The notional interest deduction ("NID") refers to the deemed interest expenses that Belgian companies and establishments are entitled to calculate annually on the amount of their total equity and deduct for tax purposes, thus reducing their tax bases. The deduction is based on the amount of a company's total equity as determined in accordance with Belgian GAAP, and comprises the share capital and share premium as well as the various retained earnings.
What amounts to total equity, is determined by reference to the company's equity position at the end of the preceding financial year. Once this base amount is established, certain adjustments have to be made. If the company has a foreign establishment of which the income is tax exempt by virtue of a tax treaty, one of these adjustments consists of reducing the base amount by any positive difference between (i) the net book value of assets allocated to such foreign establishment and (ii) the liabilities allocated to such establishment.
It was on this limitation of the NID calculation basis for foreign establishments, that the Antwerp Court of First Instance referred a question for a preliminary ruling to the European Court of Justice on June 24, 2011. The Court of First Instance asked whether the freedom of establishment is infringed by excluding the net assets of a permanent establishment located in another EU Member State and of which the income is exempt in Belgium by virtue of a tax treaty, from the NID calculation basis.
On July 4, 2013, the European Court of Justice issued its ruling in this Argenta Spaarbank case (case C-350/11). It found that this limitation does constitute a restriction of the freedom of establishment as it may cause Belgian companies to refrain from pursuing their activities through a permanent establishment in a Member State other than Belgium. It was further stated that this restriction cannot be justified either by the need to preserve the coherence of the fiscal system, or by the balanced allocation of taxing powers between EU Member States.
We now await the reaction of the Belgian legislature to this clear ruling.
