In Belgian acquisition structures, the application of the 30% EBITDA interest limitation creates significant uncertainty. Although the law permits the transfer of excess interest deduction capacity within Belgian groups even in excess of the transferring entity’s own capacity, the tax authorities have adopted a restrictive interpretation which is particularly negative for Finco’s. Recent case law is in favour of the taxpayer, but it is uncertain how the tax authorities will react.
Under the 30% EBITDA interest limitation rule, a taxpayer may deduct its exceeding borrowing costs (EBC) only up to 30% of its fiscal EBITDA or, alternatively, up to a EUR 3 million de minimis threshold (to be determined at Belgian group level). EBC are defined as the positive difference between the interest (and equivalent) expenses and the interest (and equivalent) income of the entity. Expenses and income arising from Belgian intragroup transactions are excluded from the calculation of the EBC.
This determination of EBC is particularly annoying for acquisition structures where a Finco obtains external funding and subsequently on-lends the proceeds to Belgian companies (e.g. to finance the acquisition and to refinance existing debt) with a mark-up. Because the interest income received from its Belgian group entities is excluded, the Finco is deemed to incur a fictitious EBC. This position may result in a tax cashout in case its 30% EBITDA threshold (or its portion of the EUR 3 million de minimis amount) is exceeded. However, Belgian tax law explicitly permits the transfer of interest deduction capacity between Belgian group entities, even in excess of the transferring entity’s own capacity. Therefore, the Belgian group entities can transfer interest deduction capacity to the Finco, neutralizing Finco’s unintended EBC.
However, the tax authorities reject transfers of interest deduction capacity to the extent that they exceed the transferring entity’s own capacity. This position is based on an answer of the Minister of Finance to a parliamentary question and is included in an administrative circular letter and reflected in form 275CDI, which must be filed when transferring interest deduction capacity.
Recently, the Bruges court of first instance has issued a favourable judgment confirming that the transfer of interest deduction capacity may exceed the transferring entity’s own capacity. The court confirmed that the law is clear and consistent with parliamentary works. In addition, the objective of the interest limitation rule is not breached as Finco does not erode its taxable basis through excessive interest payments. It is not yet clear whether the tax authorities will appeal against the court decision.
While the positive judgment is welcomed by tax practitioners, it does not eliminate the uncertainty caused by the circular letter. Therefore, even if the tax authorities would not appeal, it remains essential for companies involved in acquisition structures with a Finco to carefully assess their position when applying the 30% EBITDA rule until the circular letter has been withdrawn and form 275CDI has been amended.
