A new regime that limits certain interest deductions—known as the earnings stripping rules—has an effective date of 1 January 2019. However, Belgian entities have not had clarity as to how to apply the rules because of a lack of certain guidelines.
A draft law has been introduced in parliament to clarify: (1) when a taxpayer is considered to be part of a group; (2) the calculation of a taxpayer’s EBITDA (earnings before interest, tax, depreciation, and amortization); and (3) how the threshold of €3 million is to be divided among Belgian group members.
Also, executive measures (in principle by means of a Royal Decree) are to define more precisely under what modalities a grandfathered loan is excluded from the earnings stripping rules, and to identify when the costs and revenues that are to be considered are economically equivalent to interest cost and interest income.
Group of companies
To determine whether a company (or branch) belongs to a group of companies, the tax law refers to company law rules. However, this does not resolve issues of when or how long a company must have been part of the group, in order to apply the new earnings stripping rules. The draft law would specify that a company must have been part of the group during the entire calendar year preceding the assessment year (e.g., during calendar year 2019 for assessment year 2020).
The rules already provided for an ad hoc consolidation to calculate the EBITDA of the different Belgian group members. As such, transactions between Belgian group members must be eliminated for EBITDA purposes. This consolidation principle is further developed in the draft law—negative EBITDA of a Belgian group member would be allocated to the EBITDA of the other members. As a consequence, the total interest capacity for a group (based on the EBITDA calculation) could no longer exceed 30% of the consolidated EBITDA. On the other hand, if a Belgian group member has exceeding borrowing income (instead of exceeding borrowing costs), this income could be allocated to the other Belgian group members, thus increasing their interest deduction capacity.
Division of threshold of €3 million
The draft law would add clarity on how the threshold of €3 million would be divided among the entities of the Belgian group. As a default option, this threshold would be divided in proportion to the group members’ excess borrowing costs. Alternatively, the threshold could be divided equally among group members (for instance, a threshold of €1 million for each of three Belgian group members).
Modalities are foreseen for excluding interest on loans concluded before 17 June 2016. The taxpayer would add to the tax return an overview of the loans to which no fundamental change has been made since that date. This overview would also need to provide details on information about each loan (such as the parties to the loan, the interest rate, the loan’s duration, and the borrowed amount).
Costs and revenues to be considered as similar to interest
A Royal Decree would be expected to define types of costs (and revenues) that are economically equivalent to interest. This would include, among other items, depreciation of assets to the extent interest was included in the acquisition value and foreign exchange gains and losses in connection with the interest cost incurred or interest income received in execution of a loan agreement. Other costs or revenues could also be considered as equivalent to interest (through confirmation by the ruling commission provided the other contracting party accepts the qualification).
Read a November 2019 report prepared by the KPMG member firm in Belgium
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