To counter the undercapitalization of companies, Belgium introduced a thin cap scheme in the past.
This current scheme will soon be replaced by a new interest deduction limitation.
The current scheme: thin cap of 5:1 debt/equity ratio
In the current scheme, interest on loans paid to certain actual beneficiaries are not deductible as professional expenses if and to the extent that:
The total amount of the loans exceeds five times the sum of:
- the taxed reserves at the beginning of the taxable period and
- the paid-up capital at the end of the taxable period.
The total amount of the loans received is the debt balance on which the interest paid is calculated. The nature of the loan is not important. Both ordinary loans, current accounts, loans represented by securities, .... are covered by the scheme.
Only payments to certain beneficiaries are covered by the rules, in particular:
- Beneficiaries who are not subject to income tax or whose interest income is subject to a tax scheme that is considerably more favorable than the Belgian (= payments to tax havens) or
- Beneficiaries who are members of the same group as the debtor (= affiliated companies).
The new scheme as from January 1, 2019
For accounting years starting from January 1, 2019 (tax year 2020), the current thin cap scheme is largely replaced by a new interest deduction limitation, under the influence of the European ATAD directive (Anti Tax Avoidance Directive).
Based on this new deduction limitation, the net borrowing cost (= the so-called financing cost surplus being the positive difference between the total amount of interest charges and the total amount of interest income) is not deductible to the extend it exceeds:
- EUR 3 million and
- 30% of the taxable EBITDA of the taxpayer.
Any excess financing cost surplus that cannot be deducted can be carried forward to subsequent taxable periods.
If the company is affiliated with other companies on the basis of Article 11 of the Company Code, the de minimis rule and the taxable EBITDA must be determined on the basis of an ad hoc consolidation whereby the EUR 3 million threshold is proportionally spread over the Belgian group entities. A Royal Decree will need to provide further details about the modalities. In addition, a transfer of the non-deductible part of the financing cost surplus to other Belgian group entities is possible on the basis of a formal agreement.
The new deduction limitation applies in principle to all Belgian companies subject to corporate tax and to Belgian establishments of foreign companies subject to non-resident tax, with the exception of, among others, financial institutions, companies whose sole activity is the execution of projects of public -private cooperation (PPP) and “standalone” companies, i.e. companies that are not part of a group of companies, and satisfy certain other conditions.
As mentioned above, the new regulation applies from tax year 2020 (financial years starting from 1/1/2019).
However, the old thin-cap scheme continues to apply to:
- Interest paid to tax havens
- Interest on intercompany loans taken out before 17 June 2016 provided no fundamental changes have been made since that date. What is considered a fundamental change is not really clear yet.
This means that for loans received from 17 June 2016, the old thin-cap scheme will continue to apply for interest paid during the fiscal year 2018 and that the new rule will only enter into force from the financial year 2019.
The new interest deduction limitation is far more robust than the current thin cap rule and gives less room for manipulation.
However, the practical application is complex especially the ad hoc consolidation for groups and the calculation of the limitation amounts.