How does it impact your Belgian Finance company. Recent trends in the European tax landscape - Relevant headlines of the Belgian tax reform 2012

1. Belgian Corporate Tax Reform:
How does it impact your Belgian
Finance company
30 May 2012, Diegem
Seminar Organised for ATEB
Peter Moreau – Andy Neuteleers
Guest Speaker Veronique Tai, President of the Belgian ruling
Commission

2. Agenda
► Introductions and welcome
► Recent trends in the European tax landscape
► Relevant Headlines of the Belgian Tax Reform 2012
► Introduction of the Belgian Ruling Commission
► Impact tax reform on Belgian Finance and Treasury
company - Selected topics
► Closing and Cocktails
Page 2

3. Recent Trends in the European Tax
Landscape
► Governments seek additional revenue through tax increase and/or broadening
of the tax base.
► Introduction of more strict thin capitalisation rules
► Introduction of other interest deduction limitation rules
► EBITDA interest limitation
► Limitation in interest deduction for acquisition of shares
► Stricter (application of) anti-abuse rules - focus on “substance”
► EU and OECD focus on double non-taxation through mismatches (e.g. hybrid)
– “code of conduct”
► Limitation on use of tax losses
► More exchange of information
► More tax and TP controversy – more aggressive tax audits
► Aggressive tax planning under scrutiny – media coverage
► Introducing NID (Italy)
► Lowering tax rate and making tax regime more attractive (UK)
Page 3

4. Relevant Headlines of the 2012 tax reform
► Notional interest deduction
► Thin capitalization rules
► Anti-abuse legislation
Page 4

5. Notional interest deduction
Page 5

6. Notional Interest Deduction (NID)
► Introduced in 2005 (applicable Tax Year 2007) to “replace” BCC regime
► Deemed deduction on qualifying Belgian GAAP equity (reduced by items
such as financial fixed assets, foreign branch equity, ...)
► Deduction linked to 10 year OLO but capped to 3.8 % for tax years 2011
and 2012, for tax year 2012 NID rate is 3.425 % (3.925 % for SMEs)
► Full carry forward (C/F) but limited to 7 years
► Can not be used against abnormal or benevolent income ... (circular)
► Budget Impact :
► Tax year 2010 NID : used16.3 Bio € with 2010 C/F: 12.6 Bio € (PV-QP
25/07/2011),
► Estimated total NID equity 2010 : minimum 330 Bio € (applying 4.973% on NID
used)
► Unique measure? No! The Netherlands, Luxembourg, Switzerland, Italy,
... have similar measures
► Many other financing regimes & alternatives (EU & non-EU) exist
Page 6

7. Notional Interest Deduction (NID)
( )
Interest
Parent
Loan
-
Interest
Belgian NID Co (Foreign) Op Co
Loan
- + -
NID and foreign tax credit
Page 7

8. Notional Interest Deduction (NID) – New
Rate Cap
► Maximum NID rate is still based on 10 year OLO but capped
► Reduction NID cap to 3% as of taxable year 2013 (accounting
years > 30/12/2012) (as from taxable year 2015: NID rate will be
determined by law) - 3.5% NID for SMEs
► Would have been +/- 4.2% based on average 2011‘12 month’ 10
year OLO
► Law of 28 December 2011 (Belgian official Gazette 30/12/2011)
► Expected income … 1,620 Mio € (+/- 45.6% tax measures)
Page 8

9. Notional Interest Deduction (NID) – New
Carry Forward abolished
► Third program law relating to 2011 budget, still to be voted, but
approved at government level
► All non-used NID for accounting years > 30/12/2012 (taxable
years 2013) is “lost” – abolishment of article 205 quinquies ITC
going forward - no more carry forward
► Companies with an existing “stock” of unused NID “C/F" for
accounting years 31/12/2011 or accounting years ending <
31/12/2012 (taxable year 2012 and before) can still carry
forward that stock, but subject to certain limitations ! (1 MIO € /
60-40)
► These limitations are immensely complex to apply in practice
and will result in a considerable amount of calculation work for
the years to come ! – Impact on deferred tax assets !
Page 9

10. Basic principles to be applied for “C/F” stock
NID – Accounting years < 31/12/2012
► The calculation of the NID “C/F” to be applied in a particular year
becomes a complete “separate operation” of the tax return. It becomes
its last operation, and will thus be effected “AFTER” the deduction of any
tax loss “C/F" (a reversal of the two operations, first NOLs and thereafter
NID “C/F” thus vice-versa compared to the past)
► The NID “C/F” to be used will be a function of (1) the existing 7 year
limitation following the year the NID was created (2) a % of residual
profit and/or the 1 Mio €-rule, the residual profit being the taxable profit
left before the last operation (the imputation of the NID “C/F”)
► NID “C/F” can always be applied on the first 1 Mio € of residual profit
► The residual profit left after imputation of the first 1 Mio €, can only be
reduced by NID “C/F” to a maximum of 60% - 40% remains taxable
basis.
Page 10

11. Next ...carry forward ?
► The 7 year limitation continues to exist, meaning that NID C/F can
not be used after 7 years beyond its year of inception,
However
“If part of the NID “C/F” that could have normally been used
under the former law within the 7 year limitation cannot be used
in a particular year as a result of the application of the 60/40
limitation, that part of the NID C/F becomes C/F “indefinitely”, that
is without limitations in time”
► On the other hand, if because of the reversal of the operations,
the use of existing tax loss carry forwards (NOLs) prevent the
timely use of NID “C/F” within the normal 7 year limitation, that
part of the unused NID “C/F” is lost forever, thus affecting tax
deferred assets if periodic income previsions do not foresee the
use of NID “C/F” before expiry of the NOLs
Page 11

12. Thin cap rules
Page 12

13. Thin capitalization - General
► To prevent tax avoidance by excessive leveraging, many countries
have introduced rules to prevent thin capitalization (Thin Cap)
► Two existing rules in Belgium ‘7/1’ (‘1/1’)
► Under the current legislation, a specific 7/1 Thin Cap applies where
the beneficial owner of the interest is a person who is not subject to
tax or if the income is subject to a tax regime that is significantly more
advantageous compared to the Belgian tax regime (Art 198,11° ITC)
► Current Thin Cap almost never applies, because of a “too narrow
beneficial ownership concept (direct-indirect)” & EU/treaty context
► The new thin cap is estimated to generate 100 Mio € income
► Change of thin cap ratio from ‘7:1’ now to ‘5:1’ and broaden scope
► Referral to an ‘annex to the budget’ – with reference to PPL structures
Page 13

14. Thin capitalization - New art. 198, 11° ITC
Program Law of March 29th 2012
Dutch French
“onverminderd de toepassing van de artikelen 54 en « sans préjudice de l’application des articles 54 et 55,
55, de betaalde of toegekende interesten van leningen les intérêts d’emprunts payés ou attribués si, et dans
indien, en in de mate van die overschrijding, het totale la mesure de ce dépassement, le montant total desdits
bedrag van deze leningen, andere dan obligaties of emprunts, autres que des obligations ou autres titres
andere gelijksoortige effecten uitgegeven door een analogues émis par appel public à l’épargne et autres
openbaar beroep op het spaarwezen en andere dan que les emprunts octroyés par des institutions visées à
leningen toegekend door instellingen bedoeld in artikel l’article 56, § 2, 2°, excède cinq fois la somme des
56, § 2, 2°, hoger is dan vijf maal de som van de réserves taxées au début de la période imposable et
belaste reserves bij het begin van het belastbare du capital libéré à la fin de cette période, lorsque les
tijdperk en het gestort kapitaal bij het einde van dit bénéficiaires effectifs de ceux-ci :
tijdperk, wanneer de werkelijke verkrijgers ervan : ► soit, ne sont pas soumis à un impôt sur les
► hetzij, niet onderworpen zijn aan een revenus ou y sont soumis, pour ces revenus, à
inkomstenbelasting of, voor die inkomsten, un régime de taxation notablement plus
onderworpen zijn aan een aanzienlijk gunstigere avantageux que celui résultant des dispositions
aanslagregeling dan die welke voortvloeit uit de du droit commun applicables en Belgique;
bepalingen van gemeen recht van toepassing in ► soit, font partie d’un groupe auquel appartient le
België; débiteur »
► hetzij, deel uitmaken van een groep waartoe de
schuldenaar behoort”
English (free translation)
“notwithstanding the application of the articles 54 and 55, any interest paid or attributed on loans, if, and in so far they are excessive,
the total amount of these loans, other than bonds or similar securities which are issued to the public, et other than loans granted by
institutions aimed by art. 56, § 2, 2°, exceeds five times the sum of the taxable reserves at the beginning of the taxable period and of
the paid-in capital at the end of that period, where the beneficial owner of these:
► either is not subject to income tax or, for these income, is subject to a far more beneficial regime on interest income than in
Belgium;
► either is part of a group to which belong the debtor”
Page 14

15. Thin capitalization – New
► The scope of existing thin cap rules will be broadened
► Change of thin cap ratio from 7:1 to 5:1
► Not only for loans with beneficiaries in tax havens but also for intra-group loans,
irrespective of tax treatment of interest
► Debt includes all loans, with the exclusion of bonds, other publicly issued borrowing
instruments and loans granted by financial institutions
► In case of indirect loans or guaranteed loans, the determination of the beneficial
owner will be crucial
► Not applicable for:
► Companies engaged in leasing of movable goods
► Companies mainly engaged in factoring and real estate leasing, provided
► They’re part of financial sector, and
► Loans are effectively used for factoring / leasing
► Companies mainly engaged in execution of projects of public-private cooperation
Page 15

16. Thin capitalization – New
► How to calculate:
► Qualifying equity : taxed reserves at the start of the financial year + paid-up capital
(incl. share premium) at the end of the financial year
► What if threshold is exceeded:
► Interest expense on exceeding part is not tax deductible
► To be calculated on pro rata basis
► Preliminary assessment of new rules
► Thin cap rules are less strict than in other EU / OECD countries
► In case of substantial leverage in Belgium, it will be necessary to check the
qualifying debt/equity ratio to verify whether equity needs to be reinforced →
definition of equity provides opportunity for planning
Page 16

17. Thin capitalization – New
► Entry in force is postponed
► Date will be determined by the King
► At the latest at 1 July 2012
► Problem of cash-pooling/intra-group financing companies/factoring
should be solved by then
Page 17

18. Thin capitalization – New - Regulation
Scoping – Interest & loan
► No longer limited to interest paid to beneficial owner, subject to no
income tax or a far more beneficial regime for interest income
► Also for intra-group loans (irrespective of tax treatment of interest at
the level of the beneficiary)
► Definition of group companies in accordance with Art. 11
Companies Code
► Connected, related companies (concept of control)
► Consortia (companies under central management)
↔ Initial version: (broader) BCC definition
► Excluded: loans contracted by
► Leasing companies (RD55) under supervision of BNB/NBB and
FSMA insofar the loans relate to leasing activities
► Factoring companies under supervision of BNB/NBB and FSMA
insofar the loans relate to factoring activities
► Companies primarily active in the field of public-private
cooperation
Page 18

19. Thin capitalization – New - Regulation
Scoping – Debt & equity
► Change of thin cap ratio from 7:1 now to 5:1
► Debt
► All relevant “loans”, with the exclusion of
► Publicly issued bonds
► Other publicly issued or comparable borrowing instruments
► Loans granted by certain financial institutions (banks, insurance
companies and other types of financial institutions listed in Art. 56, §2,
2° ITC 92)
► Equity = fiscal equity
► The sum of the taxable reserves at “the beginning of the taxable
period” and the paid-in capital “at the end” of the taxable period
↔ Initial version: accounting equity
► Special provision neutralizing the decrease of taxed reserves in
case of parent-subsidiary restructurings (merger goodwill)
Page 19

20. Thin capitalization – New - Debt & equity –
Exemptions based on the creditor
► “Other than loans granted by... institutions meant in ITC 56 § 2, 2°
ITC”. These are:
1. Regulated Belgian or EU credit institutions
2. National Bank of Belgium
3. Herdisconterings- en Waarborginstituut
4. Regulated Belgian or EU mortgage companies
5. Regulated Belgian or EU consumer credit companies
6. Regulated Belgian or EU insurance companies
7. FPIM and regional investment companies
Page 20

21. Thin capitalization – New - Debt & equity –
Exemptions based on the debtor
► “Not applicable on loans received by...”
1. Regulated movable asset leasing companies
2. Companies of which a) the principal activity consists of factoring or
immovable asset leasing and this b) within the financial sector and c)
to the extent that the received funds are effectively used for leasing
and factoring activities. STRICT!!
3. Companies of which the principal activity consists of executing public-
private cooperation projects
Page 21

22. Thin capitalization – New – Indirect loans &
guaranteed loans – Look THROUGH !
► In the case of loans guaranteed by party x or loans whereby a party x
has provided the lender with the proceeds to finance & whereby party
x partially or fully bears the risk, then party x will be considered the
beneficiary owner, unless the guarantee or the indirect funding did not
have “tax avoidance” as its principal motivation
► Concept of guaranteed loans to include in I/C debt, is “extremely soft”
as it’s easy to evidence lower cost of funding ≠ other jurisdictions ≠
plantation patterns (US law)
► Indirect funding (B to B) comparable to old “anti-channeling”
provisions
Page 22

23. Thin capitalization – New
No Netting ?
► Future of Belgium as location for financing centers?
► Future of cash pooling and intercompany factoring?
► No netting (no Dutch 10d-type rule)
► Factoring/leasing exclusion: too restrictive scope of application
► No tax consolidation (double taxation)
► Legislative change in progress to
► Introduce netting (only on excess of interest-out vs. interest-in)
► For interests paid/received as part of a centralized treasury group
agreement
Page 23

24. Thin capitalization – Amendments for
Treasury Centers (1)
► A special provision (exception) is inserted for central treasury &
financing companies to the extent they are involved in daily treasury
activities or treasury management (cash pooling), within a group (as
defined under Article 11 Companies Code)
► As regards such financing (daily cash pooling & others) as part of a
central treasury management within a group (Article 11 Companies
Code), the amount of interest considered paid & attributed for purposes
of the thin cap is calculated as the difference between:
► Interests paid (expensed) to group companies (not being financial
institutions)
► Interests received from group companies as part of a central
treasury agreement (not being financial institutions)
Page 24

25. Thin capitalization – Amendments for
Treasury Centers (2)
► When calculating this positive difference, interests relating to group
companies that are not subject to tax or not subject to a foreign tax
similar/comparable to Belgian tax or based in a country where the
common tax regime is considerable more advantageous regime (EEA
countries being excluded from the latter), are not taken into account
► The companies concerned need to clarify their used financing &
treasury group model in a treasury agreement
(raamovereenkomst/convention cadre) concluded between group
members
Page 25

26. Thin capitalization – Amendments for
Treasury Centers (3)
► In this interco agreement the group co’s explain the used financing
model and the activities qualifying within central treasury management.
This document is required for the tax audit of the netting exception. The
agreement a.o. needs to explain:
► The treasury model as regards the investment/placement or
redistribution of excess cash of certain group co’s with other group
co’s
► The treasury model as regards the guaranteeing of third party loans
with group co’s
► The way “netting” is achieved between incoming/outgoing group
debt/receivables
► The principles & modalities applied for remunerating the model
► In other words “Transfer Pricing” & a solid interco agreement become
very relevant => APA’s are best considered
Page 26

27. Thin capitalization – Amendments for
Treasury Centers (4)
► Central treasury management is considered to be the management of
“Daily” treasury transactions or short-term treasury management and
even exceptionally long-term treasury management in order to account
for specific circumstances applicable under normal treasury
management
► Transactions not qualifying under these circumstances are subject to
the general Thin cap rule, then the netting rule does not apply
Page 27

28. Thin capitalization – Amendments for
Treasury Centers - Example
B/S (in -000-) P/L “only related to central treasury agreement”
Receivables LT 125 Equity 125 Fin. Costs 4,000 Fin. Income Group Co’s 3,000
Group Co’s
Receivables ST 1,000 Debt ST 1,000
Group Co’s 700 Group Co’s 800 Fin. costs 1,000 Fin. Income 300
Non-group Co’s 300 Third parties 200 others SHT Tax haven
Bank 500 Fin. Income 200
1,125 1,125 Related banks
Fin. Income 2,000
Other
5,500 5,500
Ø Normal Thin cap: 4,000 * 800 – (5 * 125) = 875
800
ØNew Thin cap: (4,000 – 3,000) * 800 – (5 * 125) = 218.75
800
Page 28

29. New anti-abuse legislation
Page 29

30. 2012 Tax reform
New anti-abuse legislation
► “Right to choose least tax way” (Brepols doctrine)
► Original provision (art 344 §1) adopted in 1993
► Recharacterization of transaction(s), when aim of legal
characterization of the parties opted for is tax avoidance
► Taxpayer may prove legitimate needs of a financial or economic
nature for the chosen legal characterization
► Limited application in practice due to strict legal approach adopted
in case law of Supreme Court : need for similar legal
consequences (impossible for one-step transactions and difficult
for step-by-step transactions unless (near-)simulation)
Page 30

31. 2012 Tax reform
New anti-abuse legislation
► Modification of the general anti-abuse provision :
► Abuse of tax law
► Avoidance of the application of provisions of ITC 92 or RD/ITC 92
(taxation vs. tax benefit)
► Through legal and non-simulated legal acts
► Approximating to taxable acts vs. acts not benefiting from a tax benefit
► Not in line with the objectives of the tax provision
► Avoidance of Belgian income tax as sole material purpose
Page 31

32. Comparing Old vs. New
Old provision New provision
Object A legal act or separate legal acts A legal act or set of separate legal acts
establishing the same operation establishing the same operation
Non-opposability Characterization of legal act(s) Legal act(s)
Burden of proof Tax avoidance of characterization Abuse of tax law
tax authorities
Counterproof of Legitimate financial or economic needs Other motives than income tax
the taxpayer avoidance
Consequence Re-characterization in an act with Restore the tax basis and tax
identical or similar legal consequences calculation in accordance with the
purpose of the tax provision as if there
was no abuse
Page 32

33. 2012 Tax reform
New anti-abuse legislation
► Modification of the general anti-abuse provision :
► Inspiration in ECJ case law – aimed at wholly artificial
arrangements
► Not pursuant the economic goals of the tax provision; or
► Not pursuant the economic reality; or
► Not at normal economic or financial conditions
► Entry into application
► Tax year 2013
► Tax year 2012 if accounting period is closed on or after 6 April 2012
(date of publication)
► Similar provisions for registration duties and inheritance tax
► Action points:
► Assess impact of extended reclassification on structures and
operations
► Substance and business rationale
Page 33

34. Introduction of the ruling commission
Page 34

35. Impact on Belgian Finance and Treasury
Company
Page 35

36. Impact on Belgian Finance and Treasury
company : General
► Lower NID rate and no more carry forward – increase in effective tax rate ?
► Thin capitalization limitations – increase in effective tax rate ?
► Anti-abuse legislation - impact on tax-effective financing ?
Page 36

37. Why is this hot in transfer pricing?
► EY’s 2010 Global Transfer Pricing Survey
► Our in-the-field experience
confirms this trend
Page 37

38. Impact on Belgian financing
NID
► NID is still a sustainable and effective financing/tax planning
instrument and attractive for ‘low yield’ financing; mainly short-term
EUR or USD funding, cash-pooling, factoring or sub-financing of a
main group treasury center
► NID is one of the options for Belgian finance companies who must
revisit their intra-group financing due to the new thin cap rules
► Key will be to revisit the treasury policy and to forecast the taxable
spread
► Alternatives exist when the intercompany interest rate is above 3% or
particularly volatile (see infra) : for example
► PPL/PPS with Netherlands / Luxembourg
► Luxembourg finance branch
► Controversy against improper use
► Administrative circular letters and guidelines
► Recently targeted fiscal controls to NID
Page 38

39. Impact on Belgian Finance and Treasury
company : Topics
► Equity funded Finance company : Plain NID
► Hybrid financing instruments - Profit Participating Loans
► Foreign Finance Branch
► Tax Effective Treasury
► Cash pooling
► The Halo Effect
► What works in other countries ?
Page 39

40. Financing
Plain NID company
Strategy
► Use of an equity financed Belgian company (“BelCo”) to
provide intercompany group financing
Parent
► The NID at the level of Belco provides decreases in the
taxable basis and leads to a low effective tax rate
Equity
Assessment
► The financing is relatively straightforward to be
Interest implemented and maintained. Tried and tested since the
introduction of NID
BelCo OpCo ► If foreign withholding is applicable, up to 15% foreign tax
credit could be claimed in such an equity funded Belco
► NID is still very attractive for low yield financing, even
Loan after capping the NID rate at 3%
► If the interest income exceeds the NID rate, the effective
tax rate increases quite rapidly. As an example, an
interest income of 5% leads to an effective tax rate of
20,0%
15,0%
13,6%. With 6% interest income, the effective tax rate is
10,0% 17%
5,0%
0,0%
► If the interest income is below the NID rate, the unused
-5,0% NID cannot be carried forward and a potential tax asset is
-10,0%
-15,0% permanently lost (no negative ETR possible)
-20,0%
2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% ► In particular this strategy may be very effective to provide
ETR -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0% short term financing with arm’s length yields around 3%
directly to operational companies or to another group
Intercompany Financing Rates
treasury company
Note that negative ETRs are no longer possible, but are shown here to indicate trend.
Page 40

41. Financing
Profit Participating Loan/Security
Strategy
Parent ► The use of a hybrid financing instrument creates a
tax-deduction in the debtor’s country (Belgium), while it
results in tax-exempt income in the recipient country,
where the instrument qualifies as equity
PPL/PPS subscription Exempt dividend ► Belgium on lends the funds realizing an arm’s length
Holdco
taxable spread
► Could be implemented with a Netherlands or
Luxemburg resident PPL subscriber (Holdco)
Taxable interest Belco ► Equity component should generate NID
Deductible Interest
Assessment
► The financing is more complex to be implemented and
OpCo’s
Deductible Interest maintained (compared to plain NIDco)
► Rulings are required in multiple jurisdictions
► The use of a PPL/PPS is very attractive for high yield
4,0%
3,5% financing and only increases slowly with increased
3,0%
2,5% interest rates
2,0%
1,5% ► With the proposed thin cap rules, Belco should respect
1,0%
0,5%
the 5 to 1 debt equity
0,0% ► As an example, an interest income of 5% leads to an
-0,5%
-1,0% effective tax rate of 2,98%. With 6% interest income, the
-1,5%
2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% effective tax rate is 3,42%. With 10% interest income
ETR -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42% the effective tax rate would be 4,3%
► Since the precise language of the proposed law are not
Intercompany Financing Rates
yet available, the Belgian Ruling commission is awaiting
.
Note that negative ETRs are no longer possible, but are shown here to indicate trend
clarity before issuing new rulings
Page 41

42. Financing
Finance Branch
Strategy
► Use of an equity financed Belgian company (“BelCo”) to
Parent
provide intercompany group financing
► The equity is allocated to a foreign finance branch which
provides group financing
► The branch is low taxed following the tax rules of the
branch country
Belco ► The income generated by and allocated to the finance
branch is exempt in Belgium under the applicable
double tax treaty between Belgium and the branch
Interest
jurisdiction
Finance Branch Subs ► The equity and income allocated to the Belgian head-
office is low taxed because of the NID
► Multiple branch locations can be considered
Loan
Assessment
2,5%
► The financing is more complex to be implemented and
maintained (compared to plain NIDco)
2,0%
► Rulings are required or recommended in multiple
1,5%
jurisdictions
1,0% ► No changes in Belgian tax law are currently envisaged
0,5% to make this financing ineffective
0,0% ► The effective tax rate may vary between 1,5% and 2,5%
2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%
ETR 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52%
although this depends and varies based on the branch
location and the allocation
Intercompany Financing Rates ► The finance branch is tried and tested and is a good
addition to an existing NID finance company
Page 42

43. Financing
Comparison Effective Tax Rates
20,0%
NID
15,0%
10,0%
5,0% PPL
0,0%
Branch
ETR
-5,0%
-10,0%
-15,0%
-20,0%
2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%
ETR NID -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0%
ETR PPL -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42%
ETR Branch 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52%
Note that negative ETRs are no longer possible, but are shown here to indicate trend.
Intercompany Financing Rates
Page 43

44. What if an arm’s length rate falls below the
NID rate?
► Potential problem area
► Assume full equity financing, with NID deduction at 3.00%
► Assume outbound financing transactions ‘at arm’s length’ lead to
an interest rate below 3.00%, for example due to:
► Superior credit rating
► Short term funding
► Specific options
► Potential solutions
► Minimum taxable base ruling?
► What if stock of excess NID exists?
Page 44

45. The Belgian Tax Effective Treasury Center
► Key concepts
► Optimize planning for Belgian NID-regime
► Whereby NID-rate is a proxy for the risk-free rate (‘RFR’)
► Whereby NID-rate changes annually (difficult to plan for)
► Remunerate treasury center in line with its functional risk profile based on
Transactional Net Margin Method:
► For the combined of its activities,
and accordingly all transactions
% Reported return
► Characterization is that of
routine profit center (pre-NID)
► Entrepreneurial counter-
party/ies needed (yet flexible)
► on Return On Equity basis
= RFR + (low) premium (~D:E) NID-rate 3.0%
► Pragmatic update policy
Y
Page 45

46. The Belgian Tax Effective Treasury Center
(2/2)
Pure cost center Pure profit center
► Treasury is characterised as the provider of ► Treasury is characterised as an entrepreneurial
routine services, arranging financial in-house financial institution, doing business
transactions on behalf of affiliates, either with independently with affiliates on the same basis
external or internal financial sources as one would expect an external bank to offer
► As a pure cost center, the treasury center ► The treasury profit center’s goal will be typically
does not assume risks in respect of its equity, limited to profit maximization.
and hence acts as a pure service provider. ► Typical policy: entrepreneurial profits or
► Typical policy: Cost Plus losses (for the transactions it engages is).
CONTINUUM
Routine profit center
► Treasury is characterised as a routine in-house financial institution, doing business under a
service level agreement with the parent company or group as a whole, whereby its goal of profit
making is expanded to e.g. providing liquidity to group members.
► Typically routine treasury centers are supplied with sufficient equity to perform its roles including
taking routine market risks.
► Typical policy: Arm’s length range on a net profit basis compared to its equity at risk –
Return on Equity for its role and responsibilities on the aggregate of activities/transactions
Page 46

47. The transfer pricing approach to cash
pooling (1/2)
► Key TP considerations:
► Division of benefits amongst cash pool participants, after remunerating
the cash pool leader in accordance with its functional risk profile
► Irrespective of notional or Benefit of Cash Pooling
target balancing pooling
In rest e ense
► True and fair assessment of Pre-cash Post-cash
xp
assumed risks by all pooling pooling
te
► Structural financing vs. cash
positions
► Pragmatic approach on
assessing outside options
► Budget vs. actuals Benefit of
cash pooling
► Key TP questions and methods
► Remuneration cash pool participants: Residual profit split method
► Remuneration cash pool leader: cost plus – return on equity at risk
Page 47

48. The transfer pricing approach to cash
pooling (2/2)
► Example:
Page 48

49. Incorporating the HALO – effect in interest
rate benchmarking, or not? (1/2)
► General interest rate benchmarking approach
► STEP 1 – Assess the credit score of the loan
► Credit worthiness of the borrowing entity HOT TOPIC
► Credit rating adjustment due debt instrument type
► STEP 2 – Benchmark the straight loan interest rates
► Direct ‘CUP’ analysis
► Use of Fair Market Yield Curves
► STEP 3 – Adjust for embedded options and for currency and/or
coupon structure
► Embedded options like early prepayment and early demand
► Currency Swaps
► Fixed-to-floating Swaps
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50. Incorporating the HALO – effect in interest
rate benchmarking, or not? (2/2)
► Our current approach
► Step 1: Quantitative and qualitative analysis of borrower
► Develop industry specific (quantitative and qualitative) criteria for
classifying subsidiaries based on S&P/Moody classification:
► CORE SUBSIDIARY à Group rating
► STRATEGICALLY IMPORTANT à Notching/In-between
► OTHER SUBSIDIARIES à Stand-alone rating
► Step 2: Use CreditScore software to assess credit worthiness of
borrowing entity in accordance with classification
► Step 3: Thoroughly document position taken that the framework
applies (burden of proof), and how it applies (or not) on the
borrowers reviewed
► Explain congruence with the interpretation of the arm’s length principle
► Make use of market references that apply the framework
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51. What works in other countries ?
► Branch financing – Switzerland-Luxembourg-Hungary
► Back to Back financing with low/untaxed entity
► Transfer Pricing based - excess profit (Netherlands,
Luxembourg)
► Tax Holiday – Special Regimes (Switzerland, Malta,
Cyprus, Hong Kong, Singapore …)
► Use of hybrid loans – Use of hybrid entities
► Finance rulings financing with a low/untaxed entity
► Traditional Luxembourg-Dutch finance rulings
► Use of a hybrid entity (for example CV-BV)
► Use of hybrid loans
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52. Example : Dutch CV-BV
Strategy
US-Parent ► The use of a hybrid entity in the Netherlands allows the
same advantages as the PPL loan, namely that only a
spread of about 12,5 bp is taxed
Finco ► CV is a transparent partnership in the Netherlands but a
CV
Non taxed interest
company (CFC) for US tax purposes, consequently
‘subject to Subpart F’ rules the low taxed interest
Financing (1) income is not picked up
► Could be implemented with Luxemburg SNC as well
BV ► Could also be considered in Belgium, combination of a
Deductible Interest
BVBA-SARL & a Maatschap
Financing (2)
Assessment
OpCo’s
► Very powerful Finco, covered by a Dutch or Luxembourg
Deductible Interest APA
► Alternative for NID, since allowing higher interest rates
► Spread is limited to a cost +
► Low ETR
► Tested
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53. Closing
Page 53

54. Key Messages
► Review Thin Cap Impact – conclude framework agreement
► Review alternatives
► Differentiate if needed
► Discuss with the ruling commission
► Review intercompany pricing model
► Transfer pricing documentation and APA
► Economic and Business Rationale - No wholly artificial finance
structures
Page 54

55. Questions?
Page 55

56. Contact Details
Peter Moreau
Partner – International Tax Services
Office: +32 (0)2 774 9187
Mobile: +32 (0)477 78 78 24
Peter.Moreau@be.ey.com
Andy Neuteleers
Senior Manager – Transfer Pricing
Office: +32 (0)2 774 9941
Mobile: +32 (0)476 977 583
Andy.Neuteleers@be.ey.com
Page 56

57. Thank you for attending !
The above information does
not constitute advice and
cannot be used for those
purposes