Courts of appeal reject Belgian tax authorities’ stern approach to the notional interest deduction

Global Tax News


For the second time in eight months, a Court of Appeal has rejected the Belgian tax authorities’ stern approach to the way that some intragroup financing companies have been using the notional interest deduction. This jurisprudence should raise further interest in Belgium as a jurisdiction for intragroup financing activities.


The notional interest deduction (NID) was introduced more than 10 years ago with the aim of limiting the difference in tax treatment between debt and equity financing of companies. Belgian companies and permanent establishments of foreign companies may deduct a fictional or notional interest that is computed on the basis of their (adjusted) accounting equity. The government determines this percentage annually, by averaging the monthly reference indices of the interest rate on 10-year linear government bonds in the second year before the assessment year. The NID rate for assessment year 2017 is 1.131 percent (1.631 percent for SMEs).


The NID is an efficient planning tool that has attracted a lot of investment to Belgium. Many MNEs placed their internal financing vehicles in Belgium. This tool is even more appealing in combination with the comparatively lenient Belgian thin capitalization rules, which allow financing with “bad” debt (mainly intragroup debt − bank debt is in principle not subject to thin capitalization limitations) for an amount of up to five times a company’s equity.

The NID lost some of its appeal pursuant to the 2012 tax reform, which resulted in capping the NID rate by law at 3 percent and abolishing the carrying forward of excess NID. Another significant factor which reduced the attractiveness of the NID was the aggressive approach used by the tax authorities to tackle certain financing structures used by MNEs. A recent decision by the Court of Appeal of Antwerp (12 January 2016) in the Fortum case has dealt a major blow to the tax authorities’ approach.



Fortum, a Finnish MNE, financed a large acquisition in Russia by having its Finnish parent company grant a loan to a Belgian group company (Belco). Belco, in its turn, granted a loan to a Swedish group acquisition vehicle. Shortly thereafter, the Finnish parent company performed a debt-equity swap by contributing its receivable against Belco into Belco’s capital. The debt-equity swap resulted in a very large increase of Belco’s NID, which allowed it to offset the interest income on its receivable held against the Swedish acquisition vehicle.

Belco had no other activity other than holding this single receivable. It had no personnel and rented one office together with another group company.

Tax authorities’ approach

The Belgian tax authorities challenged the benefit of the NID on the basis of Article 207 of the Income Tax Code, a specific anti-abuse rule stating that profit that originates from “abnormal or benevolent advantages” may not be offset with the NID. Referring to well-established jurisprudence of the Supreme Court, they claimed that the whole operation had been exclusively driven by tax considerations and was performed under abnormal economic circumstances. The tax authorities claimed that the interest gathered by Belco on its receivable therefore stemmed from a received abnormal or benevolent advantage and that the company could not offset that income with the NID.

In a rather concise decision of 25 June 2014, the Tribunal of First Instance of Antwerp ruled in favor of the tax authorities. The Tribunal was of the opinion that the equity financing of Belco, given the circumstances, constituted an abnormal or benevolent advantage granted to Belco. The Tribunal denied the company the right to use the NID to offset its interest income gathered from its receivable.

Court of Appeal of Antwerp

The decision of the Tribunal of First Instance has been reversed by the Court of Appeal of Antwerp. In its decision in January 2016, the court ruled that the debt-equity swap did not qualify as an abnormal or benevolent advantage. Belco was therefore entitled to offset its interest income with the NID.

The court was of the opinion that the tax authorities’ broad interpretation of the concept of abnormal or benevolent advantage only applies to situations where profit is shifted by transferring profit-making enterprises to entities with large tax attributes. As a consequence, the court considered that the manner in which Belco was interposed was not abnormal. The NID regime poses conditions that aim to avoid abuse. The court ruled that imposing a certain substance or activity level would result in adding conditions to the law.


This decision is very significant because it confirms the approach already adopted earlier (in a case dated 26 June 2015) by the Court of Appeals of Liège in a similar case. Although one cannot exclude that the tax authorities may persevere and bring the case to the Supreme Court, these two outcomes have dealt an important blow to the tax authorities’ effort to challenge the use of the NID by MNEs. The decision should result in a new momentum for Belgium as a location for intragroup financing activities.

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