g. the change of government in a country), market risk (the dollar / euro exchange rate, interest rates …), credit risk (the solvency of the state that issues the bond). And then there are other situations like the subprime loans and SocGen’s rogue trader. 

Since last year, the Mifid Directive obliges your investment adviser to help you define your risk profile. Do you go for a risky investment with a high return or whether you take a lower return with less risk? When you are young, you can afford to take more risk – in the long term the risk may be less. But that doesn’t mean you want to take risk. And when you retire, you want the security of a regular income from bonds without much risk, because you may need the money.

Keep in mind :

Return
Risk
Liquidity
Cost
Taxes

And that’s how we come to liquidity. How easy is it to get your money out? A house is the example of an investment that is anything but liquid. If you need to sell it in a hurry, you will not get a good price. A rule of thumb: if you've got money that you will need in the next five years (as a down payment on a house, or tuition fees for university), you should not invest it in the stock market.  A dynamic investor will want investments that he can sell quickly to reinvest in new opportunities. A defensive investor prefers investments with a higher return that are less liquid.

Most investments come at a cost: entry fees, exit fees, transaction costs, stock exchange tax and even VAT.  Sometimes, there are costs that are less visible. The taxes that the insurance company on the premiums you pay.

Contrary to return, taxes are predictable and they reduce the return. You should only take account of the return after taxes. Your financial adviser should always advise you of the tax regime of investments.  In Belgium, the rule is that dividends are taxed at a flat rate of 25 % and interest at 15 %. That tax is levied by the Belgian bank or financial institution that pays the dividends or interest. If so, you do not need to declare the dividends or interest in your tax return. It is only if you collect the dividends or interest directly from a foreign bank or financial institution that you must declare them in your tax return.

And the good news is that Belgium does not tax capital gains. That explains the success of Sicavs, but that’s another story.

 

Comments (1)add comment

Paul said:

  I've read quite a lot of advice, but cannot find a clear answer to the following question - which you touch on in the post.

I am a UK citizen, resident in Belgium and liable to Belgian income tax.

I have stocks/shares in the USA which I manage online. I completed the WB-8BEN from provider by the stockbroker which means I pay tax on dividends (15% til now, but perhaps that goes up with the change in Belgium law?).

My Question: Am I required to declare the existence of these stocks in my Belgian tax return for 2012?
15 August 2013

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