Notional interest deduction - EY

1 Ernst & YoungAssurance |Tax |Transactions |AdvisoryAbout Ernst & YoungErnst & Young is a global leader inassurance, tax, transaction and advisoryservices. Worldwide, our 141,000 peopleare united by our shared values and anunwavering commitment to quality. Wemake a difference by helping our people,our clients and our wider communitiesachieve their more information, please Ernst & Young refers to the globalorganization of member firms of Ernst &Young Global Limited, each of which is aseparate legal entity. Ernst & Young Global Limited, a UKcompany limited by guarantee, does notprovide services to clients.

2 2011 Ernst & Young. All rights rights publication contains information in summary formand is therefore intended for general guidance only. It isnot intended to be a substitute for detailed research orthe exercise of professional judgment. Neither EYGML imited nor any other member of the global Ernst &Young organization can accept any responsibility for lossoccasioned to any person acting or refraining from actionas a result of any material in this publication. On anyspecific matter, reference should be made to theappropriate NID could mean for yourcompany s effective tax rateNotional interest deduction - conceptThe deduction for risk capital or more commonly called Notional interest deduction (NID)is a unique tax measure allowing a tax-free return on qualified equity by allowing a deemedinterest deduction calculated as the qualifying equity multiplied by the applicable NID rate.

3 The measure was introduced in 2005 (applicable as from tax year 2007)and in principleapplies to all companies with a Belgian taxable presence, irrespective of their size, industryof activities. This reflects the broad objective of the measure, which was to align the taxtreatment of financing a company with equity with the tax treatment of financing with debtin order to allow companies to strengthen their capital structure without giving up thebenefit of tax-deductible interest , the NID may create a tax lowering effect to many companies.

4 In particularfor equity intensive activities ( , group financing, intellectual property, etc.) this will leadto quite a low effective tax of applicationEligible companiesAll companies (Belgian or foreign) which are subject to (i) Belgian corporate income tax,or(ii) Belgian non-resident corporate income tax ( permanent establishment, Belgianreal estate income) are eligible for NID. Companies that benefit from another Belgian beneficial tax regime are excluded from theapplication of the NID, Recognized Coordination CentersReconversion companiesInvestment companies (Beveks / Sicavs)Certain cooperative participation companiesShipping companies applying the tonnage tax regimeNotional interestdeductionNotional interest deduction4 How can Ernst & Young assist you?

5 Ernst & Young consults on a day-to-day basis on the application of this relatively newmeasure. We are constantly updating our knowledge and can fill in the gaps. Furthermore,Ernst & Young can assist you in monitoring your NID position and in tax-optimizing. Contact persons For more information on the Notional interest deduction , please contactHerwig JoostenErnst & Young Tax ConsultantsDe Kleetlaan 21831 Diegem, BelgiumTel: + 32 (0)2 774 93 ClaesErnst & Young Tax ConsultantsDe Kleetlaan 21831 Diegem, BelgiumTel: + 32 (0)2 774 94 VandermeerscheErnst & Young Tax ConsultantsMoutstraat 549000 GhentTel: +32 (0)9 242 51 MoreauErnst & Young Tax ConsultantsDe Kleetlaan 21831 Diegem, BelgiumTel: + 32 (0)2 774 91 one of your regular contacts atAntwerpJ.

6 Englishstraat 52-542140 AntwerpTel: +32 (0)3 270 12 00 Fax: +32 (0)3 235 31 45 BrusselsDe Kleetlaan 21831 DiegemTel: +32 (0)2 774 91 11 Fax: +32 (0)2 774 90 90 GhentMoutstraat 549000 GhentTel: +32 (0)9 242 51 11 Fax: +32 (0)9 242 51 51 Notional interest deduction3 Notional interest deduction2 Eligible incomeThere is no restriction on the type of income againstwhich the NID can be set off. So, all business income willbe eligible, operational income, interest , dividends,royalties, anti-abuse rules limit the use of NID to set offnon-arm s length profit, so-called received abnormal orgratuitous does it work?

7 An off-balance tax deduction is obtained by applying theannually set NID rate on the Qualifying Equity. Theresulting amount is deducted from the taxable baseremaining after the application of the patent incomededuction and the participation exemption on capitalgains on shares and dividends and prior to deducting thetax losses carried forward. This is a Notional interest deduction for which no cashpayment occurs or interest expense is the calculated NID in a particular year exceeds thetaxable income, the excess NID can be carried forwardfor seven equityThe Qualified Equity is determined as the total equitystated in the non consolidated Belgian Statutory closingbalance sheet of the previous taxable period adjustedwith a number of items to avoid artificial boosts ofQualifying Equity and duplication of tax benefits.

8 The equity according to Belgian statutory accountsincludes the paid-up capital, share premium, unrealizedrevaluation gains, reserves, retained earnings and lossesand capital subsidies. The following items, as determinedper the end of the previous taxable period are to bededucted from this accounting equity: The fiscal net value of own shares and other sharesrecorded as financial fixed assetsThe fiscal net value of shares issued by investmentcompanies of which the income would qualifying forthe Belgian Participation ExemptionThe net equity value allocated to foreign permanentestablishments or foreign real estate properties orrights of which the income would qualifying for anexemption based on a double tax treatyThe net book value of tangible fixed assets thatunreasonably exceed professional needsThe book value of tangible fixed

9 Assets that are heldas investment assets and can by their nature notgenerate periodic incomeThe book value of real estate assets or rights used bythe directors, their spouse or childrenThe tax exempt portion of revaluation gains, capitalsubsidies and tax credits for research anddevelopmentBoth upward and downward changes of the differentcomponents of the Qualifying Equity over the taxableperiod are taken into account on a pro-rata monthlybasis, except for the changes in the current year rateThe base NID rate for any particular tax year is fixedannually and is determined as the monthly averageinterest rate for risk-free, long-term government bonds(the ten-year OLO) over the calendar year two yearsprior to the tax year at hand.

10 As an example, note that inBelgium tax year 2012 relates to financial years closingbetween 31 December 2011 and 30 December per 31 December 2011 is tax year 2012. Closingper 30 December 2011 is tax year 2011. The annual NID rate increase or decrease is currentlyhowever capped at 1%, while the maximum base rate iscapped at (temporary capped for tax years 2011and 2012 at ). For small and medium size entities ( SME ), the baserate is increased with of the applicable ratesImpact on effective tax rateExample illustrating the ETR on a Belgian company inany business (1,000 business assets / 1,000 q.)