On 26 November 2019, a draft bill containing various tax provisions was submitted to the Belgian Chamber of Representatives. Several upcoming changes are related to the interest deductibility limitation (i.e. 30% EBITDA rule) which was introduced in the 2017 corporate income tax reform and applicable as of 1 January 2019 (assessment year 2020). If enacted, the draft legislation will substantially modify some of the concepts currently included in art. 198/1 CIT92.
The main changes included in the draft bill relate to the following:
- Computation of deduction capacity; and
- Allocation of €3mio threshold
(i) Computation of deduction capacity
The draft bill significantly changes the computation of the deduction capacity by introducing an obligation for group entities with a negative EBITDA to allocate this negative EBITDA to all other Belgian group members with a positive EBITDA in proportion to this positive EBITDA. The legislator confirms this step is needed in order to ensure an application of the EBITDA rule on an overall ‘consolidated’ basis.
A second change – with equal rationale – relates to the situation where some members of a group have net borrowing income. Under the draft bill such net borrowing income should be allocated to the deduction capacity of other Belgian group members with net borrowing costs, again in proportion to this net borrowing costs.
(ii) Allocation of 3 mio threshold
Subsequently, the draft bill foresees in three specific methods to allocate the €3 million threshold amongst Belgian group entities:
- A complex, mixed allocation based partially on the 30% of the group EBITDA, and partially of an allocation of the €3mio limiting amount;
- A more simplified allocation method, in which a group waives it right to apply the 30% EBITDA threshold (but will thereby also no longer have the burden to calculate the Tax EBITDA, including its intercompany eliminations, for each entity separately). In that case, the €3mio threshold will be allocated based on the net borrowing costs;
- An equal allocation between all group members.
Important to note is that because of the new rules, members of a group will have to consistently apply either the 30% EBITDA as threshold or the €3mio as threshold. Application of the two thresholds within members of the same group is no longer allowed.
Furthermore, the draft bill provides some clarification on the elimination of Belgian intra-group transactions and definitions regarding ‘group’ and ‘assessment periods’.
The concept of “economically equivalent to interest” when calculating the net borrowing cost, however, is still to be defined by Royal Decree of which no draft has been shared publicly per today
Time for action
The changes introduced by the draft bill significantly impact the computation of the deduction capacity of many (multinational groups). With year-end approaching, it is time to take action by (re-)assessing the impact of the 30% EBITDA rule in order to properly assess the tax provision in accounting books and need for additional prepayments.
How can we assist you?
Understanding the struggle of multinationals trying to assess and deal with the impact of the measures, PwC has developed a web-based solution, named ILIA (Interest Limitation Insights & Analytics), that enables clients to perform these complex underlying calculations and assess optimization opportunities in-house. ILIA not only automates the calculations and makes estimations of cash tax effects, but also allows to conduct real-time EBITDA capacity transfers and group contributions transfers. In addition, it allows for certain modelling features to assess the impact of new financing structures, updated business plans etc. As ILIA is web-based, the simulations can be performed and stored efficiently in a user-friendly environment.
We would be happy to give you a live demo to show how ILIA can help you and your organisation to manage the impact of these new rules. Feel free to contact us to schedule a live demo, via the people listed below or via the following email address email@example.com.
Follow our tax news updates for further information in the coming months!