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Notional Interest Deduction

A big challenge – and great opportunity – for multinational companies today is effectively managing local and foreign taxes in a way that aligns with their overall business objectives and operations. On June 22, 2005, the Belgian parliament passed into law the notional interest deduction (NID) to replace the coordination center regime and counteract the country’s high nominal corporate tax rate. Applicable since the start of the tax year 2006 (assessment year 2007), the NID has transformed the Belgian taxation system and has helped to preserve the overall attractiveness of doing business in Belgium.

The Concept

The NID reduces tax discrimination between debt and equity financing by allowing companies to deduct a (notional) interest charge on their equity, in the same way that interest on loans is tax deductible. The amount that can be deducted from the taxable base equals the fictitious interest cost on the adjusted equity capital.

Notional interest deduction = notional interest rate x adjusted equity

In this way, the NID allows the actual deduction to be proportional to the equity invested in the Belgian company or branch office. By aligning the tax treatment of debt and equity financing, the NID enables companies to strengthen their capital structure with the extra benefit of tax deductible (notional) interest charges. The measure applies to all companies with a taxable presence in Belgium, whether local or foreign, and irrespective of their size, industry or activities (although the NID rate for small and medium-sized enterprises is 0.5% higher than the standard rate).

The Rate

The notional interest rate is calculated on the basis of the average rate of 10-year Belgian government bonds (OLO). In December 2011, the NID was reformed to limit the maximum rate to 3% for large enterprises and 3.5% for small and medium-sized enterprises (SMEs). These new maximum rates apply as of tax assessment year 2013 (book years ending on or after December 31, 2012). Following a further reform of the NID regime at the end of 2012, the NID rates for tax assessment year 2014 will likely be 2.74% (standard rate) and 3.24% (for SMEs).

Impact on Effective Tax Rates

The table below illustrates the impact the notional interest deduction can have on a company’s effective Belgian corporate tax rate (ETR).

Table 1: An example illustrating the effective tax rate (ERT) on a company in Belgium (1,000 business assets/1,000 q. equity), tax year 2012. Source: EY.
Return on equity ETR before NID ETR after NID
3.425% 33.99% 0%
4% 33.99% 4.9%
5% 33.99% 10.7%
6% 33.99% 14.6%
8% 33.99% 19.4%
10% 33.99% 22.3%
15% 33.99% 26.2%

The Benefits of the NID

Although it may seem counterintuitive for a system that reduces taxes for large multinationals, the NID is in fact one of Belgium’s main wealth-creation mechanisms. Despite reducing a company’s taxable base and generating a higher return after tax, the measure encourages more businesses to set up shop in Belgium. Since it is by definition more attractive for the most heavily capitalized companies, the NID often has a structural influence on the financial behavior of economic agents in Belgium. The introduction of the NID therefore reinforced Belgium’s attractiveness as a favorable location for treasury centers and for capital-intensive investments in general. Already in the first nine months of 2006, capital increases totalled €32.1 billion, a tenfold increase on the previous year’s €3.2 billion. According to Deloitte, based on these capital increases, the NID is expected to generate €256 million in revenue for the Belgian Government in 2013. Additionally, Paul Soete, CEO of Agoria, claims that the NID has created 4,000 jobs in the industrial and technology sectors as it relieves some of the fiscal pressure for companies.

Against the high cost of labor and otherwise high tax burden, the notional interest deduction is a key attraction for businesses in Belgium. In 2012, Belgian law firm Laga conducted a survey in which 80% of respondents indicated that the NID was important for their business. This underlines the fact that, in addition to enticing large multinationals with lots of capital, the NID also helps SMEs to increase their after-tax results and hence longer-term investments. In short, the NID offers an attractive national and international tax planning tool that does not discriminate between companies.

Unfortunately, since its inception, the NID has gradually become less attractive due to a variety of tweaks and cuts, as people were concerned about the size of Belgium’s ‘tax gift’ to multinationals. In 2009, a cap on the NID benefit and other restrictive administrative conditions were put in place to avoid perceived abuse of the system. Yet, despite these safeguards, the debate never seems to be settled, and the polemic around the NID, including proposals to further reform or even entirely scrap the system, continues to create uncertainty for businesses.

Argenta Spaarbank

Further uncertainty has been created by the Argenta Spaarbank court case. Argenta Spaarbank NV is a Belgian financial institution with a permanent establishment in the Netherlands. The company did not exclude the net assets of its Dutch branch from its NID basis in its Belgian corporate tax return as was required by law. The Belgian tax authorities therefore refused to grant the NID on the amount of net assets attributed to the foreign branch.

Litigation before the Court of First Instance of Antwerp ensued, resulting in a request for a preliminary ruling from the European Court of Justice (ECJ) on the conformity of the Belgian NID regime with the European freedom of establishment. More specifically, the request for preliminary ruling related to the exclusion of the net equity of permanent establishments located in other EU Member States from the NID basis. 

On July 4, 2013, the ECJ declared the obligation under Belgian law to deduct the net equity of branches established in other Member States in calculating the basis for the NID to be incompatible with the EU freedom of establishment. On the basis of this judgement, Belgian companies with branches in other EU Member States may claim reimbursement of taxes paid unduly as a result of the NID exclusion for net assets attributed to foreign permanent establishments, at least for the years up to 2012.

An elegant solution?

Following the ECJ’s ruling, AmCham Belgium’s Legal & Taxation Committee set to work on an amendment which would bring the NID legislation in line with EU requirements and, at the same time, minimize the impact on the budget. Minister of Finance Koen Geen’s team has, in the meantime, put together a proposal for amendment,  which would relocate the NID on the tax returns so that it will, going forward, be treated before (or above) any other allowable deductions. The income to which the NID is to be applied is then to be split out according to the source of revenue in question and allocated to a “basket” of revenue, either in Belgium, a tax treaty country and/or a non-tax treaty country.

“A loud and clear signal that the NID is here to stay would have been more than welcome.”

-Werner Heyvaert, Chair of AmCham Belgium's NID taskforce and Of Counsel, Jones Day BrusselsJones Day

The NID would then be applied to each revenue “basket”, linked to the income produced by the assets in that source of revenue, and the total amount of NID is then determined by aggregation.

Time to put the debate to rest

The Chamber hopes that this amendment to the NID will be the last in order to create a predictable fiscal environment for all companies in Belgium. Instead of criticizing companies for making use of the NID, the Belgian Government would be advised to work with these corporations to help them expand their operations in Belgium. The NID gives Belgium a competitive edge over neighboring countries, but if the debate continues, it is not overly difficult for companies to move big parts of their business to a more stable tax and regulatory environment. Indeed, Belgium has seen at least one high-profile company decamp in the past year because of the political instability surrounding the NID regime. Werner Heyvaert, Chair of AmCham Belgium’s NID task force and Of Counsel at Jones Day Brussels, says that “many in the business community regret that none of the political parties that adopted the NID in 2005 came forward when, in October 2012, ArcelorMittal relocated its intragroup treasury center from Brussels to Luxembourg. A loud and clear signal that the NID is here to stay would have been more than welcome.”

A reprieve?

The government of Charles Michel has agreed to focus on mutual trust between the tax authorities and the taxpayers, including corporations. According to PwC’s Tax Reform in Belgium 2014/2015, the NID regime will remain in place for now, although some changes affecting banks and institutional companies may be introduced.

AmCham Belgium recommendations:

  • Maintain the notional interest deduction
  • Create a predictable fiscal and regulatory environment
  • Work with corporations to expand their operations in Belgium

For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.