Are you as an entrepreneur also penalised in terms of tax because of a negative interest rate?

The fact that the European Central Bank (ECB) has been keeping European market interest rates particularly low for some time now has not escaped anyone’s attention. The aim is to stimulate economic growth again. The ECB offers banks the opportunity to deposit or borrow money. Banks pay interest on these loans, also referred to as refinancing interest. Sometimes banks have (temporary) cash surpluses, which they can deposit with the ECB, which in turn pays interest in compensation.

Negative interest rate charged

To discourage banks from depositing their cash surpluses with the ECB and encourage them to inject these funds cheaply into the market, the ECB decided to apply negative interest rates to deposits. In practice this means that banks have to pay the ECB to securely store their cash surpluses.

Some Belgian banks are now passing on these negative interest rates to their customers. Entrepreneurs consequently have to pay their banker to be able to deposit and keep money in their financial account.

Negative interest non-deductible

The passing on of these negative interest rates has not escaped the notice of the tax authorities. They issued a circular on the subject (2021/C/53 dated 8 June 2021) stating somewhat vaguely that negative interest is not deductible under any circumstances.

The authorities correctly assert that negative interest does not occur when collecting movable assets. Precisely because of this, it is not taken into account when determining the taxable base for such income. For the calculation of withholding tax, we understand why negative interest would not be deductible from movable income. Indeed, the deductible items defined by law to determine the taxable base of movable income are very limited.

What about deductibility as professional expenses?

However, should it also be understood from the circular that negative interest is not tax deductible as a professional expense for personal or corporate income tax purposes (Article 49 ITC92)?

In practice, we come across situations in which a business, out of necessity or prudence, keeps its cash surpluses available in a financial account. It can do this, for example, to finance an investment within the foreseeable future, to purchase new stocks, to pay salaries... In short, all situations in which the cost of a negative interest rate does indeed meet the basic conditions for the deduction of professional expenses for tax purposes. The negative interest is paid to the bank to make it possible to achieve or maintain taxable income. In normal situations negative interest should be tax deductible on the part of companies.

Addendum clarified

The lack of nuance in the aforementioned circular caused quite a commotion and the tax authorities received quite a few questions concerning this issue. As a result, an addendum was added to the aforementioned circular on 13 July 2021 (Circular 2021/C/65 dated 13 July 2021), in which the tax authorities confirm that the intended non-deductibility of negative interest only applies to the determination of the taxable base of movable income.

However, the tax authorities have taken things a step further and now confirm that negative interest can be considered deductible professional expenses (for personal and corporate income tax purposes). The tax authorities are correct though in pointing out that all (deductibility) conditions must be met.

Despite this welcome clarification, there will probably still be further debate on the deductibility of negative interest during a subsequent tax audit.

So what is the circular letter about?

The circular states quite clearly that negative interest does not constitute capital income and is therefore not subject to withholding tax.

According to the circular, negative interest shall not be 'offset' by positive interest for withholding tax purposes. In practical terms: your bank may not deduct the negative interest paid by you from the positive interest it owes you. This is not surprising, as to the best of our knowledge there is only one exception to a debit and credit interest compensation ban and that is the so-called 'unity of account' principle.

Our experts will gladly assist you with all your tax queries so please do not hesitate to contact them.