WEB EXCLUSIVE
Belgium Introduces Tax Deduction for Risk Capital
Recent studies have shown that Belgium has become
one of the most profitable countries in the world
for U.S. companies to do business. U.S. tax magazines,
such as Tax Notes, have pointed out that in the period
from 1999 to 2002, the effective tax rate for U.S.
companies in Belgium decreased to 12% while U.S. profits
in Belgium increased by 84%.
Dedicated to reinforcing opportunities for local
and international investors, Belgium significantly
reduced its corporate tax rate in 2003, and has now
amended its tax law to provide Belgian companies and
Belgian branches of foreign companies a tax deduction
based on their equity as of January 1, 2006.
Under the so-called "notional interest deduction,"
a new and innovative measure in international tax
law, all companies subject to Belgian corporate tax
will be able to deduct from their taxable income an
amount equal to the interest they would have paid
on their capital in the case of long-term debt financing.
At the same time, the 0.5% registration duty on capital
contributions will be abolished.
The new rules are intended to ensure equal treatment
of loan and equity capital. They will have the following
positive effects:
The bill implementing the notional interest deduction
for companies was adopted by the Belgian Parliament
on 2 June 2, 2005, and was published in the Belgian
Official Gazette on June 30. The notional interest
deduction will enter into force from assessment year
2007 (for companies that keep their books on a calendar
year basis, from January 1, 2006). The equity capital
on December31, 2005 will, in principle, serve as the
basis for the calculation of the first deduction.
How Does It Work?
The calculation of the tax deduction will begin with
the "equity capital" as stated in the companyıs opening
balance sheet of the taxable period. Based on Belgian
accounting law, "equity capital" includes capital,
share premiums, revaluation gains, reserves, carry-forward
of profits or losses, and capital investment subsidies.
Increases or decreases of the capital during the taxable
period will be taken into account on a pro rata basis.
The equity capital will be adjusted by eliminating,
among others, the following items:
The notional interest rate will be set each year
and will follow the average annual 10-year government
bond rate. Currently, that rate is around 3.5%. The
law sets a maximum deviation of 1% from one year to
the next and a maximum percentage of 6.5%. The government
may change these percentages by Royal Decree. Small-
and medium-sized companies may in some cases apply
a 0.5% higher deduction rate.
To the extent that the interest deduction does not
have a direct tax effect (e.g. in loss situations),
the interest deduction can be carried forward for
the next seven years.
To benefit from the notional interest deduction,
the company will need to record an amount equal to
the deduction in a separate account on the liabilitiesı
side of the balance sheet and keep it there for a
period of three years following the taxable period
during which the deduction was claimed. The notional
interest deduction does not discriminate between companies
and complies fully with existing Belgian and EU law.
Discussions with EU authorities have taken place
and the measure is compatible with EU State Aid rules
and the Code of Conduct.
