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Law Introducing a Tax Deduction for Risk
Capital
(Notional Interest Deduction)
Belgium - July 2005
Embassy
of Belgium - Washington D.C.
Context
Recent studies have shown that Belgium has become one of the most profitable countries for US companies to do business in the world. US tax magazines (like Tax Notes) pointed out that, in the period from 1999 to 2002, the effective tax rate for US companies in Belgium decreased to 12%, while US profits in Belgium increased by 84%.
Dedicated to reinforce opportunities for local and international investors, Belgium significantly reduced its corporate tax rate in 2003, and has now amended its tax law to provide Belgian companies and Belgian branches of foreign companies a tax deduction based on their equity as of January 1, 2006.
What is it?
Under the so-called 'notional interest deduction', a new and innovative measure in international tax law, all companies subject to Belgian corporate tax will be able to deduct from their taxable income an amount equal to the interest they would have paid on their capital in the case of long-term debt financing.
At the same time, the 0.5% registration duty on capital contributions will be abolished.
Objectives
The new rules are intended to ensure equal treatment of loan and equity capital. They will have the following positive effects:
1. A general reduction of the effective corporate tax rate for all companies, and a higher after-tax return on investment.
2. Encouragement of capital intensive investments in Belgium, and an incentive for multinationals to examine the possibility of allocating such activities as intra-group financing, central procurement and factoring, to a Belgian group entity.
3. Continuing opportunities for tax-efficient, equity-funded, inter-company financing from Belgian companies, such as the Belgian Coordination Centers (BCC) already present in the country.
Timing
The bill implementing the notional interest deduction for companies was adopted by the Belgian Parliament on 2 June 2005, and was published in the Belgian Official Gazette on June 30th.
The notional interest deduction will enter into force as from assessment year 2007 (this means, for companies that keep their books on a calendar year basis, as from 1 January 2006). The equity capital on 31 December 2005 will, in principle, serve as the basis for the calculation of the first deduction.
How Does It Work?
· The calculation of the tax deduction will begin with the 'equity capital'
as stated in the company's opening balance sheet of the taxable period.
· Based on Belgian accounting law, 'equity capital' includes capital, share
premiums, revaluation gains, reserves, carry-forward of profits or losses and
capital investment subsidies.
· Increases or decreases of the capital during the taxable period will be taken
into account on a pro rata basis.
· The equity capital will be adjusted by eliminating, among others, the
following items:
-The net book value of the shares the company holds in its own share capital;
-Shareholdings recorded as financial fixed assets;
-The net book value of real estate (or entitlements in real estate), or assets
of permanent establishments, income of which would be tax-exempt in Belgium
based on double taxation treaties;
-Capital grants (subsidies)
2. The notional interest rate will be set each year and will follow
the average annual 10-year government bond rate. Currently, that rate is around
3.5%.
The law sets a maximum deviation of 1% from one year to the next and a maximum
percentage of 6.5%. The government may change these percentages by Royal Decree.
3. Small- and medium-sized companies may in some cases apply a 0.5% higher deduction rate.
4. To the extent that the interest deduction does not have a direct tax effect (e.g. in loss situations), the interest deduction can be carried forward for the next seven years.
5. To benefit from the notional interest deduction, the company will need to record an amount equal to the deduction in a separate account on the liabilities' side of the balance sheet and keep it there for a period of three years following the taxable period during which the deduction was claimed.
Legal Certainty for Investors
The notional interest deduction does not discriminate between companies and complies fully with existing Belgian and EU law.Discussions with EU authorities have taken place and the measure is compatible with EU State Aid rules and the Code of Conduct.
The data in this notice are given for information purposes only and do not legally engage the Belgian Government or its representatives
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