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Belgium: Earnings stripping rules, clarifying decree

Belgium: Earnings stripping rules, clarifying decree

A Royal Decree, published in the official gazette on 27 December 2019, implements the “earnings stripping rules”—that is, the rules that limit certain interest deductions pursuant to legislation enacted in late 2017.

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The Royal Decree clarifies certain aspects of the earnings stripping rules, but some issues remain unresolved. 

Earnings stripping rules

The new earnings stripping rules are effective as from assessment year 2020 (for tax periods beginning 1 January 2019 at the earliest).

The Royal Decree includes:

  • A specification of the costs and revenues that are to be considered to be economically equivalent to interest cost and interest income. This includes: (1) depreciation on assets to the extent interest was included in the acquisition value; and (2) 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 can also be considered to be equivalent to interest through confirmation by the ruling commission, as long as the other party to the contract accepts the qualification.
  • The modalities for excluding interest on loans concluded before 17 June 2016 (and on loans related to a project of public-private cooperation). In order to benefit from this exclusion, the taxpayer must provide with the tax return an “overview” of those loans to which no fundamental change has been made since that date. This taxpayer-provided overview also needs to contain more details on the modalities of each loan (such as the parties, interest rate, duration, borrowed amount).
  • More details on the ad hoc consolidation that needs to be performed to arrive at the qualifying stand-alone earnings before interest, tax, depreciation and amortization (EBITDA) of the different Belgian group members. As such, transactions between Belgian group members must be eliminated in order to arrive at a stand-alone EBITDA, and the negative EBITDA of a Belgian group member must be allocated to the EBITDA of the other members, so that the overall stand-alone EBITDAs for purposes of the interest deduction limitation rules are reduced. Group members can conclude an agreement to collectively forsake the calculation of EBITDA, resulting in a deemed EBITDA of zero (€0) for each group member.
  • Rules on how the threshold of €3 million must be split among the entities of the Belgian group. As a default option, this threshold is to be divided in proportion to the excess borrowing costs. Alternatively, the threshold can be divided equally among group members (e.g., if there are three Belgian group members, then a threshold of €1 million for each of three group members).
  • Formalities regarding the exemption of the excess borrowing costs that were disallowed in a previous tax period and regarding the interest deduction agreement.

KPMG observation

The Royal Decree does not foresee:

  • How exactly membership of a taxpayer in a group of companies must be determined (there is no definition of the tax period during which the taxpayer must be or must remain part of the group).
  • Whether negative exceeding borrowing costs (thus, positive financial results) can be allocated to other group entities.
  • How the calculation of the qualifying stand-alone EBITDA is to be documented. The obligation to add the ad hoc consolidated calculation of EBITDA to the tax return, as stipulated in a previous law proposal, has been dropped.

The Royal Decree brings some (but not all) much needed clarification to the application of the earnings stripping rules. The new rules add administrative burdens for Belgian groups.

In conclusion, the earnings stripping rules require a mind-shift for Belgian groups, as it is no longer possible to calculate a taxpayer’s interest deduction capacity on a stand-alone basis without first undertaking a consolidated approach.
 

Read a January 2020 report prepared by the KPMG member firm in Belgium

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