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‘Thin Cap’ Regulation Finalised
The Belgian government has recently published new legislation on 'thin cap' rules. The 'thin cap' regulation has now become more stringent and a debt/equity ratio of 5:1 is imposed. The interest payments on all qualifying loans exceeding 5 times the net asset value of the debtor company will no longer be tax deductible. Taxand Belgium looks at how companies in Belgium will be affected by the new more stringent thin cap legislation.
In order to reduce the tax consequences of these new rules on companies centralising their cash management in Belgium, a specific tax regime has been provided for this type of taxpayers.
One of the new Belgian government decisions concerns the implementation of a 'thin cap' regulation'. In the past, such measurement already existed in a 7:1 debt/equity ratio for interest paid to so-called tax heavens. As a result of the Law of 29 March 2012, this 'thin cap' regulation has become more stringent and also applies to other loans (including group loans), except for loans concluded by companies for movable leasing, immovable leasing in the financial sector and some government assignments. Also loans concluded by financial institutions are excluded (under conditions).
A lot of discussion came up with respect to centralised cash management. Companies who settle their European or worldwide finances via a Belgian group company would be penalised on the loans granted. In order to safeguard the tax position of these taxpayers, an additional exception on the 'thin cap' regulation has been implemented (law of 22 June 2012).
For companies who are responsible for the centralised cash management, the 5:1 debt/equity ratio is computed based on the positive difference between paid or attributed interests to its group companies, and the received or obtained interest from its group companies. The purpose of this adjustment is the avoidance of the penalisation of so-called 'cash pooling' of Belgian (group) companies.
To benefit from this latest exception, the company in question must draft a framework agreement to clarify its financing structure and to defend the interest deductibility. Interest received out of the scope of this framework agreement does fall under the new 'thin cap' regulation.
The measurements entered into force as of 1 July 2012. It is important for companies falling within the scope of the new 'thin cap' regulation measurement to draft a solid framework agreement, and avoid compromising their tax position.
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