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Thursday, 08 December 2016

Does the finance structure of your real estate investments need to be reviewed?

Unfortunately, there is as yet no final agreement on a major reform of the Belgian corporate income tax system. However, increasing numbers of tax measures do not require an agreement at the Belgian federal or regional government level as they originate at the EU level, which makes their implementation obligatory. One of those measures is a limitation on the interest deductibility to 30% of a taxpayer’s EBITDA. This measure clearly could have an impact on real estate investment company’s financing structures, given that real estate investments are traditionally heavily-leveraged.

On 19 July 2016, the so-called ‘ATAD’, the Anti-Tax Avoidance Directive (2016/1164 of 12 July 2016), which lays down the rules against tax avoidance practices that directly affect the functioning of the internal market, was published. As a matter of principle, the ATAD’s rules are intended to tackle cross-border tax avoidance practices and provide a common framework for implementing in a coordinated manner the BEPS’  outputs into EU Member States' national laws.

One of the ATAD measures provides a European minimum standard for an interest limitation rule. In summary, under this new rule, net borrowing costs will be restricted to 30% of a taxpayer’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). Tax-exempt income must be excluded from EBITDA. Furthermore, this rule will apply on the aggregate net interest position including both internal and external financing.

This interest limitation must be adopted into national law by 31 December 2018. However, a derogation until 1 January 2024 is available for Member States having rules “as effective as the fixed ratio rules”.

The Belgian Ministry of Finance intends to implement this interest limitation in conformity with the ATAD from the assessment year 2019, i.e. for the financial years from 1 January 2018.

This ATAD leaves space for a number of derogations to the general interest deduction limitation. For example, taxpayers may be given the right to deduct borrowing costs exceeding up to EUR 3 million € (as considered at the group level). Although it is not yet possible to predict exactly how the ATAD’s provisions will be implemented exactly into national law in Belgium, we understand that it is the Minister of Finance’s intention to implement this threshold.  Furthermore, it is likely that there will be an exemption for AIF.  However, it is not clear whether this exemption will also apply for companies controlled by such an AIF.

Furthermore, it is also likely that Belgium will leave open the option to carry forward non-deductible exceeding borrowing costs, but probably with a time-limit.

A number of real estate companies will thus need to refinance or restructure to stay within the interest-limitation rule. Given the ATAD only imposes a de minimis interest limitation rule and the Member States are allowed to impose stricter rules, it is important to carefully monitor the implementation of this rule under the laws of each Member State in which financing structures are in place.  Please note that the ATAD not only applies to all taxpayers that are subject to corporate income tax in one or more Member States, but also to permanent establishments in Member States of entities that are resident for tax purposes in a third country.

We will keep you updated on this major change on interest deductions that impact upon the real estate sector.

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