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15 November 2017 / article

Tax reform: new rules against tax avoidance practices

The interest limitation rule and the “Controlled Foreign Company” rule are taken up in the new tax reform.

The Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices (ATAD) contains two measures of importance for the sector:

  • the interest limitation rule (art. 4 ATAD)
  • the “Controlled Foreign Company” (CFC) rule (art. 7 and 8 ATAD)

Interest deductibility limitation rule

In accordance with the ATAD, exceeding borrowing costs will be tax deductible up to 30% of the company’s adjusted EBITDA as from tax year 2021 (taxable periods starting on or after 1/1/2020).

Definitions

“Borrowing cost” is largely defined in the ATAD and includes interest payment and finance cost element under a financial lease, but also payments under hedging, FX gains and loss under borrowings, guarantee fees, arrangement fees… In Belgium, the existing definition of interest shall be supplemented by a Royal Decree in order to capture those costs that are economically similar to interest. Only the “exceeding borrowing cost” shall subject to this limitation, and corresponds with the (theoretically) deductible borrowing costs that exceeds the taxable interest revenue.

EBITDA is defined as the result of the taxable period

  • increased by the depreciation, write-off and exceeding borrowing costs that are tax deductible; and
  • decreased by the tax-exempt revenue (e.g. dividends received, benefits exempt by virtue of a tax treaty) and the revenue realised through the execution of a public-private partnership where the operator, the interest costs, the assets and the revenue are all located in the EU.

Excluded loans and taxpayers

Are excluded from the scope of application of this new interest deductibility limitation:

  • the loans concluded before 17 June 2016 and for which the taxpayer demonstrates that no fundamental modification has been made since that date;
  • the loans concluded to fund public-private partnerships (granted further to a public procurement procedure) when the operator, the interest costs, the assets and the revenue are all located in the EU.

The following taxpayers (as further defined by the applicable regulatory legislation) shall also not be subject to this limitation:

  • the credit institutions and investment firms;
  • the AIFs and the managers of an AIF;
  • the UCITS and the management company of UCITS;
  • the insurance undertakings and the reinsurance undertakings;
  • the institutions for occupational retirement;
  • the pension institutions operating pension schemes which are considered to be social security schemes, as well as any legal entity set up for the purpose of investment of such schemes;
  • the central counterparties;
  • the central securities depositories;
  • the companies whose exclusive activity consists in the realisation of a public-private partnership granted further to a public procurement procedure; and
  • the standalone entities, i.e. taxpayers that are not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment.

Interest deductibility limitation and carry-forward

The exceeding borrowing cost shall be deductible, provided that all other standard deductibility requirements are met, up to the highest of 3,000,000 EUR or 30% of the borrower’s EBITDA. The non-deductible interest may be carried-forward for an unlimited period of time and can therefore be used to compensate future profits, still within the aforementioned limit.

Group provisions

Specific provisions, which shall be supplemented by a Royal Decree, shall apply to Belgian companies and establishments that a part of a group of companies in order to calculate:

  • their exceeding borrowing cost: interest paid between Belgian taxpayers should be excluded from the calculation;
  • their EBITDA: payments made between Belgian taxpayers should be neutralised;
  • the de minimis of 3,000,000 EUR, which should be spread between the Belgian taxpayers.

CFC rule

In implementation of one of the options provided by the ATAD, the tax law shall provide, as from tax year 2021 (taxable periods starting on or after 1/1/2020) for a CFC rule for all income of a foreign company in case of non-genuine arrangement. In a nutshell, the income generated in a foreign subsidiary through a non-genuine arrangement and not yet distributed shall be attributed – and thus added to the taxable base – of the Belgian taxpayer. When distributed, this income will benefit from the participation exemption in order to avoid a double taxation.

To qualify as a CFC, the foreign company must meet the following cumulative criteria:

  • the Belgian taxpayer must own either
    - directly or indirectly the majority of the voting right of the foreign company, or
    - directly or indirectly a participation of at least 50% in the capital of the foreign company, or
    - a right to at least 50% of the benefits of the foreign company; and
  • the foreign company either
    - is not subject to an income tax in its state of residence; or
    - is subject to an income tax of less than 12.50% on its taxable income, determined in accordance with the Belgian rules applicable to that type of income.

One can speak about a non-genuine arrangement when the foreign company concerned would not have owned the assets generating full or part of its profits nor would have borne the risks related to those assets if it would not have been controlled by the Belgian taxpayer.



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