1. 2011 EMEA Regional Conference Dubai, United Arab Emirates Thin Capitalization in Belgium Jean-Marie Leclercq

2. Belgium: General background

4. - Belgium is strategically located at the heart of Europe : London, Paris, Amsterdam and Frankfurt all lie within 300 km (by train 1h51', 1h22', 2h39' and 3h45' respectively) while some of Europe's key business hubs including Lisbon, Rome, Madrid, Stockholm, Athens, Warsaw, Berlin and Dublin are only a 2h flight away. - Belgium enjoys a pivotal position in public organization : The European Union, NATO and some 1,400 international non-governmental organisations are also headquartered here. - Belgium tax system in a nutshell : Corporate tax rate of 33.99% Reduced progressive tax rates for small and medium sized companies Corporate income tax on their worldwide income (more than 90 DTT) Taxable result = net accounting result increased/decreased by tax corrections

5. Belgium: Thin Capitalization

6. INTRODUCTION No real specific ‘thin capitalization rule per se in Belgium Belgium refers to net equity Only 2 anti-avoidance rules:  1:1 debt/equity ratio  7:1 debt/equity ratio But… Advantages granted through notional interest deduction (NID) rules

7. 1:1 debt/equity ratio - Art 18 ITC Application:  on loans  granted by: - individuals directors, - shareholders & - non-EU corporate directors Measure:  Interest of said loans exceeding the ratio = dividends Consequence:  Non-deductibility (taxed @ 34%) & Withholding tax +spouse and children

8. 7:1 debt/equity ratio - Art 198 11° ITC Application:  on loans  granted by creditors: - resident or non resident, - exempt or taxed at a reduced rate Measure:  Interest of said loans exceeding the ratio = non deductible Consequence:  Non-deductibility (taxed @ 34%)

9. Belgium: Advantages of NID

10. Notional interest deduction Off balance deduction from taxable income equal to a percentage of the net equity in the BE GAAP accounts, corrected for tax purposes Purposes:  reinforce equity position and improve solvency  attract large industrial groups in Belgium  preserve fiscal competitiveness (EU average Effective Tax Rate)

11. Notional interest deduction Who is concerned? Companies subjected to Corporate tax Non-residents / Corporate Tax

12. Notional interest deduction How does it work ? Annual Tax Deduction = EQUITY X RATE (3,425% for 2011)

13. Notional interest deduction Which equity? Net equity for accounting purposes (end of the previous year) Some elements to be deducted f.i.  Own shares  Shares booked as financial fixed assets  Assets held as investment not generating recurring income  Real property used by a director or his spouse / children  Capital subsidies

14. Notional interest deduction Which rate? Rate = interest on 10 years bonds (“OLO”) issued by the Belgian State Income year 2010 = 3,800% Income year 2011 = 3,425% Increased for Small companies = 0,5%

15. Notional interest deduction P&L AccountBefore N.I.D.After N.I.D Profit before tax 400 N.I.D. (3,425%)/ - 342,5 Taxable 400 57,5 Corporate Tax (33,99 %) 135,96 19,5 Effective Tax Rate 33,99 % 4,89% AssetsLiabilities Various Assets 10,000 Net Equity (Share Capital 9.000 + Reserves 1.000) 10.000 NID rate = 3.425%

16. Notional interest deduction NID rate = 3.425% Notional interest for international tax planning (1/2) Foreign Co needs a capital increase of 10.000 Solution?  Step 1: capitalization of BelCo (+10.000)  Step 2: BelCo grants a loan to foreign Co @ 5% Advantage of NID?  Taxable Income BelCo = 500,00  Notional Interest deduction (3,425%) = (342,50)  Taxable Income = 157,50

17. Notional interest deduction NID rate = 3.425% Notional interest for international tax planning (2/2) Points of attention  Interest paid by Foreign Co deductible?  In its country? or thin cap’ issue?

18. Conclusion Belgium has no real thin capitalization rules but Belgium has 2 anti-avoidance rules  Belgium does not refrain thin Cap’ but  Belgium promotes local and international plannification via “high” capitalization (generated by the Notional interest deduction)

19. Questions ? Managing Partner Jean-Marie Leclercq jml@taxconsult.be + 32 2 678 17 77