Earnings stripping rules: precision of the legal framework expected before year-end

The new regime of interest deduction limitation (earnings stripping rules) is in force since 1 January 2019, but could in practice not yet be applied by Belgian entities due to the lack of certain guidelines.

A new draft law has now been introduced in Parliament to bring some much needed clarification (i) on when a taxpayer is considered to be part of a group, (ii) to fine-tune the calculation of a taxpayer’s EBITDA and (iii) to determine how the threshold of 3 million EUR should be divided among Belgian group members.

Along with a new law, the regime also requires executive measures (in principle via a Royal Decree) in order to define more precisely under what modalities a grandfathered loan is excluded from the earning stripping rules and to describe the costs and revenues which are to be considered as economically equivalent to interest cost and interest income.

To determine whether a company (or branch) belongs to a group of companies, tax law refers to company law rules. However, this does not solve the question when or how long a company should have been part of the group, in order to apply the new earning stripping rules.

The draft law now specifies that a company must have been part of the group during the entire calendar year preceding the assessment year (e.g. during calendar year 2019 for assessment year 2020).

The initial law already provided for an ad hoc consolidation to calculate the EBITDA of the different Belgian group members. As such, transactions between Belgian group members must be eliminated for EBITDA purposes.

This consolidation principle is further developed in the draft law: negative EBITDA of a Belgian group member should now be allocated to the EBITDA of the other members. As a consequence, the total interest capacity for a group – based on the EBITDA calculation – can no longer exceed 30% of the consolidated EBITDA.

On the other hand, if a Belgian group member has exceeding borrowing income (instead of exceeding borrowing costs) this income can now also be allocated to the other Belgian group members, as such increasing their interest deduction capacity.

The draft law finally brings clarity on how the threshold of 3 million EUR must be divided among the entities of the Belgian group. As a default option, this threshold should be divided in proportion to their excess borrowing costs. Alternatively, the threshold can be divided equally among group members, e.g. threshold of 1 million EUR for each of 3 Belgian group members.

Modalities are foreseen for excluding interest on loans concluded before 17/06/2016. The taxpayer should add to his tax return an overview of the loans to which no fundamental change has been made since that date . This overview should also give more details on the modalities of each loan (parties, interest rate, duration, borrowed amount).

A Royal Decree is still to define types of costs (and revenues) which are economically equivalent to interest. This would include a.o. depreciations on assets to the extent interest was included in the acquisition value and foreign exchange gains and losses in connection with  the interest cost incurred or interest income received  in execution of a loan agreement. Other costs or revenues can  also be considered as equivalent to interest through confirmation by the ruling commission provided the other contracting party accepts the qualification.

The draft law brings some much needed clarifications on e.g. the calculation of EBITDA and the division of the 3 million EUR threshold. However, these new measures also bring extra administrative burdens for Belgian groups, as each calculation method requires its own formalities to be completed (forms to proof EBITDA calculations, agreements to divide the threshold etc.).

More importantly, these new earning stripping rules require a shift in mind-set for Belgian groups. It is no longer possible to calculate one’s interest deduction capacity on a stand-alone basis, but a consolidated approach is necessary.