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By Marc Goldstein
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Posted: 04/07/06 11:37
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At the end of 2005, a new fiscal law was adopted that will make Belgium far more attractive to all companies doing business there —which means not only diamond companies, but firms from all business sectors and industries. To introduce the new incentive program to Antwerp-based companies, a seminar was held in Antwerp. It was organized by Panis, Hendrickx & Co., one of the major accounting offices in the Belgian diamond sector, and auditors Westen, François & Co.
“NOTIONAL” INTERESTS
The principle of the new program relies on what’s been referred to as a “notional interest rate.” As of accounting year 2006, all Belgium-based companies will have the opportunity to calculate a totally fictitious interest rate on their equity. This interest rate — which is currently between 3.442 and 3.942 percent — will be deductible from the taxable profit, a measure that is likely to reduce the taxable profit of businesses to very interesting levels. Indeed, it’s been suggested in various case studies that the effective tax burden, especially for larger capitalized companies, could drop from the usual 28 or 34 percent corporate income tax rate to the negligible figure of 6 percent in the best cases. As a matter of fact, the new law is nothing more than an ingenious system to provide a legal basis to reduce the global tax burden. It’s been reported that this is one of the issues discussed during the January trip of Belgian Prime Minister Guy Verhofstadt to the U.S. — convincing American investors that it was worth investing in Belgium.
Assuming this new tax law does not have any stringent conditions — no employment condition, no investment condition, applicable to all companies, no limitation on activity — such an incentive is likely to restore the balance between Antwerp and other competing diamond centers. Serge Korn of Kordiam commented that “If this initiative turns out to be effective, I’m convinced it will help reinforce the position of Antwerp-based companies on the international market. No other measure could have been more beneficial for Antwerp, in the sense that this is a real asset that could attract foreign companies.”
Kaushik Mehta of Eurostar Diamond Traders, however, has a different opinion: “It’s very good as you pay less tax. The notional interest will certainly help ease business in Belgium, but it’s still no match for Dubai, at least as far as their zero tax is concerned. Antwerp has other assets, such as a huge market, to compete with other diamond centers.”
EUROPEAN COMMISSION REACTION
Stefan De Clercq of Panis, Hendrickx & Co. is confident in regard to the European Commission (EC), “To my knowledge, they have no specific reaction or objections to the new legislation. On the contrary, the notional interest deduction applies to all Belgian companies, but is, of course, most beneficial for companies with large capitalizations and profits.”
The notional interest also can be helpful with respect to Diamond Trading Company (DTC) or bank pressure. “The diamond sector is typically a sector that requires large working capital and relatively small profit margins,” explains De Clercq. “A substantial number of companies have capital booked as current account. Currently, this cannot be taken into consideration for the notional interest deduction and is booked as a loan. How can this measure help against pressure from banks, DTC, etc? From this year onward, registration fees on capital increases of 0.5 percent are abolished and there is virtually no cost involved anymore in increasing the statutory capital. Therefore, it is useful to incorporate the loans/current accounts into statutory capital. This, of course, can substantially increase the equity of the company, which also results in an improved solvability toward third parties — this is equity against balance sheet total. Banks are, indeed, pushing diamond companies to move toward an equity of 15 percent-plus because traditionally the equity of Belgian diamond companies is very low. Also, for sightholders, the DTC takes into consideration the financial strength of a company, which is reflected in the equity and solvability ratio.”
Consequently, the larger the capital, the higher the amount of the notional interest deduction. This allows companies with larger capital to pay lower taxes on their profit and as a result have higher net profits, which, again, they can capitalize. The following year, the equity has grown with the increased net profits of the previous year on which the notional interest deduction is applicable. So, this creates a rollerball effect in which equities grow quicker and quicker and are constantly leveraged with the notional interest deduction the following year.
“Faster is better in the sense that the sooner you capitalize, the sooner and the more you can benefit from the notional interest deduction,” concludes De Clercq.
It’s been understood that the measure would also benefit smaller-size companies, depending on their degree of capitalization, as the law applies to all corporate entities. Percentwise, it can create the same result, but, of course, the nominal amounts are smaller. On the other hand, the discrepancy between the big and small companies lies somewhere else, even beyond their size: the field of information. The majority of the small and medium companies approached for their reaction to the new measure weren’t even aware of the existence of the notional interest deduction.
The first cycle of the system won’t be completed for a year. Chetan Mehta of Gembel European Sales concludes, “It sounds and looks interesting, but we must see how it’s going to be implemented before forging an opinion.”
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