In principle interest costs are deductible in Belgium provided that they are made in order to generate or maintain taxable income and are at arm’s length. However, the Belgian authorities have imposed a number of anti-avoidance provisions with regard to the deductibility of interest costs.
Interest payments that exceed a normal market interest rate are not tax deductible.
Interest paid to low-tax beneficiaries
Interest payments made directly or indirectly to specified non-resident beneficiaries or foreign establishments (beneficiaries established in tax havens or beneficiaries that can benefit from a preferential tax regime) are subject to a rebuttable presumption that they are not made ‘at arm’s length’. This means that in principle they will not be deductible. However, if the taxpayer can prove that the interest payments are related to genuine commercial operations and do not exceed normal limits, deduction of the interest payment will be allowed.
Interest payments made to certain shareholders and directors
Interest which exceeds a normal market rate and/or the sum of reserves taxed at the beginning of the fiscal period and the total of paid-in capital at the end of the period will be reclassified as a dividend distribution.
Thin capitalisation rule
Legislation enacted in March 2012 replaced the former thin capitalisation rule (which imposed a 7:1 equity ratio) by a 5:1 debt-equity ratio.
For the purposes of this debt-equity ratio, debt will include all loans, bonds and other debts. Debt issued by public offering and loans granted by financial institutions will however be excluded. Equity will be determined based upon the sum of the taxed reserves at the beginning of the taxable period and the paid-in capital at the end of the taxable period.
In contrast with the old rules (where only interest payments made to beneficial owners that were not subject to income tax or that were subject to a substantially more beneficial regime than the Belgium tax regime were taken into account in determining the 7:1 ratio), the new provision provides that payments made to group companies should also be taken into account for the purposes of the 5:1 debt-equity ratio.
The new rules are also subject to an anti-avoidance provision which provides that where a loan is granted by a non-affiliated company but guaranteed or funded by a third (affiliated) party (bearing the risk of the loan), this third (affiliated) party will be deemed to have granted the loan.
Interest payments in excess of the 5:1 debt-equity ratio are not tax deductible.