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How does the new interest deduction limitation work in practice?

Wednesday 27/01/2021
Interestaftrekbeperking

A new interest deduction limitation was introduced in Belgium from assessment year 2020 (financial years starting on 1 January 2019). The aim of this is to counteract the erosion of the taxable base due to excessive interest payments, and some things have already been clarified in the meantime.

Nevertheless, this regulation remains complex. What does that mean in practice?

Interest deduction limited

From now on, the financing cost surplus is only deductible to the tune of EUR 3 million, or 30% of the fiscal EBITDA (a way of mapping out the value of a company).

Because at least EUR 3 million in interest remains deductible in any case, this scheme is less relevant for the average Belgian SME, which usually doesn’t pay EUR 3 million in interest. It is, however, relevant for a group of linked SMEs/companies, because, in that case, the minimum threshold of EUR 3 million must be divided over all the companies of the group.

What is a company group?

In the context of the financing costs surplus, a company group consists of companies that are affiliated within the meaning of Art. 1:20 of the Companies and Associations Code. For most aspects, the companies must be affiliated during the entire taxable period.

Caution in the case of a takeover

A point for attention is the interest deduction in the case of the acquisition of a company. The acquiring company will usually take on a (large amount of) financing in order to carry out the acquisition. During the first year, the acquired company will not yet be considered part of the group of the acquiring company for the application of the interest deduction limitation. There is not yet any affiliation throughout the 'entire taxable period'. If the interest charge amounts to more than EUR 3 million, a part of this will not yet be deductible in that first year.

How do you calculate the financing cost surplus?

In order to determine the amount of the interest deduction limitation, you must first calculate the financing cost surplus per company.

The financing cost surplus is the positive difference between:

  • The total of interest costs (and economically similar costs);
  • The total of interest income (and economically similar income).

Some costs and revenues are excluded from the calculation.

  • Under certain conditions: the interest of loans for which the contract was concluded before 17 June 2016.
  • If the taxpayer is part of a group of companies during the entire taxable period, the interest paid to or by a Belgian group company does not qualify for the determination of the financing cost surplus. Interest paid to or by a foreign group company is therefore eligible.

Deduction capacity at group level

Once you have calculated the financing cost surplus, you must check the deduction capacity at group level. If the financing cost surplus on the group level is more than EUR 3 million or 30% of the fiscal EBITDA, additional steps are necessary.

After all, under certain conditions, the deduction capacity can be transferred, either between group members or to the next taxable period.

Even if the financing cost surplus remains below EUR 3 million, the allocation of the deduction capacity between the group members must be checked as a function of the EBITDA calculation.

Which declaration formalities must be completed?

The new interest deduction limitation entails many declaration formalities. Group companies with a financing cost surplus of less than EUR 3 million may also have to complete additional formalities.

  • Form 275 CRC must be added to the declaration in order to waive the EBITDA rule and to ensure that the distribution of the EUR 3 million between the group members is carried out according to the financing cost surplus. In smaller groups with a financing cost surplus of less than EUR 3 million, it is also best to submit this form in certain cases.
  • In case you want to exclude older loans, concluded before 17 June 2016,from the application of the measure, you must attach an attachment to the declaration with additional information about the respective loans.
  • Form 275 SE is added to the tax declaration if you carry over the non-deductible financing cost surplus to the next assessment year. Where applicable, the amount is included in disallowed expenses.
  • Form 275 CDI must be completed if you want to transfer the deduction capacity between companies. This must be attached to the declaration of the involved parties.

Obtain assistance

The new interest deduction limitation is very complex and, especially for corporate groups, there is a risk of total or partial rejection of interest if the correct attachments are not included with the corporate tax return.

You should therefore ensure that you obtain assistance to check the consequences of this new regulation for your specific situation. We will be happy to help you with that.

Contact one of our experts

Laura Meert

Laura Meert

Manager Tax & Legal Associate