2011 emea regional conference dubai, united arab emirates thin capitalization in belgium jean-marie...
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2011 EMEA Regional ConferenceDubai, United Arab Emirates
Thin Capitalization in Belgium
Jean-Marie Leclercq
Belgium: General background
- Belgium is strategically located at the heart of Europe :
London, Paris, Amsterdam and Frankfurt all lie within 300 km (by train 1h51',
1h22', 2h39' and 3h45' respectively) while some of Europe's key business
hubs including Lisbon, Rome, Madrid, Stockholm, Athens, Warsaw, Berlin
and Dublin are only a 2h flight away.
- Belgium enjoys a pivotal position in public organization :
The European Union, NATO and some 1,400 international non-governmental
organisations are also headquartered here.
- Belgium tax system in a nutshell :
Corporate tax rate of 33.99%
Reduced progressive tax rates for small and medium sized companies
Corporate income tax on their worldwide income (more than 90 DTT)
Taxable result = net accounting result
increased/decreased by tax corrections
Belgium: Thin Capitalization
INTRODUCTION
No real specific ‘thin capitalization rule per se in Belgium
Belgium refers to net equity
Only 2 anti-avoidance rules:1:1 debt/equity ratio7:1 debt/equity ratio
But… Advantages granted through notional interest deduction (NID) rules
1:1 debt/equity ratio - Art 18 ITC
Application: on loans granted by:
- individuals directors,
- shareholders &
- non-EU corporate directors
Measure:Interest of said loans exceeding the ratio = dividends
Consequence:Non-deductibility (taxed @ 34%) & Withholding tax
+spouse and children
7:1 debt/equity ratio - Art 198 11° ITC
Application: on loans granted by creditors:
- resident or non resident,
- exempt or taxed at a reduced rate
Measure:Interest of said loans exceeding the ratio = non deductible
Consequence:Non-deductibility (taxed @ 34%)
Belgium: Advantages of NID
Notional interest deduction
Off balance deduction from taxable income equal to a percentage of the net equity in the BE GAAP accounts, corrected for tax purposes
Purposes:reinforce equity position and improve solvencyattract large industrial groups in Belgiumpreserve fiscal competitiveness (EU average Effective Tax Rate)
Notional interest deduction
Who is concerned?
Companies subjected to
• Corporate tax • Non-residents / Corporate Tax
Notional interest deduction
How does it work ?
Annual Tax Deduction=
EQUITY X RATE (3,425% for 2011)
Notional interest deduction
Which equity?
Net equity for accounting purposes (end of the previous year)
Some elements to be deducted f.i.Own sharesShares booked as financial fixed assetsAssets held as investment not generating recurring incomeReal property used by a director or his spouse / childrenCapital subsidies
Notional interest deduction
Which rate?
Rate = interest on 10 years bonds (“OLO”) issued by the Belgian State
Income year 2010 = 3,800%Income year 2011 = 3,425%
Increased for Small companies = 0,5%
Notional interest deduction
P&L Account Before N.I.D. After N.I.D
Profit before tax 400 400
N.I.D. (3,425%) / - 342,5
Taxable 400 57,5
Corporate Tax (33,99 %) 135,96 19,5
Effective Tax Rate 33,99 % 4,89%
Assets Liabilities
Various Assets
10,000
Net Equity (Share Capital 9.000 + Reserves 1.000)
10.000
NID rate = 3.425%
Notional interest deduction NID rate = 3.425%
Notional interest for international tax planning (1/2)
Foreign Co needs a capital increase of 10.000
Solution?Step 1: capitalization of BelCo (+10.000)Step 2: BelCo grants a loan to foreign Co @ 5%
Advantage of NID?Taxable Income BelCo = 500,00Notional Interest deduction (3,425%) = (342,50)Taxable Income = 157,50
Notional interest deduction NID rate = 3.425%
Notional interest for international tax planning (2/2)
Points of attentionInterest paid by Foreign Co deductible?In its country?
or thin cap’ issue?
Conclusion
Belgium has no real thin capitalization rules but
Belgium has 2 anti-avoidance rulesBelgium does not refrain thin Cap’ but Belgium promotes local and international plannification via “high”
capitalization (generated by the Notional interest deduction)
