Tax Alert

New interest limitation rule

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EY Belgium Tax
17 Sep 2019
Subject Tax alert
Categories Corporate tax
Jurisdictions Belgium

The first EU Anti-Tax Avoidance Directive (ATAD 1) provides for new interest deduction limitation rule which has been transposed at the end of 2017 as part of the Belgian corporate income tax reform. Pursuant to this interest deduction limitation rule, the deduction of net interest charges is limited to the higher of (i) 3.000.000 EUR, and (ii) 30% of the taxable EBITDA. The entry into force of the limitation rule was initially scheduled for 2020, but was brought forward to 2019 (financial years starting on or after 1 January 2019) last year in order to fully comply with ATAD 1 and to avoid potential action from the EU Commission.

The new rules provide for a grandfathering of loans concluded before 17 June 2016 which have not been fundamentally modified after the grandfather date. These grandfathered loans remain subject to the 5/1 thin capitalization rules (if applicable). The new Circular letter clarifies the notion “fundamentally modified”. Depending on the particular situation, a modification of the contracting parties, the interest rate, term of the loan or principal amount loaned, qualifies as a fundamental modification. Refinancing an existing loan will likewise be considered as a fundamental modification. More generally, any kind of debt renewal (novation) in the meaning of art. 1271 of the Civil Code or of a similar foreign provision qualifies as a fundamental modification.

Although the Circular letter leaves room for further evaluation of every particular situation, the circular identifies a number of (i) fundamental modifications and (ii) non-fundamental modifications.

Fundamental*

  • A modification of the term of the loan not contractually foreseen prior to 17 June 2016; 
  • A modification of the interest rate not contractually foreseen prior to 17 June 2016; 
  • A modification of the principal amount loaned; 
  • A modification of the interest calculation not contractually foreseen prior to 17 June 2016; 
  • A modification or replacement of one or more of the initially involved parties except for a modification or replacement of the original lender which was already contractually foreseen prior to 17 June 2016; 
  • Any modification imposed by the legislator or a supervising authority.

Non-fundamental**

  • Minor administrative changes such as the modification of an account number; 
  • A name change or change of the legal form of one of the contracting parties; 
  • An address change of one the contracting parties; 
  • A modification to the term of the loan contractually foreseen prior to 17 June 2016 and resulting from an automatic extension; 
  • A modification of the interest rate contractually foreseen prior to 17 June 2016; 
  • Modifications to the interest payment modalities (e.g. quarterly payment instead of monthly); 
  • A modification to the original security; 
  • A drawdown under a facility agreement as from 17 June 2016 relating to loans concluded prior to that date.

A fundamental modification to a loan as from 17 June 2016, that would in principle have been entitled to grandfathering, results in an entire loss of the grandfathering. All interest relating to the period as from the fundamental modification will fall into the scope of application of the new interest deduction limitation rule.

Unfortunately, the circular letter does not clarify a number of conceivable scenario’s e.g. whether cash pool arrangements can be grandfathered, whether the relocation of a contracting party to Belgium constitutes a material modification etc.

For the sake of completeness, be aware that certain key elements of the EBITDA interest deduction limitation still need to be implemented before year-end 2019 (e.g. definition of expenses and income equivalent to interest, the allocation key to divide the 3 million EUR threshold among the Belgian group entities, etc.)

* Irrespective whether there is an (explicit) agreement or consent of (one or more) of the parties involved.

** The Circular letter specifies that this is a non-exhaustive list of examples which can qualify for grandfathering.