Belgium Modifies its Notional Interest Deduction Regime to Comply with EU Law

In 2008, Argenta Spaarbank NV—a Belgian savings bank operating a branch in The Netherlands—challenged the validity of the exclusion of the net book value of its Dutch branch from the computation basis for the notional interest deduction ("NID"). The principal argument of Argenta was that this exclusion falls afoul of the principle of freedom of establishment as established in Article 49 of the Treaty on the Functioning of the European Union ("TFEU"). Argenta argued that if the bank had operated its branch in Belgium, the net assets would have been allowed for purposes of computing its 2008 NID amount, whereas those very same net assets were being disallowed in this case because they were connected with a branch located in another EU Member State (The Netherlands). The Antwerp tax court submitted the issue to the EU Court of Justice ("ECJ") in Luxembourg for a preliminary ruling on the subject. The ECJ held on July 4, 2013 in favor of Argenta and found that Belgium's NID regime was a hindrance to the freedom of establishment insofar as it disallowed assets invested by a Belgian company through a Dutch branch from the basis for computing the NID.

With the law of December 21, 2013 (the "Law"), the Belgian government has purported to remedy the lack of compliance of the NID regime with EU law. The Law repeals the provision of the NID regime that disallows assets allocated to a branch situated in a treaty country, and it reduces the NID for Belgian companies that operate through a branch in a treaty country that is a member of the European Economic Area ("EEA"). Henceforth, the total amount of NID will be reduced as follows:

  • If the Belgian company has invested any assets in or through a branch located in a treaty country that is not a member of the EEA, the total amount of NID will be reduced by the proportionate part thereof that corresponds to the net assets invested in such branch.
  • If the Belgian company has invested any assets in or through a branch located in a treaty country that is a member of the EEA (an "EEA Branch"), the total amount of NID will be reduced by the proportion thereof that corresponds to the net assets invested in the EEA Branch, but only insofar as the total amount of NID exceeds the business profits derived from the EEA Branch. In other words, if an EEA Branch would end the fiscal year with a net loss, the proportion of NID corresponding to the assets of that EEA Branch would not be forfeited but can, instead, be deducted from the company's other profits (i.e., Belgian-source profits).

These new rules entered into effect for tax assessment year 2014 (i.e., for book years ending on or after December 31, 2013).

The first Belgian commentaries on the K case (ECJ, C-322/11, 7 Nov. 2013), another recent ruling by the ECJ, rightfully point out that the ECJ's findings in the K case would seem to support the way in which the Belgian legislature has remedied the NID rules following the Argenta case. Indeed, tax advantages or adjustments can be limited to property located in the Member State granting the tax advantage or adjustment, provided that such limitation is necessary "to safeguard the balanced allocation of the power to impose taxes between the Member States and to ensure the cohesion of the [Finnish] tax system and that it is appropriate for attaining those objectives." Because the new Belgian NID rules in fact do now achieve a similar symmetry, it may be expected that they should stand the test of EU law going forward.These new rules entered into effect for tax assessment year 2014 (i.e., for book years ending on or after December 31, 2013).