On 5 May 2020, the Belgian tax administration published its Circular Letter 2020/C/62 on specific payment holidays negotiated in the context of the COVID-19 crisis. More in particular, this circular accepts that certain loans will not lose their “grandfathered” status in case specific modifications are negotiated to loan agreements so to bridge temporary payment difficulties.
The 30% EBITDA interest limitation rule and grandfathered loans
The 30% EBITDA rule includes a grandfathering provision for loans that have been issued before 17 June 2016 and that have not been “fundamentally modified” since that date. The interest income/expenses on these loans are not taken into account for purposes of the 30% EBITDA interest deduction limitation rule. Since the current legislative framework does not define the notion of “fundamental modification”, a first Circular Letter was published in September 2019 (2019/C/89), providing taxpayers with administrative guidance on how to Belgian tax authorities will interpret the notion of “fundamental modification” when assessing the grandfathering rule.
Loan renegotiations in the COVID-19 context
In order to face temporary payment difficulties, a lender and borrower may agree to temporarily deviate from their initial contract. In certain cases, this is done under a general framework. For example, the Minister of Finance and the Belgian financial sector has taken a series of measures to support lending to Belgian businesses to deal with the immediate fall-out of the COVID-19 crisis. This includes a suspension of payment obligations under existing credits for businesses (principal only).
Also in an intercompany context, it may be in the interest of both parties to agree to adapt certain terms of their loan contract so to support the borrower in these exceptional circumstances. If properly substantiated and documented, this is defendable under the concept of “options realistically available”. The new chapter X of the OECD Transfer Pricing Guidelines covers more detailed guidance on how to apply this concept on intercompany financing.
What’s in the new Circular Letter?
The recently published Circular Letter observes that due to the COVID-19 crisis specific payment holidays are now exceptionally, and under certain conditions, allowed by banks or intra-group companies.The Circular Letter indicates that allowing specific payment holidays for loans concluded before 17/06/2016 will not be considered a “fundamental modification” of the existing agreement, under two conditions:
- The taxpayer can demonstrate that the problems are due to the COVID-19 crisis (e.g. a significant decrease in turnover or activity, temporary or total unemployment of staff or temporary closure as a result of the measures imposed by the federal government to combat COVID-19).
- The specific terms of payment are reflected in an approved application to a financial institution or are included in an supplementary agreement (e.g. in the context of an intra-group loan).
The terms of payment must be granted to those ‘grandfathered’ loans before 30.06.2020 and they may be kept in place until 31.12.2020 at the latest.
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