Tax reform – Draft Repair Bill: Relevant changes for the real estate sector
The draft Repair Bill modifies the law reforming the Belgian corporate income taxation, i.e. in terms of interest deduction restriction.
The law reforming the Belgian corporate income taxation Dated 25 December 2017 and published on 29 December 2017. has been discussed and voted in the framework of the very last rush of the end-year. As this law is still subject to many (justified) interrogations, a draft “Repair Bill” is currently under discussion. Please find hereafter a short overview of items relevant for the real estate sector.
Notional interest deduction
Pursuant to the Belgian corporate tax reform, as of 1 January 2018, the notional interest deduction (NID) no longer applies to the total equity but only to the increase of equity measured over a rolling 5-year period. The equity base to calculate the NID is equal to 1/5th of the positive difference between (i) the corrected equity at the end of the taxable period and (ii) the corrected equity at the end of 5th preceding taxable period.
Companies that are decreasing their equity on a regular basis to upstream their excess cash through capital decreases, which shall be the case for a large majority of real estate companies, shall therefore no longer benefit from the NID.
The draft Repair Bill includes the result of the current taxable period to the “corrected equity at the end of the taxable period” and introduces a new anti-abuse provision to avoid “artificial” increases of equity. A capital contribution by an affiliated company will be excluded from the calculation basis of the NID if the contribution was financed with a loan and the affiliated company claims a tax deduction for interest payments on this loan.
Interest deduction restriction based on the Anti-Tax Avoidance Directive (ATAD)
As from tax year 2021 Financial years ending on 31 December 2020 or in 2021 at the latest on 30 December., arm’s length exceeding borrowing costs will be deductible in the tax period in which they are incurred only up to the higher of 30% of the taxpayer’s EBITDA or 3,000,000 EUR (de minimis). Subject to group provisions. This new interest limitation rule shall replace the 5:1 debt-to-equity ratio but also extends the former thin capitalisation rule since it applies to all interest and not only intragroup interest.
BE-REIT, SREIF, real estate certificates and leasing companies
As previously published, this new interest deduction restriction is subject to exclusions (certain loans) and exemptions (certain taxpayers).
However, based on the bill voted last year – but not yet in force – it was concluded that
- BE-REIT, and potentially SREIF, would not be exempt from the application of this new rule – although the interest paid by them does not lead to a decrease of their taxable basis due to their specific tax regime;
- Real estate certificates would not be excluded from the scope of application of this new rule – although the tax system is similar to a BE-REIT or a SREIF, namely a shift in taxation from the vehicle to the beneficial owner of the real estate income.
Leasing and factoring companies were also no excluded from the scope of application while they benefit from specific provisions under the current thin capitalisation rule.
In terms of exemption, the draft Repair Bill adds companies that are solely or mainly active in the financing of real estate through the issue of real estate certificates, as well as companies that are mainly conducting leasing and factoring activities. With respect to real estate certificates, the draft Repair Bill specifies that public issue and trading is not required; in other words, institutional or private issue shall not jeopardise this exemption.
With respect to BE-REIT and SREIF, the draft Repair Bill does not modify the provisions with respect to interest deduction restriction, but well the tax regime of BE-REIT and SREIF. Under the current regime, non-deductible interest, including as a result of the application of the ATAD, are included in the taxable base of a BE-REIT or a SREIF, and therefore subject to corporate income tax at the standard rate. In accordance with the draft Repair Bill, non-deductible interest in the sense of the ATAD shall not be added (anymore) to the taxable result of a BE-REIT or a SREIF.
The draft Repair Bill makes an attempt to clarify the “group provisions” applicable to this interest deduction restriction. Further administrative comments and Royal Decree are however still needed and the relevant provisions might still be subject to interpretation:
- interest paid between Belgian taxpayers of the same group should be excluded;
- payments made between Belgian taxpayers of the same group are “neutralised” (i.e. either added or deducted from the EBITDA) to determine the EBITDA;
- the de minimis threshold of 3,000,000 EUR which should be allocated proportionally among the Belgian taxpayers of the same group.
Note that non-deductible borrowing costs can be carried-forward to compensate future profits to following tax periods under the form of a new tax deduction. The draft Repair Bill specifies that this tax deduction remains however limited to the unused part of the 3,000,000 EUR or the 30% EBITDA for the current tax period (i.e. unused interest deduction capacity), and is not allowed when another company member of the group exceeds its own interest deduction capacity.
In such a case, a transfer of the unused portion of interest is available at the level of the group, but also under the limits of the interest deduction capacity.
Moreover, the draft Repair Bill specifies that a company might be allowed to transfer more than its unused interest deduction capacity, to the extent such additional transfer is then considered as disallowed expenses at the level of the transferor company.
As from tax year 2020 (taxable periods starting on or after 1 January 2019), Belgian tax law shall provide for a possibility to consolidate profits and losses within a group through a so-called “intragroup transfer” between a Belgian taxpayer and another qualifying taxpayer.
The draft Repair Bill neutralises the consequences of a reorganisation (e.g. a merger) as regards the qualification as a qualifying taxpayer for the purposes of this tax consolidation, when all companies that participated into the reorganisation could have been considered as a qualifying taxpayer on a standalone basis (i.e. “going concern”).
As the Constitutional Court recently ruled that the fairness tax is contrary to Belgian constitutional law, the abolition of the fairness tax as from tax year 2019 (taxable periods starting on or after 1 January 2018) is included in the draft Repair Bill.
AntoineBéchaimontSenior associate Attorney at Law
Antoine Béchaimont is a member of the Loyens & Loeff Real Estate Practice Group in Belgium and of the Investment Management/Funds Team. He is a senior associate in our Brussels office with a broad practice of counselling in real estate transactions and taxation.T: +32 2 700 10 39 E: firstname.lastname@example.org