Thin cap: bill on netting for treasury centers

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The government drafted a bill with some modifications to the new 5:1 thin cap rule. Besides reordering the text of article 198, 11° ITC in order to improve its reading, the draft bill is mainly aimed at enabling the functioning of treasury centers in Belgium. These changes will enter into application on a date to be set by royal decree and on 1 July 2012 at the latest. You can find a coordinated version of article 198 ITC including the proposed amendments in the attached document.

Thin cap under the Program Law of 29 March 2012
The scope of the 7:1 thin cap rule in article 198, 11° ITC was recently extended by the Program Law of 29 March 2012, which introduces a 5:1 debt/equity ratio, applicable both to intra-group interest payments and to interest payments to persons who are not subject to income tax or are subject to a far more beneficial tax treatment on the interest income (click here for prior coverage).
The debt component in this ratio includes all loans, with the exclusion of publicly issued bonds, other publicly issued borrowing instruments and loans granted by financial institutions.
An exception was foreseen for loans contracted by leasing companies and factoring companies in the framework of those specific activities and to loans contracted by companies primarily active in the field of public-private cooperation.
No such exception was provided for group treasury centers as a result of which these companies would be heavily impacted by the new thin cap provision. In a reaction to the subsequent lobbying, the date of entry into application of the measure was shifted back in order to allow the Finance Minister to examine the impact on financing activities in Belgium. This resulted in a draft bill with the proposed modifications set out below.

Proposed modifications
Netting for treasury centers
A netting regime will be introduced for the application of the thin cap rule to treasury centers.
This netting regime will only apply to financing operations in the framework of a centralized treasury framework agreement. This agreement must deal with:

  • the finance model and the activities in the framework of the centralized treasury management;
  • the treasury-related tasks;
  • the manner in which claims and debts are netted;
  • the modalities for the intervention of the treasury company;
  • the modalities for the repayment.
The treasury center must be able to prove that the interest paid or received falls within the scope of the framework agreement and results from this framework agreement. This can only be the case for day-to-day treasury operations, for short-term treasury management and exceptionally for long-term treasury management. For other treasury operations, the normal thin cap rule applies (without netting).

According to the bill, the thin cap rule only takes into account the positive difference between the below items as interest paid or granted by the treasury center:

  • the interest paid or granted by the treasury center to other group companies in the framework of a centralized treasury framework agreement and
  • the interest received from group companies in the framework of such an agreement, excluding interest received from:
    • factoring companies under financial supervision, established in Belgium or in the European Economic Area,
    • leasing companies under financial supervision, established in Belgium or in the European Economic Area,
    • companies with main activity in public private cooperation, established in Belgium or in the European Economic Area,
    • financial institutions, and
    • group companies established in tax havens (Member States of the European Economic Area are deemed not to be tax havens).


Fixed assets1,250,000Capital1,000,000
Claims (long term)1,000,000Retained earnings250,000
Claims (short term)10,000,000Debt11,000,000
Connected companies7,000,000Connected companies8,000,000
Other than banks6,000,000
Tax havens400,000
Associated companies3,000,000Associated companies2,000,000

Financial expensesFinancial revenue
Connected companies400,000Connected companies (other than banks)300,000
Connected companies (banks)30,000
Connected companies (tax havens)20,000
Associated companies100,000Associated companies100,000

In the above example, the equity amounts to EUR 1,250,000 (capital + retained earnings), whereas the loans targeted by the thin cap provision amount to EUR 8,000,000.
The thin cap threshold is exceeded: EUR 8,000,000 debt vs. EUR 6,250,000 equity (5 times EUR 1,250,000).
In the thin cap regime under the Program Law of 29 March 2012, EUR 87,500 would not have been deductible, i.e. EUR 400,000 x (8,000,000 – EUR 6,250,000/EUR 8,000,000).
Under the proposed new regime, only EUR 21,875 will not be deductible, i.e. (EUR 400,000 – EUR 300,000) x (8,000,000 – EUR 6,250,000/EUR 8,000,000). This is the result of the netting between the interest paid to connected companies and the interest received from connected companies (other than banks and tax haven companies).

Other changes
The wording of the provision excluding certain loans of factoring companies, leasing companies and companies primarily active in the field of public private cooperation, as inserted by the Program Law of 29 March 2012, is too broad. The text will be amended to clarify that this exclusion does not apply to interest paid to companies established in tax havens, but only to interest paid to group companies.

The introduction of a netting regime for treasury centers is a well-received amendment, preserving the current level of attractiveness of Belgium as a location for financing activities.
If this bill becomes law, treasury centers will need to be able to provide the tax authorities with a centralized treasury framework agreement and to document which loans fall within the scope of this agreement. EY Tax Consultants can provide assistance to companies in meeting these obligations.