New interest deduction limitation as from 2019
One of the elements of the Corporate Tax reform is the new interest deduction limitation. The government has advanced the implementation of the new rules, so they apply as from 2019.
What is it all about?
Based on the EU legislation, all European member states are obliged to introduce a new interest deduction limitation. The EU wants to use these rules in the fight against tax evasion: through interest payments international groups can shift profits to affiliated companies in low-tax countries. Europe wants to avoid this.
According to European rules EU member states should introduce measures limiting the interest deduction. They should do so by implementing the European directive into national legislation. Belgium should transpose the European rules into Belgian legislation. The member states had until 31 December 2018 to do so, so the new rules could be applied as from 1 January 2019.
Member states can however ask Europe for a delay until 2024. Belgian did apply for such delay. Finally, the government decided to nevertheless apply the new interest deduction limitation as from 1 January 2019. This means: for accounting years which started on 1 January 2019 - as from tax year 2020.
The new rules do not apply to ...
Financial companies are not subject to these new rules.
Also, independent companies which are not part of a group, fall outside scope. After all they cannot transfer their profits to an affiliated company in a low tax country.
Interest related to leasing contracts closed before 17 June 2016 and to which from that date onwards no significant changes were made, also do not fall within the scope of these new rules.
What does the interest deduction limitation mean?
The interest deduction limitation means that a company can only deduct a part of its paid interest as professional expenditure. The company cannot deduct interest:
above 3 million euro.
increasing more than 30% of EBITDA.
Interests above three million euro
A company loses its right to deduct interests when they surpass three million euro. Net interest expenditure is concerned, also referred to as financial costs surplus.
Therefore, interests received by a company are deducted from the interest which the company pays. If the positive result exceeds three million euro, the company loses its deduction right to the extent that the amount exceeds the three million threshold.
When a company pays less than three million euro interests, it keeps its full interest deduction right.
In other countries, the threshold is lower: e.g. the Netherlands has set the threshold at one million euro.
30% of EBITDA
The interest deduction is also limited to 30% of the EBITDA, which means Earnings Before Interest, Taxes, Depreciation and Amortization. This notion is used as a benchmark for the profit obtained by a company with its operational activities without financial profit and losses.
Unused interests are transferable
When a company cannot use part of the interests because the thresholds are exceeded, it can transfer these interests to a future year and use them later.