The Notional Interest Deduction - Still Under Scrutiny

Eager to cut the budget deficit, Belgium’s Prime Minister Elio Di Rupo has proposed several measures to curtail the notional interest deduction (NID). In addition, in its opinion of 26 January 2012, the European Commission urged Belgium to revise the manner in which the NID is calculated in order to prevent further violation of freedom of establishment (Articles 49 and 54 TFEU) and the free movement of capital (Article 63 TFEU). Will the NID weather the storm of European scrutiny?

Main issue: exclusion of equity allocated to foreign permanent establishments (PEs) and foreign real estate from the scope of the NID

On 26 January 2012, the European Commission officially asked Belgium to amend its legislation on the NID. The Commission is of the opinion that excluding the net equity allocated to the foreign PEs of Belgian companies from the basis on which the NID is calculated violates freedom of establishment (Arts. 49 and 54 TFEU) and that excluding the net equity allocated to foreign real estate violates the free movement of capital (Art. 63 TFEU). According to the Commission, these restrictions may dissuade Belgian companies from establishing a foreign PE or investing in real property abroad.

This discussion is not new. The Commission already issued a warning to this effect on 19 February 2009. Moreover, on 24 June 2011, the Antwerp Court of First Instance referred a request for a preliminary ruling to the Court of Justice of the European Union (CJEU) on the question of whether the NID is compatible with EU law.


The rules used to calculate the NID clearly distinguish between taxpayers that exercise their fundamental freedoms (by investing in a foreign PE or real property abroad) and those who choose not to do so. However, a difference in treatment will not be deemed to constitute a violation of EU law if it is justified.

In brief, the Belgian government could cite three main arguments justifying the current rules.

The first argument is that the NID is not discriminatory, as it is available to both resident corporate taxpayers and to Belgian PEs of non-resident corporate taxpayers. This is clearly irrelevant: the fact that a foreign taxpayer is treated the same as a resident taxpayer does not suffice to conclude that a given rule does not create a difference in treatment between taxpayers who exercise their freedoms and those who do not. The CJEU has noted on several occasions, including in the field of tax incentives, that there is no room for unwarranted protectionism in the Single Market.[i]

The second argument is that the current limitations on the NID are necessary in order to maintain a balanced allocation of taxation powers between the Member States. Indeed, a PE located in a country with which Belgium has concluded a tax treaty and which forms part of the equity of a Belgian company does not generate taxable profit in Belgium since the PE is taxable in the country in which it is established, pursuant to Article 7 of the OECD Model Convention. Consequently, the foreign PE's equity should be deducted from the NID calculation basis.[ii] On the other hand, if the PE is located in a country with which Belgium has not concluded a tax treaty, Belgium can tax the profits generated through the PE and will not deem it necessary to deduct the foreign PE's equity from the NID calculation basis. This second argument also makes little sense: the NID is a lump-sum deduction, a fictitious advantage, and there is no (direct) relationship between the amount that can be deducted and the taxpayer's (taxable) profit. Therefore, Belgium's ability to tax profits attributable to the foreign PE is irrelevant.

Thirdly and more generally, the government could argue that the exclusion of equity attributable to foreign PEs and real estate (from the NID calculation basis) is necessary in order to preserve the coherence of Belgium's tax system. Indeed, the NID was first introduced in order to make corporate taxation fully neutral for various types of financing (debt and equity), and since the cost of borrowed funds allocated to foreign PEs is not deductible in Belgium, pursuant to the OECD rules, it would not be logical to allow the deduction of equity costs. This is the strongest argument of the three, as it seems to support the initial aim of the NID. However, as mentioned above, in practice there is no (direct) link between the amount of the deduction and the company's (taxable) profit. Moreover, the CJEU is unlikely to find that the NID calculation method complies with Community law, as national measures must also be proportionate in order to pass muster. In the case at hand, that requirement is most probably not met: rather than excluding equity attributable to foreign PEs and real property from the scope of the NID, Belgium could instead choose to include this equity in the calculation basis for the NID. In this case, it would appear justified, pursuant to the OECD rules on the allocation of profit to PEs, to allocate, on a pro rata basis, the NID pertaining to equity invested in the foreign PE and real property to the taxpayer's foreign-source income, thereby reducing the exempt treaty-based foreign-source income by the same amount. The end result would be the same as under the current NID rules, but without hindering the exercise of fundamental freedoms.


The Commission's request comes as no surprise. The NID calculation rules do indeed violate Community law, as they render investments in foreign assets less attractive for Belgian taxpayers, without any justification for doing so and without respecting the proportionality principle. What does come as a surprise, however, is that this issue has received no attention whatsoever in the build-up to the formation of a new federal government and the ensuing budget discussions.[iii]


[i] See e.g. Jobra Vermögensverwaltungs-Gesellschaft mbH v Finanzamt Amstetten Melk Scheibbs, case C-330-07, OJ C 19 of 24 January 2009. In this case, the CJEU ruled that the Austrian rules that denied an investment-premium tax advantage to lessors of goods used by lessees in other EU Member States violated the freedom to provide services.

[ii] The same is true regarding the exclusion of foreign real estate, taking into account Article 6.1 of the OECD Model Convention

[iii] See our article in the December 2011 issue of BttP.