In early 2000, the European Union obliged Belgium to gradually abolish its coordination centre tax regime, which was attracting many foreign investors to Belgium, on the grounds that it was a form of unlawful tax competition between EU Member States. In 2006, Belgium replaced its coordination centres with the Notional Interest Deduction (NID).
The NID allows a Belgian company or the Belgian branch of a foreign company to deduct a deemed (and therefore "notional") interest on its own net equity from its Belgian taxable income. This has substantially enhanced the attractiveness of investing in Belgium in recent years and has discouraged the relocation of Belgian businesses to other EU jurisdictions. Financing activities and capital-intensive investments, both of which require a lot of equity, have benefited particularly from the measure.
At the time of the NID’s introduction, it was reviewed informally by the European Commission and no objections were raised. It now appears, however, that Luxembourg has lodged a complaint with the Commission against the establishment of the NID.
The Commission has reviewed its earlier opinion and now judges the system to be contrary to the free movement of capital and the freedom of establishment as it believes that the measure discourages Belgian companies from investing in another Member State. The Commission has written a letter to the Belgian Government notifying it of the opening of a formal infringement procedure.