In 2006, a drastic change took place in the Belgian financial world. The Belgian government established a new financial policy, and the notional interest deduction was born. This somewhat odd concept implies that enterprises who possess a lot of equity (in comparison with their debts) can deduct a certain percentage of the corporation tax. The size of the deduction depends on the magnitude of the equity, and the interest rate used on that equity to compute the deduction is based on the rate of 10-year government bonds. In 2007, the notional rate was around 4%, but now it’s already around 2% .
The main reason why this deduction was founded, is to make financing with equity more appealing. After all, for small businesses financing with debts is preferable (interest on debts are deductible , more easy to obtain,…), but is also dangerous because bankruptcy changes increase. The deduction works than as an incentive to strengthen the equity of the firm, and as a result they are more solid and resistant -certainly in times of crisis-. Secondly would the new regulation also attract foreign enterprises with lots of money who may want to invest their profits into Belgian companies, since foreign multinationals own a lot of equity on their balance sheet.
The current minister of finance, Johan Van Overtveldt, wants to reform the current financial policy drastically. He wants to lower the corporation tax from 33.99% to 20% by 2020. In order to execute and partly finance this, he wants to abolish the notional interest deduction .
The most important reason for the reform is the fact that the national SME’s are left in the cold. Currently, SME’s have to pay the remarkable high corporation tax of 33.99%, and they can hardly benefit from the notional interest deduction, since it’s difficult for them to obtain a lot of equity. Van Overtveldt says that the current financial policy is too much focused on the money of the foreign investors. In his opinion, we should pay more attention to the SME’s, who are the engine of our economy with almost 70% of the employment .
Secondly, Van Overtveldt states that foreign authorities will start to tackle the notional interest deduction. For example, the authorities of our most important foreign investor, the USA, are planning to tax American enterprises heavily, who make use of the deduction. Consequently, Belgian enterprises will be less appealing to invest in, and they will invest their money elsewhere .
The degradation of the corporate tax, in combination with the abolishment of the deduction will make it also easier for start-ups to grow their businesses, and will also make our national enterprises more competitive abroad.
Of course, the financial reform has also a lot of opponents, mainly from the conservative and socialist political parties CD&V and SPA. The main concern is how the government will finance the tax degradation, since they avoid a lot of tax incomes. There are questions about Van Overtveldt’s calculations, in which he states that a large part will be compensated with the abolishment of the notional interest deduction. Opponents argue that Van Overtveldt overestimates this compensation, since the deduction has already been strongly reduced to only 2% in 2016 (not surprisingly, since the notional rate is based on the 10-year government bond rate, which is historically low) .
In my (humble) opinion, it is clear that a financial reform is needed. The reasons why the notional interest deduction was established are reasonable and understandable, but we have to keep in mind that those measures were taken in different (and bad) times. A national government should always support its SME’s, certainly when they employ nearly 70% of the labour force. That’s why I hope that corporate taxes will reduce, but not at any cost of course.
Cédric Bauwens 19-09-2016