Belgium offers a sweet tax deal for U.S. investors: eager to position itself as the "gateway to Europe" for U.S. and other global businesses, Belgium has instituted sweeping economic reforms in efforts to challenge such rivals as Ireland and Switzerland as countries of choice for corporate relocations.

Belgium's two top elected officials--Prime Minister Guy Verhofstadt and Deputy Prime Minister and Minister of Finance Didier Reynders--donned their salesmen's hats in January and took their "roadshow" extolling their country's benefits to select business audiences in Washington, D.C., New York and Chicago. The two dignitaries were also welcomed at the White House by President George Bush.

Belgium wants to be known for more than chocolate and beer, so it's offering businesses a reformed tax regime--among other enhancements--all aimed at attracting foreign investment by U.S. and other global companies seeking sites for their European operations. Belgium aims to compete with other countries offering favorable tax treatment, such as Switzerland, Ireland or Poland.

Its capital, Brussels, is known as the "gateway to Europe and its 450 million consumers, [and] the reason why more than 2,000 international companies already have their European headquarters or a representative office in our capital," said Verhofstadt in a speech to a group assembled by the New York Tax Institute in New York. The European Union (EU) is also headquartered in Brussels, and Antwerp, about a 25-30 minute drive west, provides the second largest port in Western Europe.

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The U.S. has "always been a major investor in Belgium," added Verhofstadt, with about 1,600 American companies already investing more than $1 billion dollars annually, and employing more than 130,000 people. For a rather small country of 11 million inhabitants, he said, "these are significant figures." However, he sees the potential of Belgium "much higher." And, he lists his country's attributes.

Besides location, it's also got: quality of life (healthcare and education); a highly-educated, multilingual workforce (the second most-productive workers in the world, with a gross domestic product (GDP) 11 percent higher than in the U.S, 40 percent higher than in Japan and 30 percent higher than the average of the EU); and an attractive expatriate "fiscal status" that substantially limits individual income tax for the more than 20,000 Belgium-based Americans.

And, if those attributes aren't persuasive enough, over the past six years, Belgium has made "major efforts to eliminate problems for businesses," said Verhofstadt. It has instituted a new tax regime for expatriate companies to locate within its borders, and eliminated much of "the administrative burden of red tape" with several "E-government" actions.

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First, to set up shop, what previously took 56 days, then 26 days to accomplish, will soon take just three days. With labor costs high throughout Western Europe, Belgium cut 5 billion euros in labor taxes over the past seven years (the first such cut in 75 years); and this, he proudly noted, has been achieved with a balanced budget for the past six years.

Corporate taxes have been trimmed from 40 to 33 percent--soon to be at 25 percent--and substantial tax breaks are also given to promote R & D (a 50 percent reduction in withholding taxes for researchers who work in companies that are somehow connected with research centers).

A centerpiece of the new corporate tax reduction--the raison d'etre of the U.S. roadshow--was the announcement of what is being promoted as "the Belgian Tax Deduction for Risk Capital," the notional interest deduction (see sidebar). "The unique deduction provides for a tax deduction for the cost of capital for both Belgian and foreign investors. It reduces the existing discrimination between the tax treatment of debt financing and the tax treatment of equity financing," said Verhofstadt. Thus, he added, "Belgium will become the only country in Europe with such an innovative and important incentive for companies to build headquarters, distribution centers" and more.

In an interview, Minister of Finance and Deputy Prime Minister Didier Reynders also spoke about Belgium's balanced budget for six years running (with him in the top finance role). Earlier in his career, he chaired the Euro group (meeting of the Ministers of Finance of the euro area) and the Ecofin (meeting of the Ministers of Finance of the EU).

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Reynders reflects that "some years ago, we thought it would be difficult to have a strong currency in Europe." Now, he says, "we maybe have too strong a euro (in comparison)." The move to the euro, he believes, has helped expansion. "It used to be complicated doing business in various currencies in different European countries." Now, he says, "with the euro, that's no longer a problem."

He views the current economic climate in Belgium as "very positive," particularly referring to the corporate taxation reforms and the new notional interest deduction. "If you finance one product with debt, you may deduct the interest you pay from your tax base. If you finance your project with equity, you don't pay interest," explains the deputy PM.

Reynders stresses Belgium's willingness to use its tax structure to work with companies. Indeed, a company can determine what its taxes will be for five years in advance by bringing its case to a ruling commission that will give a decision on tax treatment. Also, there is no capital gains tax on the sale of a business.

He speaks proudly of Belgium's corporate citizens, which include owner of popular beer brands InBev; pharmaceutical and biopharmaceutical giants Solvay S.A. and UCB; Dexia Group and KBC Group in banking; and units of a growing number of U.S.-based pharmaceuticals such as Johnson & Johnson and Pfizer Inc., and the Bank of New York Inc.

In closing, Verhofstadt said Belgium is known for its cyclists (like Eddy Merckx and Tom Boonen) and painters (like Van Eyck, Rubens and Matisse). Cyclists, he said, are hardworking people, climbing mountains, focusing on their goal: the finish. Painters are creative, innovative people, always trying to cross the borders of the common.

"I think cyclists and painters both symbolize Belgium, a country of hard-working, creative people who want to move forward, beyond the limits." On the economic side, too, he said, "Belgium is moving forward--where for more than four years now, economic growth is higher than the EU average."

RELATED ARTICLE: Notional Interest Deduction

Under the notional interest deduction, a new and innovative measure in international tax law, all companies subject to Belgian corporate tax will be able to deduct from their taxable income an amount equal to the interest they would have paid on their capital in the case of long-term debt financing. At the same time, the 0.5 percent registration duty on capital contributions will be abolished.

Objectives: The new rules are intended to ensure equal treatment of loan and equity capital. They will have the following positive effects:

* A general reduction of the effective corporate tax rate for all companies, and a higher after-tax return on investment;

* Encouragement of capital intensive investments in Belgium, and an incentive for multinationals to examine the possibility of allocating such activities as intra-group financing, central procurement and factoring to a Belgian group entity; and

* Continuing opportunities for tax-efficient, equity-funded, inter-company financing from Belgian companies, such as the Belgian Coordination Centers (BCC) already present in the country.

Timing: The notional interest deduction will enter into force from assessment year 2007 (for companies that keep their books on a calendar-year basis, this means from Jan. 1, 2006). Equity capital held on Dec. 31, 2005 will, in principle, serve as the basis for the calculation of the first deduction.

How Does it Work? The calculation of the tax deduction will begin with the "equity capital" as stated in the company's opening balance sheet of the taxable period.

* Based on Belgian accounting law, "equity capital" includes capital, share premiums, revaluation gains, reserves, carry-forward of profits or losses and capital investment subsidies.

* Increases or decreases of the capital during the taxable period will be taken into account on a pro rated basis.

* The equity capital will be adjusted by eliminating, among others, the following items:

- The net book value of the shares the company holds in its own share capital;

- Shareholdings recorded as financial fixed assets;

- The net book value of real estate (or entitlements in real estate), or assets of permanent establishments, income of which would be taxexempt in Belgium based on double-taxation treaties; and

- Capital grants (subsidies).

* The notional interest rate will be set each year and will follow the average annual 10-year government bond rate. Currently, that rate is around 3.5 percent. The law sets a maximum deviation of 1 percent from one year to the next and a maximum percentage of 6.5 percent. The government may change these percentages by Royal Decree.

* Small and medium-sized companies may in some cases apply a 0.5 percent higher deduction rate.

* To the extent that the interest deduction does not have a direct tax effect (e.g., in loss situations), the interest deduction can be carried forward for the next seven years.

* To benefit from the notional interest deduction, the company will need to record an amount equal to the deduction in a separate account on the liabilities side of the balance sheet and keep it there for a period of three years following the taxable period during which the deduction was claimed.

For more detailed information, see www.invest.belgium.be.

RELATED ARTICLE: takeaways

* Belgium has launched a campaign to attract more U.S. companies to locate headquarters there, saying it's the "gateway to Europe" due to its location, educated workforce, quality of life, healthcare and more.

* It wants to be known for more than beer and chocolate. It's home to InBev, Solvay S.A., UCB, KBC Group, Dexia Group and units of U.S.-based Johnson & Johnson and Pfizer Inc.

* A key to the new tax regime, the notional tax interest deduction, allows companies to deduct from their taxable income an amount equal to the interest they would have paid on their capital in a long-term debt financing. And, the 0.5 percent registration duty will be abolished.