Notional interest: how does the risk capital deduction work?

In brief

A simple idea. A company funded by loans deducts its borrowing costs. A company funded by its shareholders used to deduct nothing. Notional interest corrects this imbalance with a fictitious return on equity.

Where does notional interest come from?

The Act of 22 June 2005 created the risk capital deduction. Most people know it as notional interest. Lawmakers wanted to encourage companies to strengthen their equity rather than take on debt.

The regime has changed a lot since then. Among other things, the 2018 reform replaced the total base with an incremental base. The legislator has also amended the rates and the eligible companies several times. Always check the rules for the relevant financial year.

How the calculation works

The notional interest calculation follows three steps.

The resulting deduction then reduces taxable profit.

Adjusted equity

The base starts from accounting equity at the beginning of the taxable period. Several items then come off.

• Own shares.
• Financial fixed assets in the form of shareholdings.
• Shares whose income qualifies for the dividends received deduction.
• Real estate used privately by a director.
• Investments that produce no periodic income.

These adjustments stop a company from inflating its base artificially. A company that buys a villa for its manager gets no notional interest from it.

The applicable rate

The rate depends on the average yield of ten-year Belgian government linear bonds, known as OLOs. It cannot fall below zero. SMEs benefit from a 0.5% increase over the standard rate. The FPS Finance publishes the rate for each tax year.

Worked example

Take a small SRL with a calculation base of 60,000 euros. Assume, for the example, an SME rate of 2%. The deduction then comes to 1,200 euros. At the reduced corporate rate of 20%, the bill falls by 240 euros. At the standard rate of 25%, the saving would reach 300 euros.

The benefit looks modest for a small business. It grows, however, with large capital increases. Notional interest mainly rewards companies that keep their profits in the business.

Conditions and limits

• The company must fall under Belgian corporate taxation, or have an establishment there.
• Investment companies remain excluded.
• The deduction cannot create a loss: it may not exceed taxable profit.
• The company attaches form 275 C to its return.

Without that appendix, the tax authority may refuse the deduction. Keep it in mind for your corporate tax return.

Increasing the effect of notional interest

A few levers strengthen the impact of this regime.

• Keeping part of the profits in reserves rather than distributing everything.
• Making a capital contribution at the right moment in the financial year.
• Avoiding assets that reduce the base, such as unproductive investments.
• Combining the regime with other tax benefits for SMEs.

Simulate each decision first. A capital increase must serve the project, not just the tax bill.

Notional interest and dividend policy

The choice between reserves and dividends directly affects the base. Distributed profit leaves equity. It therefore no longer counts towards the increase. Profit kept in reserves, by contrast, strengthens the base for the following years.

Imagine two identical SRLs. The first pays out all its profit every year. The second keeps half of it to fund growth. Only the second sees its notional interest rise over the years. It also relies less on bank credit. This reasoning must, however, factor in dividend taxation and your private needs.

Common mistakes

• Calculating on total equity, under the old rule.
• Forgetting the adjustments, for example a building used privately.
• Applying the rate of another tax year.
• Leaving out form 275 C.

In short

Notional interest rewards equity financing. The calculation starts from adjusted equity, takes its increase and applies a rate linked to OLOs, with an increase for SMEs. Check the rate for the tax year on the FPS Finance website. To place this regime in an overall strategy, read our guide to tax optimisation.