Notional Interest Deduction Rebalances Equity and Borrowings

From January 1 2006 - and for book years ending on December 31 2006 or later - all Belgian companies will be able to benefit from a deduction for risk capital, also referred to as a notional interest deduction.

For tax purposes, every company will be treated as if it had borrowed its own funds at a yearly interest rate equal to that of the 10-year Belgian government bond. The notional interest thus computed will be deductible from the tax base.

The purpose of this innovative provision is to restore the balance in the tax treatment of equity and borrowing as financing methods. Whereas the nominal corporate tax rate remains just below 34%, it has been calculated that the new provision will reduce the effective tax rate to an average of 26%. However, the effective rate will be considerably lower (sometimes as low as 0%) for capital-intensive activities such as financing. The new measure will therefore offer interesting tax-planning opportunities for both Belgian and