Luxembourg RAIFs are increasingly used in order to provide debt funding for acquisitions. Until recently it was uncertain how interest paid by a Belgian company to a RAIF is to be treated from a Belgian withholding tax perspective. Two recent decisions of the Belgian Supreme Court provide more clarity.
The RAIF Regime
In 2016, Luxembourg introduced the RAIF (“reserved alternative investment fund” or “fonds d’investissement alternatif réservé”) in order to increase its attractiveness for investment funds and asset management.
One of the most appealing aspects of RAIFs is their tax regime. In principle, a RAIF is only subject to an annual ‘subscription tax’ (‘taxe d’abonnement’) at a rate of 0.01% of its net assets (with various exemptions) and no Luxembourg withholding tax is levied on its profit distributions.
It is hence no surprise that RAIFs are increasingly used to provide debt funding for e.g. acquisitions. However, the question arises whether interest attributed or paid by a Belgian company to a RAIF can benefit from a Belgian withholding tax exemption.
Belgian withholding tax treatment of interest – Position of the Belgian Supreme Court
In Belgium, interest attributions or payments are in principle subject to a 30% withholding tax. The Belgium-Luxembourg double tax treaty provides a withholding tax exemption, but this treaty can only be invoked by companies that are subject to a kind of tax that is explicitly mentioned in the treaty, such as an ‘income tax’ or a ‘wealth tax’ (‘impôt sur la fortune’). The Luxembourg ‘subscription tax’ is not explicitly mentioned in the treaty.
The Belgian Supreme Court recently ruled on two cases relating to collective investment funds. The Court ruled that the Luxembourg ‘subscription tax’ cannot be considered as ‘equal’ or ‘equivalent’ as the taxes that are mentioned in the treaty. Therefore, the ‘subscription tax’ is not covered by the treaty. As a result, a RAIF that is only subject to a ‘subscription tax’ cannot benefit from the interest withholding tax exemption offered by the treaty.
Therefore, in case Belgian companies envisage taking out debt from a Luxembourg RAIF, it should be analysed if they can rely on a domestic exemption (such as nominative bonds, X/N accounts or finance company regime) in order to benefit from a Belgian withholding tax exemption on the interest attributed or paid to the RAIF.
This, in particular, will be important if the RAIF has negotiated a net interest rate, in which case the Belgian borrower would be confronted with a grossed-up interest in case Belgian withholding tax would be due.
Thanks to Nancy Van de Voorde, Christophe Rapoye and Mahah Chah for their contribution.
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