Transactions Blog

The Belgian tax law enables companies to deduct a fictitious interest calculated on the basis of their shareholder’s equity, the so called notional interest deduction (NID). This measure reduces the cost disadvantage of equity in the capital structure of Belgian businesses and effectively lowers the corporate income tax rate.

The applicable NID rate is determined every year, based on the average return on the secondary market of a Belgian government bond with a remaining maturity of 10 years (OLO10).

Business plan practitioners may be confronted with the question which NID rate to use, especially in long term forecasts? The current NID rate is known, but what within 5 or 30 years? Making an accurate estimate for every year during the thirty years to come is practically impossible, so a thirty year average might be an easy-to-use alternative.

One might consider taking a closer look at the historic evolution of OLO10 (see graph).

The data (period 1991-2010) indicate an average for OLO10 of 5,5% with a standard deviation of 1,7%. The notional interest rate is capped by Royal Decree at 6,5%, using this cap would most likely result in a too optimistic projection. Using 3% would conversely result in a too gloomy outlook.

In order to refine this bracket of 3 to 6,5% various approaches can taken. A conservative approach is to argue that 3,8% (average minus 1 times standard deviation) is appropriate. Another option is the use longer-term bond rates (reflecting for instance the horizon of the business plan), which will however result in higher, more aggressive NID rates.

There is obviously no right or wrong answer to this question. Unless the Belgian government would lower the cap of 6,5% to … 3% !

With the global economy recovering, foreign strategic buyers are re-emerging the surface of the Chinese M&A market and are actively looking for expansionary acquisitions. Entering the Chinese M&A environment is however challenging due to:

• Industry structure and geographic scale
• Constant changing regulatory environment
• People versus systems
• Partners and alliances
• Compliance costs
• Potential traps on financial & tax information
• Proper structuring
• Intellectual property environment

 Although the global economic recovery will entice foreign strategic buyers to look for Chinese investment opportunities, all parties involved are notably more selective in their investments and will look beyond the valuations in order to identify fundamentally sound companies. Absent local presence sourcing good quality deals in a highly fragmented and widespread market requires a combination of in-depth local knowledge and an integrated local network. Moreover the ability to implement operational efficiencies can be dictated by the quality of the relationship with management and is often constrained by minority interests.

PricewaterhouseCoopers China – in close cooperation with the business development team and the Transactions practice of PricewaterhouseCoopers Belgium – can assist in this process of sourcing the attractive investment opportunities and to perform due diligence procedures to determine the optimal governance and operational structure post closing.