For nearly 30 years, Belgium has been well known for its attractive tax rules for group finance companies, international headquarters and cash-pooling companies. In combination with other measures (such as a special tax status for expats), these rules have convinced many multinationals to move their headquarters (and associated highly skilled workforce) to Belgium. Earlier this year, the government proposed amending the thin cap rules. This article provides an overview the current and future legislation and the proposed changes to the latter.
Under Article 198(11) of the Income Tax Code, thin cap rules only apply (and consequently the deduction of interest payments is only disallowed) in a number of defined cases. Three cumulative conditions must be met:
(i) The (foreign) recipient of the interest should be either not subject to tax in Belgium or subject to (foreign) tax treatment that is significantly more favourable than would be the case in Belgium (in order to determine whether this rule applies, reference should be made to the administrative circular on the dividends received deduction or the Belgian and foreign tax treatment should be compared).
(ii) All types of interest are covered, except interest on publicly issued bonds or similar financial instruments.
(iii) The deduction of interest is disallowed for Belgian corporate tax purposes as soon as the total qualifying loans exceeds a 7-to-1 debt-equity ratio, i.e. seven times the amount of taxable reserves at the start of the tax period and the paid-up capital at the end of this period.
The Omnibus Act of 29 March 2012 (the "Act") introduces (in principle, as from 1 July 2012) totally new treatment for qualifying non-deductible interest payments. In brief, the most important changes are the following:
(i) The abovementioned 7-to-1 debt-equity ratio will no longer apply; instead, a 5-to-1 ratio will be introduced.
(ii) The Act provides for a new definition of qualifying interest on debt: (i) all intra-group loans are targeted (intra-group is defined in Article 11 of the Company Code) as well as (ii) all loans where the beneficial owner of the interest is not subject to income tax in Belgium or is subject to (foreign) tax treatment significantly more favourable than would be the case in Belgium.
(iii) Publicly issued bonds and similar financial instruments as well as loans extended by banks and financial institutions covered by Article 56(2)(2) of the Income Tax Code do not fall within the scope of application of the new rules. Moreover, loans to movable or immovable leasing companies or companies active in the field of public-private partnerships do not qualify as debt generating disallowed interest payments.
Criticism and proposed amendments
As the entry into force of these new rules would have adverse consequences for treasury and cash-pooling activity in Belgium, the government has proposed a number of measures to mitigate the undesired effects. In late May, the proposed amendments were published on the website of the House of Representatives. The legislative history to the draft Omnibus Act of June 2012 includes a series of calculations, showing the effect of the proposed amendments on the future legislation. In brief, the proposed amendments solve an important issue. In order not to discourage cash pooling and treasury activity in Belgium, it is proposed to take into account only the positive difference between intra-group interest paid and received.
In financial circles, this procedure is known as netting. In order to qualify for this measure, the group company should enter into a framework agreement with its cash-pooling or treasury centre. According to the legislative history, "only short-term loans and exceptionally long-term loans" will be eligible for netting. It is not clear what the legislature meant by this wording.
Even though some questions remain unanswered (e.g. the conditions to qualify as a short-term loan, the tax treatment of a treasury centre's excess cash, etc.), the new rules will most likely enter into effect on 1 July 2012. As a result, treasury companies will have to amend their existing loan agreements and draw up a framework agreement.
We will keep you informed of further developments once the final text is adopted.