Draft bill amends interest limitation deduction and anti-hybrid rules

On 26 November the Government submitted to the Parliament a new bill of law containing further amendments and clarifications regarding the EBITDA-based interest limitation deduction rule (hereafter: EBITDA-regime) and the rules for neutralizing hybrid mismatches together with modifications to various other tax measures, such as minor changes to the tax credit for research and development in relation to tonnage tax and the innovation income deduction. The draft bill is expected to be approved by Parliament before year-end 2019.

The EBITDA-regime and the anti-hybrid rules were introduced by the Belgian legislator in December 2017 by transposing the EU Anti-Tax Avoidance Directive (ATAD 1 and 2) into Belgian domestic legislation. These rules entered into force as from 1 January 2019 (see previous tax alert). The EBITDA-regime was already subject to multiple legislative amendments before: the entry into force was brought forward to 2019 instead of 2020 (see previous tax alert) and more clarifications to the complex set of rules were provided (see previous tax alert). In September 2019, the Belgian tax authorities also published a circular letter clarifying the concept of grandfathered loans (see previous tax alert).

Apart from specific technical changes, the draft bill particularly includes significant amendments to the EBITDA-regime for groups with multiple Belgian taxpayers. First, the draft bill outlines the methodology for proportionally allocating the minimum threshold (deduction capacity) of 3 million EUR among the Belgian group entities. Note that the government allows taxpayers to opt out of the burdensome calculation of the taxable EBITDA when the exceeding borrowing cost is below 3 million EUR. Furthermore, the draft bill extends the scope of the consolidation mechanism included in the EBITDA-regime (previously referred to as ‘ad hoc consolidation’). As a result, the negative taxable EBITDA and negative exceeding borrowing cost should be taken into consideration as well, which may significantly (negatively or positively) change the interest deduction capacity within the Belgian group compared to the application of the currently existing law.

With respect to hybrid mismatches, the government brought some substantial amendments towards the definitions and rules as previously introduced. According to the Explanatory Memorandum, it allows a better transposition of the EU Directive. For situations giving rise to a double deduction outcome, the draft law is now explicitly including losses into the definition of hybrid mismatch, broadening its scope. A consistent use of the notion “expense” in those situations should make clear that expenses of any kind are being covered (such as depreciations, capital losses, impairments, etc.). A specific provision is also inserted in the amended definition clarifying that a double deduction or a deduction without inclusion may qualify as a hybrid mismatch even though it would take place in different taxable periods (in case of carry-back or carry forward of tax losses). Importantly, as regards the so-called “escape rule” in case of non-inclusion, the draft bill is deleting the requirement that the non-taxation should be the outcome of a tax regime deviating from the common law. The provision as previously introduced was not in accordance with ATAD 2, since, in case of a mismatch outcome not resulting from hybridity, a distinction was made as regards the applicable (exemption) regime.

Further amendments are made as regards the imported hybrid mismatch rule to avoid potential double taxation situations. A.o. there should be no imported hybrid mismatch in case of an equivalent adjustment made in any jurisdiction involved in the hybrid mismatch but also in any other jurisdiction which (indirectly) funds such hybrid mismatch . Moreover, the government also introduces new restrictions regarding the use of tax losses carried forward in case of a hybrid mismatch. Furthermore, as regards some specific anti-hybrid rules, some amendments are being made to align with the linking rules as provided for in the ATAD 2.

Others measures mainly contain technical improvements to the writing of existing provisions of the income tax code and modifications in the field of VAT and Customs.

EY closely follows up on those developments especially in relation to the complex tax provisions further to the transposition of the ATAD directives.