The Risk Capital Deduction (Notional Interest) in Belgium

What Is the Risk Capital Deduction?

The risk capital deduction, commonly known as "notional interest deduction", is a uniquely Belgian tax mechanism, introduced by the Act of June 22, 2005. It allows companies to deduct from their taxable base a notional interest calculated on their adjusted equity.

Purpose of the Mechanism

The objective is to reduce the tax discrimination between debt financing (where interest is deductible) and equity financing. Companies that primarily finance through equity benefit from a compensatory tax advantage.

Calculating the Deduction

1. Determining Risk Capital

Risk capital corresponds to the accounting equity of the company at the beginning of the taxable period, adjusted for certain elements:

Elements to Deduct:

• Own shares held
• Financial fixed assets consisting of participations
• Shares whose income qualifies for DRD (Dividends Received Deduction)
• Real estate for personal use by a director
• Assets held as investments not producing periodic income

2. Applicable Rate

Since the 2018 reform, the deduction is calculated on the incremental variation of adjusted equity (no longer on the total amount). The rate is determined annually and corresponds to the average 10-year OLO rate:

Important: SMEs benefit from a 0.5% increase over the standard rate.

3. Calculating the Deduction

Deduction = (Variation in adjusted equity) x Applicable rate

Application Conditions

Eligible Companies

• All Belgian resident companies subject to corporate tax
• Belgian permanent establishments of foreign companies
• SMEs benefit from more favorable conditions

Restrictions

• The deduction cannot exceed taxable profit (no notional loss)
• The stock of unused deductions (old rule) can be carried forward under certain conditions but is limited to 60% of remaining profit (above €1 million)
• Investment companies (SICAV, SIC) are excluded

Impact of the 2018 Reform

Since tax year 2019, the system has been fundamentally changed:

• Shift from stock system to incremental system
• The deduction is calculated only on the increase in adjusted equity
• The existing stock of carried-forward deductions is gradually eliminated
• The rate remains linked to the 10-year OLO, with a floor of 0%

Tax Optimization

To maximize the notional interest benefit:

• Increase equity through reserve incorporation or new contributions
• Plan investments to optimize the calculation base
• Combine with other tax benefits (investment deduction, R&D tax credit)
• Verify eligibility of all assets taken into account

Conclusion

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