As part of the reforms to corporation tax in late 2017, a new interest deduction restriction was also introduced. This is part of the second phase of the reform, meaning that it applies in principle to financial years starting on or after 1 January 2019 (assessment year 2020). The new interest deduction restriction was introduced in the transposition of the European Anti-Tax Avoidance Directive (ATAD 1). The ATAD in turn constitutes the binding directive in the application of Action Point 4 of the OECD Plan against Base Erosion and Profit Shifting (BEPS).
The aim of the new interest deduction restriction is to counter the erosion of the taxable base through interest deductions. However, in Belgium this restriction (partly) replaces the existing interest deduction restriction regime, meaning that in certain cases the new rules will be more advantageous than the existing ones.
Existing interest deduction restriction according to balance sheet test
Under the existing undercapitalisation measure, the deduction of interest paid on loans is limited to a certain amount of those loans. This amount does not exceed five 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. The loans that need to be assessed against these limits concern, firstly, loans from associated companies and, secondly, loans granted by lenders from so-called tax havens. Loans from banks will therefore not be targeted in principle.
New interest deduction restriction according to EBITDA
Under the recently introduced interest deduction restriction, the deductibility of the total net interest will be restricted, the so-called financing cost surplus. This financing cost surplus is calculated by taking the positive difference between financing costs and financing income. It is important to bear in mind that with this new measure, interest paid to credit institutions is also subject to restriction (whereas previously only intra-group interest and interest paid to tax havens were targeted). However, domestic intra-group interest is excluded from the calculation of the financing cost surplus.
The financing cost surplus is no longer accepted as a professional expense for the amount exceeding 30% of the taxpayer's fiscal EBITDA. Since EBITDA in company reporting is calculated in various ways, the legislator has incorporated the way in which fiscal EBITDA must be calculated into the law. There is also a lower limit of €3,000,000 (for your information: in the Netherlands, the lower limit is only €1,000,000). A financing cost surplus which falls below this de minimis limit will therefore not be subject to a restriction. It has also been decided to exclude standalone companies from the scope of the restriction. As such, many SMEs will be excluded from the scope of the deduction limitation thanks to this de minimis rule.
The financing cost surplus that is not deductible in a given tax year may be carried forward to subsequent years.
For a more detailed discussion of the new rules, we refer to an article that previously appeared on our website on 28 November 2017.
The interaction between the old and new rules
As mentioned above, the new rules supplement our Belgian tax system. The entry into force of the new interest deduction restriction does not mean that the existing undercapitalisation measures will disappear. In calculating the financing cost surplus outlined above, it is therefore necessary to determine which loans (and thus interest) fall under the new interest deduction restriction, and which fall under the old one.
The existing undercapitalisation measures continue to apply to interest paid to tax havens, regardless of whether this interest is also affected by the new interest deduction restriction. Even if the loan was taken out with an associated company in a tax haven, the old undercapitalisation measure will remain in force. For the other intra-group loans, the date of the loan agreement will be taken into account (from assessment year 2020).
'Old loans' are loans that were taken out before 17 June 2016. These remain subject to the old interest deduction restriction, and are excluded from the new interest deduction restriction. This means that loans between intra-group companies concluded before 17 June 2016 will still be assessed against the undercapitalisation limit. For the part of the loan exceeding this limit, the interest will be rejected as a professional expense.
'New loans' are loans that were taken out from 17 June 2016. In principle, these fall under the new interest deduction restriction. However, as mentioned above, new loans still fall under the former undercapitalisation regime if they were entered into with parties established in tax havens.
Old or new loan?
In order to qualify as an 'old loan', it is also required that no fundamental amendment to the loan agreement has been made since 17 June 2016. Conversely, the renewal of an existing loan will only be considered as a new loan if it does undergo a fundamental amendment.
Whereas the European directive refers only to 'amendments', the Belgian transposition refers to 'fundamental amendments’. An important distinction. We can see from the parliamentary preparations that 'fundamental amendments' was chosen in order to bring the legislation into line with the European directive, but at the same time not to lose sight of the reasonableness and practical interpretation of the directive. 'Fundamental amendments' means, among other things, an adjustment of the interest rate, the parties or the term of the loan. Minor adjustments, such as the account number to which the annuities are paid, do not have to be qualified as fundamental amendments. Moreover, the Minister decided that a refinancing of a loan is considered a fundamental amendment.
The question of whether or not amendments are sufficiently fundamental for an 'old loan' to be re-qualified as a 'new loan' may therefore be the subject of discussion, since in many cases a conflict of interest may arise between the taxpayer and the administration. For taxpayers, it may be important to keep a loan from a financial institution outside the scope of the new interest deduction restriction, given that the deduction was not restricted by the old rules. When an 'amendment' is made to such a loan that was concluded before 17 June 2016, the question whether this amendment is 'fundamental' is ripe for discussion. But the tax authorities may also benefit from not considering an amendment as fundamental if an 'old loan' could be restricted via the 5/1 test, but as a 'new loan' would not be subject to any restriction, for example, by the de minimis limit.
Although the new interest deduction restriction may mean a tightening-up for large multinationals, it will de facto be more of an easing-up for most small and medium-sized enterprises. The new measure will have little impact on the latter, due to the de minimis threshold of €3,000,000. It will be important to examine whether loans will indeed fall under the new regime. Old loans (concluded before 17 June 2016) that did not undergo any fundamental amendment remain subject to the old regime. Conversely, it may be envisaged (sufficiently) renewing or refinancing existing loans in order to rule out the old regime.