Law & Numbers - News Tax

Notional Interest Deduction

04.03.2013 (Belgium)

Notional Interest Deduction: what is it? It enables all companies subject to Belgian corporate tax to deduct from their taxable income a fictitious interest calculated on the basis of their shareholder’s equity (net assets); applicable since 1/1/2006 ; at the same time, the 0,5 % registration duty on capital contributions has been abolished


 The main purpose of this measure is to reduce the tax discrimination between debt financing and equity financing: interest paid is deductible from the taxable base, while dividends are taxable.

 Positive effects:

1. a general reduction of the effective corporate tax rate for all companies, and a higher return after tax on investment
2. the promotion of capital-intensive investments in Belgium, and an incentive for multinationals to examine the possibility of allocating such activities as intra-group financing, central procurement and factoring to a Belgian entity (replaces coordination centres special tax regime).

Scope of application

Are eligible all companies that are subject to

✓ Belgian corporate income tax; or
✓ Non-resident corporate income tax.

The rate

The notional interest rate for tax year 2013 (i.e. accounting year ending on 31 December 2012 or later in 2013) is 3 %.
Increased to 3.5 % for SMEs.

Example I (tax year 2013, i.e. accounting year ending on 31 December 2012 or later in 2013)

- The balance sheet of the Belgian entity shows that the share capital (100.000) has been used for group financing.
- Intra-group interest rate: 4 %
- Profit before taxes: 4.000
- Normal corporate tax (33,99 %): 1.360
- Notional interest deducted (3 %) : 3.000
- Profit before taxes: 1.000
- Effective corporate tax : 340 (or 8,5 % x 4.000)

Example II (other approach)

As long as the net result (return on equity) is equal or lower than the notional interest rate, no corporate tax will have to be paid.
The effective tax rate corresponding to different rates of return on equity can be found in the following summary table:

Net result
(return on equity) Effective tax rate
Up to 3 % 0 %
4 % 8,5 %
5 % 13,5 %
6 % 17 %

Advantages (according to Belgian Ministry of Finance website)

 The notional interest deduction is a tool to maintain or even locate in Belgium activities which were previously allowed under the special tax regime of Belgian coordination centres
 It creates a considerable tax benefit for companies that have good solvency ratios, reducing the taxable base and generating a higher return after tax
 It provides flexibility, because it is possible to carry forward any unused amount of the deduction
 It is a permanent incentive and not just a one-shot advantage
 It strengthens the financial position of Belgian companies and branches by encouraging them to increase their equity
 It is an incentive to retain earnings in the Belgian entity and to use these to finance new investments
 For international groups, it opens possibilities for allocating new activities to a Belgian entity such as intra-group financing, central procurement or factoring.
 It makes Belgium an attractive location for capital-intensive companies, equity funded headquarters and treasury centres
 Does not seem to be a problem as far as CFC regulations are concerned.

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