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High equity companies enjoy a considerable tax break.

Since 2006, the tax base of any Belgian company or of any Belgian permanent establishment of foreign company is reduced, for each year, by a deduction for risk capital, corresponding to a notional interest charge calculated on the entity’s total equity at the close of the previous financial year (i.e. share capital plus retained earnings as they appear on the balance sheet, subject to a couple of fiscal corrections aimed at countering abuse and double dip). The applicable interest rate is in principle the average of the 10-year government bond rates for the months of July, August and September of the last but one year prior to the tax year, capped at 3% (3.5% for SMEs). The applicable rate for income year 2014 amounts to 2.63% (3.13% for SMEs).

This provision aims at promoting equity funding of companies and has triggered increased foreign direct investment into Belgium.Whereas the nominal corporate tax rate remains at just below 34%, it has been calculated that the provision reduces the effective tax rate to an average of 26%. However, the effective rate is considerably lower for capital-intensive activities such as financing.

The measure offers interesting tax-planning opportunities for both Belgian and foreign entities. One obvious opportunity is the use of a Belgian company to centralize group cash flow.

If a parent company « P » wants to finance the activities of its subsidiary « X », P can increase the capital of a (genuinely substantial) Belgian company F, which lends the funds on to X. X then pays interest to F, which redistributes its profit as a dividend to P. The interest paid by X to F – at a rate of 3.5% – is taxable in Belgium, but F can apply the deduction for risk capital based on the capital initially contributed by P. If the deduction rate for the year in question is 3%, F’s taxable profit will be 0.5% of the capital amount rather than 3.5%. The standard rate of Belgian corporate income tax is almost 34%, but the actual rate paid is under 5%.

Also note that, since 2006, capital contributions, in cash or in kind, to the equity of companies have no longer been subject to any tax, so that high equity can be built up at no tax cost.

Large companies using the NID to offset their tax base may in certain circumstances be subject to a minimum corporate tax (the so-called « fairness tax », introduced as from assessment year 2014).

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