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ECJ decision stirs uncertainty over the NID

The European Court of Justice’s ruling in favor of Argenta Spaarbank has added more fuel to the fire surrounding the notional interest deduction (NID). 

On July 4, the European Court of Justice (ECJ) issued its ruling regarding the exclusion of foreign permanent establishment capital from the NID. Finding against Belgium, the Court ruled that firms can reclaim now up to five years of excess taxes paid on such capital. This judgement has reignited talks of abolishing the NID.

The ECJ ruled against Belgium in the recent Argenta Spaarbank case, stating that the Belgian NID regime is contrary to the freedom of establishment in European law. This principle forbids a country from penalizing firms that choose to invest in another EU Member State as opposed to staying in their home country.

The NID allows companies in Belgium to claim tax relief on a ‘theoretical’ interest charge on equity capital before calculating corporate tax. The court case revolved around Belgian firms with permanent establishments abroad and whether or not the equity attributable to these foreign establishments can be taken into account when calculating the NID.

Under the current NID regime, this foreign entity capital cannot be taken into account when calculating the deduction. According to the arguments put forward by the Belgian State, since the foreign capital cannot be taxed by Belgium (by virtue of double tax treaties), it cannot be used when calculating the equity of the Belgian office that the NID can be applied to. Hence, the Belgian firm Argenta Spaarbank could not take into account the equity capital of its Dutch permanent establishment in calculating the NID, but had the firm opened a second office in Belgium instead, they could have claimed the NID.

This was deemed illegal by the ECJ, which went a step further and gave its ruling a retroactive application, allowing firms to now claim back up to five years of excess taxes.

This ruling could encourage Belgian companies to open branches in low tax jurisdictions and use the foreign equity capital to reduce their tax base in Belgium. As a result, more capital would move abroad and Belgium would receive less tax revenue.

Understandably, this diminished source of revenue troubles Belgian policymakers, some of whom are advocating once again for scrapping the NID entirely.

AmCham Belgium’s position

In a country with high corporate tax rates and a very high cost of labor, the NID regime serves as a lifeline for all businesses in Belgium. AmCham Belgium insists that it remain in place until there is a more competitive corporate tax system, as argued in our 2013 Priorities for a Prosperous Belgium. AmCham Belgium’s Legal & Taxation Committee is currently working on an amendment to be put forward to the government later this month, which would bring the NID legislation in line with EU requirements and, at the same time, minimize the impact on the budget.