NOTIONAL INTEREST A SUCCESS

On 30 December 2005, the Bill of 23 December 2005 was published in the Belgian Official Gazette containing amongst other measures a simplification of the notional interest deduction rules.

Purpose of the notional interest deduction rules

The overall purpose is to ensure equal tax treatment of debt-financing versus equity-financing and, even though all Belgian companies can benefit from this regime, provides for a solution for the so-called Belgian BCC companies ("coordination centres"), for which the existing tax advantages will cease in the near future.

At the same time, registration duties on capital contributions at a rate of 0.5%, will be abolished as of 1 January 2006. It goes without saying that these changes should prompt groups with Belgian subsidiaries to reconsider existing (group) financial structures, given the significant tax-saving potential it portends.

Key features of the new rules

Companies liable to the standard Belgian corporate tax regime (and Belgian branches of foreign companies provided they keep accounting records in accordance with Belgian law) can claim a tax-deduction for their cost of capital by off-setting their taxable basis with a notional interest at a rate calculated on the aggregate amount of their equity including retained earnings. This accounting net equity has to be reduced, a.o., with the fiscal value of participations in subsidiaries.

The notional interest rate is to be determined each year by making reference to the average interest rate on 10-year Belgian government bonds of the prior year (currently 3,5%), but capped at 6,5%. Small and medium-sized enterprises are allowed, under certain conditions, to raise the reference rate by 0,5%.

In case of insufficient tax capacity in the year the deduction is claimed (eg. in loss situations), the non-utilized part of the notional interest deduction can be carried forward for maximum seven years.

A royal decree of 17 September 2005 (published in the Belgian Official Gazette of 3 October 2005) provided additional guidelines regarding the application of these new rules (a.o., how these rules need to be applied in case of a first financial year, etc.).

How does it work ?

Example :

 

Current situation

Example 1

Example 2

Example 3

Equity

2 000

2 000

4 000

10 000

Rate NID

3,44%

3,44%

3,44%

3,44%

Profit before taxes

500

500

500

500

NID

-

-68,80

-137,60

-344

Taxable base

500

431,20

362,40

156

Corporate income tax (33,99%)

169,95

145,56

123,18

53,02

Effective tax rate

33,99%

29,31%

24,63%

10,60%