What is the existing regulation?
Until now, loans from affiliated companies and loans granted by lenders in tax havens were invariably subject to the thin-cap restriction. If the limitation amount was exceeded, the interest paid was non-deductible. This was specifically the case if the total loan amount was higher than 5 times the sum of the taxed reserves at the start of the financial year and the paid-up capital at the end of the financial year.
What are the implications of the new ATAD interest deduction limitation?
Belgium has introduced a new deduction limitation for financing costs, in response to the European Anti-Tax Avoidance Directive
(ATAD). The measure factors in the net interest costs and the equivalent economic costs and revenues (the so-called ‘financing costs surplus’). In contrast to the thin-cap regulation, the interest paid to banks is also included in the calculation.
The financing costs are subsequently assessed against the higher of the following two limitation amounts:
- +Either 30%of the fiscal EBITDA;
- + Or 3 million euros.
Thus, if the net interest costs are less than 3 million euros, this interest is fully tax deductible. The loan must, of course, still be of a professional nature and a market conform interest rate must apply.
What about the non-deductible portion?
The non-deductible portion of the financing cost surplus can be carried forward to the succeeding years. In addition, it is also possible to transfer the unused deduction capacity to another affiliate company by means of an agreement.
To which loans does this apply?
Interest paid to tax havens continues to be subject to the thin-cap restriction.
With respect to loans between affiliated companies, the loan agreement date must be reviewed. If the loan contract was concluded prior to 17 June 2016, then everything remains the same and the thin-cap 5/1 ratio must still be applied. If fundamental changes have been made to this loan contract since 17 June 2016, then the loan is subject to the ATAD interest deduction limitation. The deduction capacity of the interest that you have paid to your affiliated company may increase as a result. In its circular of 11 September 2019, the Administration provides the following examples of fundamental changes:
The refinancing of an existing loan;
- + A change in the duration, interest rate or interest calculation, which was not contractually provided for prior to 17 June 2016;
- +A change in the loan amount;
- + A change pertaining to the original parties involved
Would you like to know the precise impact of this new regulation on your group loans? Then please contact one of our specialists via email@example.com.
We base our advice on current legislation, interpretations and legal doctrine. This does not prevent the administration from being able to challenge it or to change existing interpretations.