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For nearly 30 years, Belgium has been well known for its
attractive tax rules for group finance companies, international
headquarters and cash-pooling companies. In combination with
other measures (such as a special tax status for expats), these
rules have convinced many multinationals to move their headquarters
(and associated highly skilled workforce) to Belgium. Earlier
this year, the government proposed amending the thin cap
rules. This article provides an overview the current and
future legislation and the proposed changes to the latter.
Current legislation
Under Article 198(11) of the Income Tax Code, thin cap rules
only apply (and consequently the deduction of interest payments is
only disallowed) in a number of defined cases. Three
cumulative conditions must be met:
(i) The (foreign) recipient of the interest should be
either not subject to tax in Belgium or subject to (foreign) tax
treatment that is significantly more favourable than would be the
case in Belgium (in order to determine whether this rule applies,
reference should be made to the administrative circular on the
dividends received deduction or the Belgian and foreign tax
treatment should be compared).
(ii) All types of interest are covered, except interest
on publicly issued bonds or similar financial instruments.
(iii) The deduction of interest is disallowed for Belgian
corporate tax purposes as soon as the total qualifying loans
exceeds a 7-to-1 debt-equity ratio, i.e. seven times the
amount of taxable reserves at the start of the tax period and the
paid-up capital at the end of this period.
Future legislation
The Omnibus Act of 29 March 2012 (the "Act")
introduces (in principle, as from 1 July 2012) totally new
treatment for qualifying non-deductible interest payments. In
brief, the most important changes are the following:
(i) The abovementioned 7-to-1 debt-equity ratio will no longer
apply; instead, a 5-to-1 ratio will be introduced.
(ii) The Act provides for a new definition of qualifying
interest on debt: (i) all intra-group loans are targeted
(intra-group is defined in Article 11 of the Company Code) as well
as (ii) all loans where the beneficial owner of the interest is not
subject to income tax in Belgium or is subject to (foreign) tax
treatment significantly more favourable than would be the case in
Belgium.
(iii) Publicly issued bonds and similar financial instruments as
well as loans extended by banks and financial institutions covered
by Article 56(2)(2) of the Income Tax Code do not fall within the
scope of application of the new rules. Moreover, loans to movable
or immovable leasing companies or companies active in the field of
public-private partnerships do not qualify as debt generating
disallowed interest payments.
Criticism and proposed amendments
As the entry into force of these new rules would have adverse
consequences for treasury and cash-pooling activity in Belgium, the
government has proposed a number of measures to mitigate the
undesired effects. In late May, the proposed amendments were
published on the website of the House of Representatives. The
legislative history to the draft Omnibus Act of June 2012 includes
a series of calculations, showing the effect of the proposed
amendments on the future legislation. In brief, the proposed
amendments solve an important issue. In order not to
discourage cash pooling and treasury activity in Belgium, it is
proposed to take into account only the positive difference between
intra-group interest paid and received.
In financial circles, this procedure is known as netting.
In order to qualify for this measure, the group company should
enter into a framework agreement with its cash-pooling or treasury
centre. According to the legislative history, "only
short-term loans and exceptionally long-term loans" will be
eligible for netting. It is not clear what the legislature
meant by this wording.
Even though some questions remain unanswered (e.g. the
conditions to qualify as a short-term loan, the tax treatment of a
treasury centre's excess cash, etc.), the new rules will most
likely enter into effect on 1 July 2012. As a result,
treasury companies will have to amend their existing loan
agreements and draw up a framework agreement.
We will keep you informed of further developments once the final
text is adopted.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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