Earnings stripping rules: Royal Decree clarifying legal framework published
As anticipated in our earlier flash, a Royal Decree has been published in the Belgian Official Gazette of 27 December 2019.
The purpose of the Royal Decree is to execute the so-called “earnings stripping rules“, i.e. an interest deduction limitation regime which was already enacted by the legislator at the end of 2017.
However, some issues still remain unresolved. The new (incomplete) rules enter into force as from assessment year 2020 (for taxable periods starting on 1 January 2019 at the earliest).
The Royal Decree contains:
- A specification of the costs and revenues which are to be considered as economically equivalent to interest cost and interest income. This includes 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 modalities for excluding interest on loans concluded before 17 June 2016 (and on loans related to a project of public-private cooperation). In order to benefit from this exclusion, 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 contain more details on the modalities of each loan (parties, interest rate, duration, borrowed amount).
- More details on the ad hoc consolidation that should be performed to arrive at the qualifying stand-alone EBITDA of the different Belgian group members. As such, transactions between Belgian group members must be eliminated in order to come to a stand-alone EBITDA and the negative EBITDA of a Belgian group member must be allocated to the EBITDA of the other members, so that the overall stand-alone EBITDA’s for the purpose of the interest deduction limitation rules are reduced. Group members can conclude an agreement to collectively forsake the calculation of EBITDA, resulting in a deemed EBITDA of 0 (zero) for each group member.
- Rules 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.
- Formalities regarding the exemption of the excess borrowing cost which was disallowed in a previous taxable period and regarding the interest deduction agreement.
On the other hand, the Royal Decree does not foresee:
- How exactly the membership of a taxpayer to a group of companies must be determined (no definition of taxable period during which the taxpayer must be or must remain part of the group).
- Whether negative exceeding borrowing costs (so positive financial results) can be allocated to other group entities.
- How the calculation of the qualifying standalone EBITDA should be documented. The obligation to add the ad hoc consolidated calculation of EBITDA to the tax return, as stipulated in a previous law proposal, has been dropped.
The Royal Decree brings some (but not all) much needed clarifications. Moreover, the new rules bring extra administrative burdens for Belgian groups. Most importantly, the new earnings stripping rules require a shift in mind-set for Belgian groups, as it is no longer possible to calculate a taxpayer’s interest deduction capacity on a stand-alone basis without undertaking a consolidated approach first.