Thincapitalization EBITDA

David Ledure, Jean-Charles Paquot and
Michaël Van der Velden*
Belgium
The Implementation of the 30% EBITDA Rule in
Belgium: An Angle with a Twist
This article examines the implementation of the
new interest limitation rule.
1. Introduction
Just before the end of 2017, the Belgian parliament voted
in favour of the country’s most important corporate tax
reform of the last decades. One of the main novelties
thereof was the implementation of a new interest limitation rule in line with the European Union’s Anti-Tax
Avoidance Directives (ATAD I) requirements. In this
article, the authors will first give some background on the
tax reform and will then point out the main choices the
Belgian legislator made – within the framework imposed
by ATAD I – when crafting the interest limitation rule.
Afterwards, the key characteristics of this new interest
limitation rule will be commented in a certain level of
detail. Finally, the authors will comment on the interplay
of the rule with other tax deduction rules in Belgium.
2. Setting the Scene
2.1. The Belgian corporate tax reform
The Belgian tax reform has a number of objectives. These
basically boil down to boosting the competitiveness of
Belgium while making the system both more fair and
in line with the latest international tax standards. At the
same time, the reform aims to be budget neutral.
Belgium’s high nominal corporate tax rate was often a
thorn in the view of foreign investors when making a
heat map of investment locations. With a statutory corporate income tax rate of 34%, Belgium had one of the
highest nominal tax rates in the European Union. Given
the downward trend in corporate tax rates in other EU
Member States, Belgium would soon be pointed out as the
black sheep if it would have kept its nominal rate at 34%.
For such an open economy as that of Belgium, this could
have been devastating.
However, many deductions and exemptions could be used
by corporate taxpayers in order to reduce their effective
tax rate. For instance, the use of the notional interest
deduction and research and development (R&D) incentives often had a significant impact on the effective tax rate.
However, the ability to benefit from them depended very
much on the characteristics of the taxpayer and its activities. This is why some considered the system rather unfair.
*
230
David Ledure is Partner Transfer Pricing and International
Tax, PwC Belgium, Jean-Charles Paquot is Senior Manager
Transfer Pricing and International Tax, PwC Belgium and
Michaël Van der Velden is Senior Consultant Transfer Pricing
and International Tax, PwC Belgium.
Because of the number and complexities of these rules,
the entire Belgian corporate tax system has become particularly complicated, and this was often perceived as an
additional obstacle to Belgium’s competitiveness.
On top of that, the tax landscape is rapidly changing following the OECD’s base erosion and profit shifting (BEPS)
initiative and the subsequent EU implementation measures.
Therefore, Belgium’s coalition government decided that
it was time for a significant corporate income tax reform.
An agreement on a significant reform was announced in
July 2017 and was formally approved by the Belgian parliament in December 2017. There are currently indications
that a new act may be voted on in the coming months to
fix some cracks in the December 2017 reform. At the time
of writing this article,1 no publicly available drafts are yet
available. It is, however, important that taxpayers monitor
possible changes to the law, as these could impact their
tax position.
According to the Belgian government, the reform aims at
simplifying the system and improving the level of fairness
and tax certainty for all taxpayers. It is structured around
three main pillars. First, the statutory rate will progressively decrease to 25% (20% for small to medium-sized
enterprises (SMEs)). Second, compensatory measures are
to be taken, as the reform aims at being neutral from a
budgetary perspective. Third, it transposes ATAD I2 and
ATAD II into Belgian legislation.3
The new Belgian interest limitation rule resulted from an
obligation imposed by ATAD I, although it was a useful
building block for the government’s compensating measures.
This article will focus on the transposition of article 4 of
ATAD I (Interest limitation rule). This article is largely
inspired by the Final Report on BEPS Action 4, “Limiting Base Erosion Involving Interest Payments and Other
Financial Payments”, which aims at preventing base
erosion through the use of interest payments.
The key recommendation of this report was to introduce
an interest barrier rule computed on the basis of a net-interest-to-EBITDA ratio (10-30% range).
1.
2.
3.
5 Mar. 2018.
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules
against tax avoidance practices that directly affect the functioning
of the internal market, OJ L 193/1 (2016), EU Law IBFD [hereinafter
ATAD I].
Council Directive (EU) 2017/952 of 29 May 2017 amending Directive
(EU) 2016/1164 as regards hybrid mismatches with third countries.
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
© IBFD
The Implementation of the 30% EBITDA Rule in Belgium: An Angle with a Twist
By introducing a 30% fixed ratio rule, the European Union
has therefore implemented a “best practice rule” while
using the upper boundary of the range recommended by
the OECD.
2.2. Article 4 of ATAD I: Interest limitation rule
Generally speaking, implementing BEPS measures into
European legislations is a challenge, as one must balance
the willingness to create a level playing field throughout
the European Union and the flexibility that is necessary
because of the specificities of each Member State’s corporate income tax system.
As will be seen further in this section, there is quite a significant number of options available to Member States to
implement article 4; hence, it is key to closely monitor the
implementation on a country-by-country basis.
According to the European Council, groups of companies
have increasingly used “excessive” interest payments as a
means to reduce their tax liability:
The interest limitation rule is necessary to discourage such
practices by limiting the deductibility of taxpayers’ exceeding borrowing costs. It is therefore necessary to fix a ratio for
deductibility which refers to a taxpayer’s taxable earnings before
interest, tax, depreciation and amortisation (EBITDA).4
The authors highlight below the main characteristics of
the interest limitation system introduced by ATAD I and
compare them with the various implementation options
and specificities of Belgium in this regard. This will pave
the way for a more detailed analysis of the Belgian transposition that will be presented in section 3.
The core rule of the new limitation system described in
article 4(1) states that net interest (including “economically equivalent” payments) is deductible in the tax period
in which it is incurred only up to 30% of the taxpayer’s
EBITDA. As there is no full tax consolidation system in
Belgium, the rule in principle applies to each Belgian corporate income taxpayer separately.
According to article 4(2), the deductibility ratio is computed specifically for tax purposes, and the computation details of the ratio are therefore dependent on each
national tax law. This is an important point to keep in
mind when comparing implementation across countries.
In this respect, Belgium opted to derive the EBITDA from
the taxpayer’s tax return, which, in some cases, will fundamentally deviate from the accounting EBITDA.
compared to the 30% if it was part of a more highly leveraged group. In such a case, the subsidiary could have a
tax-deductible debt leverage in line with the group’s leverage. Belgium has not included this option, which is a pity,
as the OECD itself recognized that some groups are highly
leveraged for non-tax reasons, and therefore clearly recommended the implementation of group escape rules.
A very important question is that of what happens with
the net interest that surpasses the limitation threshold(s).
ATAD I provides three options to potentially use excess
interest, namely (i) carry-forward, (ii) carry-forward and
carry-back, and (iii) carry-forward and transfer of unused
capacity. Belgium has opted for the carrying forward of
the excess without a time limit. Alternatively, Belgium
has also introduced a system to transfer non-deductible
exceeding borrowing costs to Belgian group affiliates,
as there is no full tax consolidation system in place. As
will be seen, this is an important tool to remedy unintended consequences of the interest limitation rule on a
legal entity basis.
Given the specificities of interest payments to their businesses, article 4(6) provides that financial undertakings, as
defined by ATAD I, may be out of scope. Belgium selected
this option, and there is a long list of regulated financial
undertakings (credit institutions, insurance companies,
investment funds, etc.) that are out of scope. The OECD
itself noted in BEPS Action 4 that the financial sector has
specific features that must be taken into account and that
therefore, there is a need for specific rules for this industry.
As a general rule, EU Member States have until 31
December 2018 to implement the interest limitation rule
of ATAD I and, in principle, they should apply the new
system from 1 January 2019. However, by way of derogation from article 4, Member States that already have rules
that are equally effective may apply these rules until the
end of the first full fiscal year following the date of publication on the official website of the agreement between the
OECD member countries on a minimum standard with
regard to BEPS Action 4, but at the latest until 1 January
2024. Belgium opted to keep its existing debt/equity rule
until financial year 2019 and apply the EBITDA-based
rule as from financial year 2020.
Table 1 shows the various implementation options foreseen in article 4 of ATAD I and the choices made by
Belgium.
Article 4(3) provides for two optional derogations from
article 4(1): taxpayers may be given the right to deduct
net interest up to EUR 3 million for the entire group, and
stand-alone entities may be excluded from the scope of
limitation. As will be seen in more detail, Belgium did not
opt to lower the EUR 3 million threshold and did exclude
stand-alone entities.
3. Transposition of the EBITDA Rule into Belgian
Law
According to the so-called “group escape rule” of article 5
of ATAD I, a subsidiary from a multinational enterprise
(MNE) could have a higher interest deduction capacity
3.1. Entities in scope
4.
ATAD I.
© IBFD
In essence, the application of the 30% EBITDA rule can
be broken down into different steps, as depicted in the
process flow in Figure 1. In the following sections, the
different steps will be discussed in detail.
The 30% EBITDA rule in principle applies to all entities
subject to corporate income tax. However, some of those
entities are considered to have a low risk of eroding their
taxable base through funding. Belgium has, therefore,
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
231
David Ledure, Jean-Charles Paquot and Michaël Van der Velden
Table 1
Options given in ATAD I
Application by Belgium
Limit up to 30% of 30% of EBITDA
30% fiscal EBITDA
Alternative limit up to EUR 3 million
EUR 3 million
Exclusion for:
– stand-alone entities (25% threshold)
Yes
– financial institutions
Yes
– public-private cooperation projects
Yes
Grandfathering clause (loans granted before 17 June 2016 but
not substantially modified)
Yes
Group escape clause (equity/total assets or interest-to-EBITDA
tests)
No
Carry/transfer mechanism:
– carry-forward of non-deductible borrowing costs (no time
limit)
Yes
– carry-forward of non-deductible borrowing costs (no time
limit) + carry-back (max. three years)
No
– carry-forward without limitation + carry-forward of unused
interest capacity (max. five years)
No
Option to apply on the level of a tax-consolidated group
On an entity-by-entity basis, but possible to transfer nondeductible exceeding borrowing costs between Belgian group
entities
made full use of the tolerance to exclude certain types of
entities from the scope of the 30% EBITDA rule. In particular, the Belgian legislator excluded financial undertakings such as regulated investment institutions, insurance companies and pension institutions.5 Furthermore,
the Belgian legislator included the tolerance to exclude
stand-alone entities from the scope of the 30% EBITDA
rule. Although a quite complex double rule has been
implemented, in practice, an entity should be considered
as stand-alone if three conditions are met, namely that
(i) they are not part of a group, (ii) they have no foreign
permanent establishments (PEs) and (iii) they have a
maximum of 25% ownership threshold downwards or a
common shareholder.
Figure 1
3.2. Calculation of exceeding borrowing costs
If an entity is subject to the 30% EBITDA rule, its exceeding borrowing costs will be deductible up to the higher
amount of (i) a EUR 3 million de minimis threshold or (ii)
30% of the taxpayer’s fiscal EBITDA.
Hence, one should know what are to be considered
“exceeding borrowing costs”. In essence, “exceeding borrowing costs” should be considered a netting of an entity’s
financial income and expenses. However, the calculation
will be more complex, considering some specific gimmicks that are currently included in the approved reform.
The Belgian legislator intends to align the definition of
interest expenses and equivalent expenses with the definition included in ATAD I, which is much broader than
the definition of interest currently embedded in Belgian
5.
232
BE: Belgian Corporate Income Tax Code (CIT) (Code des impôts sur
les revenus 1992/Wetboek van de inkomstenbelastingen 1992), new art.
198/1, para. 4.
tax legislation. To date, this has not yet been defined by
the Belgian legislator, and the Belgian government is
entrusted with the assignment of implementing a definition via a Royal Decree. The preparatory works for tax
reform explicitly use the ATAD I definition as the starting point. Hence, it is expected that costs related to loans,
such as costs from hedging instruments covering financial
transactions, arrangement fees, foreign exchange losses on
debt instruments, etc., should be included in the calculation of the exceeding borrowing costs.
A similar reasoning applies to the interest income to be
included in the calculation of the exceeding borrowing
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
© IBFD
The Implementation of the 30% EBITDA Rule in Belgium: An Angle with a Twist
costs. Again, income that is economically equivalent to
interest income is not yet defined, but would be largely
brought into line with the ATAD I definition.
lished on how the de minimis threshold should be allocated. This will be determined later on by the government
through a Royal Decree.
The difficulty of this computation lies in the costs of
certain loans that fall outside the scope of the exceeding
borrowing costs. Again, the current Act largely aligns with
ATAD I by excluding certain types of loans from the scope
of the rule namely (i) loans that were concluded before 17
June 2016 and were not substantially modified afterwards
and (ii) loans used to fund public infrastructure projects
for which the project operator, borrowing costs, assets and
income are all in the European Union.
Hence, irrespective of the number of Belgian entities,
the minimum deductible interest expense will be EUR
3 million on a Belgian group level. This basically implies
that for groups with a large number of Belgian entities, the
minimum threshold might lose its relevance.
In addition, the Belgian legislator added an exclusion for
loans between Belgium-based group entities. According to the preparatory works, the underlying reasoning
behind this exclusion is that the Belgian legislator aims at
simulating the effects of a tax consolidation.
Some concerns arise regarding this exclusion. First of
all, such exclusion imposes an additional administrative
burden. Whereas financial expenses and income could
be easily retrieved from a group’s accounting system, this
is often more complex at the level of one transaction and
might require updates to the enterprise resource planning
system.
Second, this exclusion might result in adverse consequences that do not fit the overall purpose of the law. This
concern will be further explained in section 3.4., together
with the calculation of the fiscal EBITDA.
3.3. De minimis threshold: “All or nothing”?
Once the exceeding borrowing costs are known, one
can assess the deductibility of those costs under the 30%
EBITDA rule. Exceeding borrowing costs will be deductible up to the higher amount of (i) the EUR 3 million de
minimis threshold, or (ii) 30% of the taxpayer’s fiscal
EBITDA.
The ATAD I provisions lay down a tolerance for entities to deduct all qualifying interest payments up to a
certain threshold. EU Member States are free to determine whether this tolerance will be implemented in their
domestic legislation. The Belgian legislator makes use of
this threshold in a business-friendly way by implementing the maximum threshold as put forward in ATAD I,
i.e. EUR 3 million. It should be noted that this de minimis
threshold as proposed in ATAD I is independent from
market interest conditions. This means that in a high-interest-rate environment, this threshold might be surpassed much faster compared to the current low-interest-rate environment.
If a domestic company or Belgian PE is part of a group, the
EUR 3 million threshold will need to be proportionally
allocated amongst the different Belgian entities. However,
no allocation should be done to entities that are excluded
(e.g. regulated financial undertakings). The underlying
reasoning of this allocation is that the Belgian legislator
once again had the intention to simulate the effects of a
consolidation. However, no guidance has yet been pub© IBFD
Indeed, for these groups, the deductibility of the exceeding interest expenses will almost only depend on the 30%
EBITDA, as Belgium has not opted for the group escape
rule as included in ATAD I. In other words, groups with a
considerable number of Belgian entities might face a significant disallowance of interest deductibility on an entity-by-entity basis, as well as an increased administrative
burden.
3.4. Calculation of fiscal EBITDA: More than an
accounting EBITDA
As mentioned in section 3.2., exceeding borrowing costs
are deductible up to 30% of a taxpayer’s fiscal EBITDA.
The notion of “fiscal” already demonstrates that the
EBITDA to be used in this respect differs fundamentally
from the accounting EBITDA.
Indeed, the calculation of the fiscal EBITDA starts from
the taxable profit after “the first operation” as reflected
in the tax return (increase in taxable reserves, disallowed
expenses and dividends paid). After that, a number of
tax-technical corrections should be made, which can basically be divided into two groups.
The first group of corrections aims at adding back to
the taxable profit amortizations, depreciations and the
amount of exceeding borrowing costs. Contrary to an
accounting EBITDA, some other non-cash costs should
not be reintegrated (e.g. provisions).
The second group of corrections aims at deducting tax-exempt profits from the fiscal EBITDA (e.g. dividends-received deductions and innovation deductions). The reasoning behind these corrections is to avoid tax-exempt
income being used to generate additional interest deductibility capacity.
Furthermore, similar to the calculation of the exceeding
borrowing costs, transactions between Belgian group
affiliates should be excluded from the fiscal EBITDA.
Hence, as mentioned in section 3.2., this might give rise
to a significant administrative burden for many groups.
In addition, this exclusion might result in some absurd
consequences that are against the spirit of the law. This
concern can be explained by the simplified example in
Table 2.
The Belgian production entity sources its raw materials from third party suppliers. All the finished goods are
sold to a related Belgian distribution entity. Hence, the
two entities’ accounting EBITDAs are, to a large extent,
dependent on Belgian intra-group transactions. Considering that these transactions should be excluded from the
fiscal EBITDA, the production entity’s turnover should be
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
233
David Ledure, Jean-Charles Paquot and Michaël Van der Velden
Table 2
taken out in order to determine its fiscal EBITDA, and this
ends up with a negative fiscal EBITDA. Consequently, its
deductibility capacity is limited to the allocation of the de
minimis threshold.
On the other hand, the Belgian distributor that sells all the
finished goods to third parties generates a fiscal EBITDA
that is significantly higher than its accounting EBITDA,
as it cannot take into account its costs of goods sold for the
fiscal EBITDA. Hence, this might result in a significant
mismatch between a taxpayer’s interest deductibility from
a tax point of view and from an economic point of view.
In essence, the attempt to simulate a tax consolidation, in
the authors’ opinion, missed its goal. Luckily, the adverse
consequences for the production company can be remediated by transferring the non-deductible exceeding
borrowing costs to other group entities. However, both
the intercompany eliminations and subsequent possible
transfers create some additional layers of red tape rather
than combat any form of abuse.
3.5. Non-deductible borrowing costs: Lost forever?
ATAD I identifies three large options open for EU Member
States in the case where an entity remains with non-deductible exceeding borrowing costs.
Belgium has opted for an unlimited carry-forward in time
of the excess borrowing costs that could not be deducted
in the current taxable period. Alternatively, taxpayers
belonging to the same group also have a possibility to
transfer any non-deductible exceeding borrowing costs
to another affiliated Belgian entity with unused EBITDA
capacity.6
234
Entity Entity Entity Entity
1
2
3
4
Net
exceeding
borrowing
costs
Fiscal
EBITDA
Deductible
borrowing
costs
250
300
200
500
1,250
1,000
500
700
1,000
3,200
300
150
210
300
960
200
290
Nondeductible
borrowing
costs
Excess
capacity
Consolidated
150
50
10
According to the 30% EBITDA, part of the exceeding
borrowing costs of Entities 2 and 4 is not deductible. In
order to arrive at a consolidated non-deductibility of 290,
these entities have to transfer part of their non-deductible exceeding interest expenses to Entities 1 and 3. In
order to do so, the necessary administrative procedures
and requirements have to be followed. Indeed, this intragroup transfer is only possible insofar as some conditions
are met (e.g. an upfront agreement should be put in place
and the transfer should be recorded in the tax return of
both parties).
In this respect, it is important to note that amendments to the current
draft reform might still take place in the coming months.
Furthermore, in order to ensure tax neutrality and safeguard the corporate interests of minority shareholders
and creditors, a compensation should be paid in favour
of the taxpayer transferring its non-deductible exceeding
borrowing costs. Such compensation should be equal to
the surplus of tax that would have been due if the excess
borrowing cost surplus would not have been exempt from
the profit in the current taxable period. In line with the
principle of tax neutrality, such compensation will not be
tax deductible in the hands of the taxpayer transferring its
non-deductible exceeding borrowing costs and will not be
considered as taxable income in the hands of the recipient.
International Transfer Pricing Journal May/June 2018
© IBFD
This can be further explained by the example in which
Group A has four Belgian entities, of which the exceeding borrowing costs and fiscal EBITDA are depicted in
Table 3.
6.
Table 3
Exported / Printed on 2 Aug. 2018 by IBFD.
The Implementation of the 30% EBITDA Rule in Belgium: An Angle with a Twist
Considering the above, Belgium has implemented the 30%
EBITDA rule in a favourable way that will generally not
result in a definite loss of non-deductible borrowing costs.
3.6. Part of the group?
The notion of “group affiliation” plays a key role in different aspects of the 30% EBITDA rule. In particular,
group affiliation is referred to for (i) the allocation of the
de minimis threshold, (ii) the scope of taxpayers subject to
the rule (i.e. the definition of “stand-alone entities”), (iii)
the computation of exceeding borrowing costs and fiscal
EBITDA and (iv) the transfer of non-deductible exceeding
borrowing costs. Nevertheless, there is currently no clear
definition of what should be considered “group affiliation”
in Belgian tax law, although it is defined in Belgian corporate law (e.g. a control relationship with a 50% threshold).
A definition of this notion was initially included in the
proposed reform, although it was excluded from the final
version approved in December 2017.
However, in the framework of another draft bill, a definition of “group affiliation” might be added to the Belgian
Income Tax Code, in line with the corporate law definition.7
As far as ATAD I is concerned, it refers to groups consolidated for financial accounting purposes.
Hence, to date, it is not clear which definition should be
considered the prevailing one in the framework of the 30%
EBITDA rule. Further guidance in this respect would be
highly welcome to avoid any confusion in this regard.
4. Interplay with Other Rules
Besides the more mechanical 30% EBITDA rule, the
Belgian tax authorities can scrutinize the deductibility
of interest costs also under other existing rules.
First of all, there is the general deductibility rule. As all
other expenses, interest expenses are only deductible if
they were made or incurred in order to “acquire or maintain taxable income” (see article 49 of the CIT). This core
rule remains applicable. In some very specific cases, this
article has been put forward by tax authorities to challenge
the deductibility of interest costs.
The deductibility of interest paid to tax havens will also
remain subject to a much more stringent burden of proof.
Indeed, in such cases, the taxpayer must prove that interest payments correspond to “real” and “sincere” operations and do not exceed “normal limits” (see article 54 of
the CIT).
Interest payments that exceed market levels are explicitly treated as non-deductible (see article 55 of the CIT).
Hereto, the law indicates that one should, amongst other
things, take into account the credit risk of the borrower
and maturity. This rule has given rise to some uncertainty,
typically in the context of interest outstanding on current
accounts. This is why this rule has been completed with
7.
BE: Art. 11 Code des Sociétés/Wetboek van vennootschappen.
© IBFD
a particular reference (monetary financial institutions
rate published by the National Bank of Belgium + 2.5%)
that should be used for non-mortgaged loans that have no
fixed maturity and are not linked to centralized treasury
management activities within a group. For loans falling
within the scope of the new rule, interest levels exceeding
this limit will not be tax deductible.
Finally, it goes without saying that the “usual” Belgian
transfer pricing articles remain applicable in the context
of intercompany interest payments (see articles 26, 79,
207 and 185 paragraph 2 of the CIT. In this context, tax
authorities cannot only scrutinize the arm’s length nature
of the interest rate, but also look at all terms and conditions of the funding. As a reminder, there is no “full” tax
consolidation in Belgium, and intercompany transactions between Belgian entities must also be done at market
prices in order to avoid an additional tax assessment.
A change is that the new EBITDA rule will partially replace
the old thin capitalization rule. Under the former system,
interest expenses were not deductible to the extent that the
debt-to-equity ratio was above 5:1 when the beneficiaries
of interest payments were related parties or were located
in tax havens. This thin capitalization rule will still be
applicable for interest payments to tax havens.
Concerning interest payments to related parties, the thin
capitalization rule will be replaced by the new system,
unless the grandfathering rule is applicable.
It is important to note that the thin capitalization rule
had no impact on interest payments made to third-party
lenders that were not located in tax havens, while the new
rule targets intercompany as well as external debt.
5. In Summary, a Fair but Complex System
The Belgian EBITDA rule had to be carved within the
framework imposed by ATAD I. However, this directive
provided some flexibility on certain clearly defined
items so as to enable countries to seamlessly integrate the
EBITDA rule into their broader tax systems. The options
that Belgium adopted reflect its stance that it wants to
remain an investment-friendly country that is fully compliant with the rules and spirit of the international tax
environment. More in particular, it did not lower the EUR
3 million threshold, as it can be fairly assumed that there is
no active tax planning if the Belgian operations of a group
have a lower net financing burden. If the threshold would
nevertheless be exceeded, there is the possibility to either
transfer the excess to other Belgian entities of the group
or carry it forward without limitation in time. This should
enable, for example, activities with a more cyclical nature
to smoothen the impact over time. Finally, it allows grandfathering of certain loans so as to foster legal certainty.
It is, however, a pity that the Belgian legislator did not opt
for the group’s carve-out rule. In line with the rationale of
this carve-out, it would allow entities of a highly leveraged
group to deduct their interest cost at least once. This will
especially have severe consequences for groups heading
into choppy waters resulting in decreasing EBITDAs. The
Belgian operations of such a group will be hit a second
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
235
David Ledure, Jean-Charles Paquot and Michaël Van der Velden
time by having non-deductible finance costs, and thus an
increased tax bill. While ATAD I uses a fairly neutral tone
with regard to the possibility of adopting the carve-out,
BEPS Action 4 clearly recommends adopting such rule.
The authors’ fundamental concern about the new reform
relates to the complexity of the rules and high compliance burden this will entail for groups. To a large extent,
this is triggered by the obligation to eliminate intercompany transactions between Belgian group entities, while
the authors do not see which type of abuse this would
counter. On the contrary, the eliminations may result in
unrealistic levels of EBITDA, triggering a too high or too
low interest deduction capacity. Afterwards, they will have
to implement transfers of their non-deductible exceeding
borrowing costs so as to come back to a reasonable allocation of these costs over the group’s Belgian entities. All of
this will require quite some resources to collect the source
236
information to make these eliminations, to monitor the
tax-adjusted financing position of each of these entities
and to implement transfers of excess borrowing costs. The
latter will require the implementation of specific contracts
covering these transfers in order to make compensating
payments to neutralize the tax impact of the transfer and
file additional enclosures in the tax return. The spirit of
Kafka seems to have sneaked into the law.
It is likely that, at the time of writing, some items of the
current reform will already be adjusted in the coming
weeks. While there is no public information on the scope
of the planned changes, it is likely that these will be limited
to more technical aspects so as to make some additional
clarifications and avoid some undesired consequences. It
is the authors’ wish that the Belgian legislator will grasp
the opportunity to cut the red tape created by the new
EBITDA rule.
International Transfer Pricing Journal May/June 2018
Exported / Printed on 2 Aug. 2018 by IBFD.
© IBFD