The Court of Appeal of Ghent has recently confirmed in two decisions that the interest paid on loans used to finance a capital reduction and a dividend distribution is tax deductible. In both cases, the Court rightfully concluded that the “condition of finality” under Article 49 of the Income Tax Code 1992 (“ITC92”) was fulfilled, applying the principles laid down in recent case law of the Court of Cassation (“Hof van Cassatie” / “Cour de cassation”) on this subject.
1. What’s it all about?
Historically, interest on loans used for a capital reduction or a dividend distribution was generally considered as tax deductible, although there was a paucity of case law on this subject (apart from an old judgment from the 1960s). However, in 2009-2010, the tax authorities started arguing during certain tax audits that such interest was not incurred to acquire or maintain taxable income for the distributing company, and thus did not fulfil the so-called “condition of finality”. This condition, set out in Article 49 ITC92, is essential for determining the deductibility of expenses for tax purposes. Certain divisions of the Special Tax Inspectorate began to challenge such deductibility by bringing test cases where the business rationale for the loan had not been documented in advance and arguing that the said condition can rarely be complied with in the framework of leveraged reductions of a company’s equity. The Minister of Finance declined to adopt a radical stance, underscoring the need for assessment on a case-by-case basis.
In a book dedicated to the tax deductibility of business expenses, one of the authors of the present contribution argued that various business motives can justify the tax deductibility of such financing expenses. One valid motive can be the prevention of asset stripping, or, more specifically, the preservation of income-generating assets from alienation (cf. S. Gnedasj, Artikel 49 WIB 1992 ont(k)leed – Lessen uit negentig jaar cassatierechtspraak inzake kostenaftrek, p. 579).
Although a few positive rulings on this subject confirm that deductibility can be defended with a sound business rationale, the case law was initially unfavourable for taxpayers.
2. First wave of negative case law
In 2018, the Court of Appeal of Ghent (2016/AR/1618) upheld the position of the tax authorities regarding the non-deductibility of interest on a bank loan used to finance the distribution of a super dividend in the context of the acquisition of a family enterprise by a third party. The case involved a classic debt push-down operation where the buyer of the company’s shares used the dividend received to repay a loan contracted to finance the acquisition price of the shares, leaving the acquired target company with a debt (with the operating company’s assets as a de facto collateral). The Court ruled that the interest payments were not tax deductible, as the company failed to meet the “condition of finality”. According to the Court, the loan was not subscribed to finance the taxpayer’s own investment, but rather to support the buyer’s acquisition of the company. The Court stressed that the financing expenses were unrelated to the taxpayer’s professional activity but rather solely benefited the buyer and the former shareholders. Therefore, the Court concluded that no connection had been demonstrated between the sale of the shares and the alleged continuation of the existence of the company on the one hand and, on the other hand, the acquisition or maintenance of taxable income by the company.
A petition was filed before the Court of Cassation, which, in its ruling of 12 December 2019, did not take a position as to the merits concerning the tax deductibility of the financing expenses but dismissed the appeal on technical grounds (i.e. an erroneous reading and understanding of the reasoning of the Court of Appeal).
Around the same period, two important cases were pleaded before the Court of Appeal of Antwerp, which upheld the tax authorities’ position twice – in 2018 (2016/AR/2108) and in 2021 (2020/AR/454). In both cases, the Court stated that the taxpayer had failed to prove that the interest payments on loans taken out for financing a capital reduction or dividend distribution were incurred to acquire or maintain taxable income.
The first case (Nyrstar) concerned the restructuring of the capital structure of an overcapitalised company, where an intra-group loan was used to finance both a capital reduction and a dividend distribution, though the business rationale for the loan had not been properly documented. The second case (Duvel Moortgat) concerned a syndicated loan contracted to finance a super dividend payment to two controlling shareholders of the company in the framework of a delisting operation – here again, no specific business rationale was documented in advance to justify such borrowing. In both cases, the taxpayer appealed to the Court of Cassation.
In its decision of 19 March 2020 in the Nyrstar case (F.19.0025.N), the Court of Cassation, albeit confirming the negative decision of the Court of Antwerp of 2018 which established the lack of concrete evidence demonstrating that the condition of finality was complied with, nevertheless reaffirmed that such deductibility cannot be excluded as a matter of principle. It also confirmed that interest on loans used to finance a capital reduction or dividend distribution is deductible if the taxpayer demonstrates that the interest itself – not the dividend distribution or capital reduction – was incurred to acquire or preserve taxable income. When subsequently verifying the proper application of Article 49 ITC92 by the Court of Appeal of Antwerp, the Court of Cassation clarified that a lack of sufficient liquidity at the time of borrowing to finance a dividend distribution or a capital reduction is not sufficient to prove that the loan was taken out to acquire or maintain taxable income. The Court then, however, almost literally quoted the suggestion defended in the aforementioned book and emphasised that the required evidence could, inter alia, be provided by demonstrating that the loan prevented the loss of assets used to acquire or maintain taxable income (the Nyrstar case doctrine).
In its ruling of 31 March 2023 in Duvel Moortgat (F.22.0071.N), the Court of Cassation dismissed the appeal against the 2021 judgment on technical grounds (i.e. merits were based on an erroneous reading and understanding of the decision of the Court of Appeal).
3. Wind of change: Ghent Court of Appeal applies the Nyrstar case doctrine in the taxpayer’s favour
Certain tax officials were already asserting in legal doctrine that the war against the tax deductibility of interest payments related to leveraged own-equity reduction operations had been won by the tax authorities. We were less sceptical as to the possibility of tax deduction; in our previous contribution on this topic, we stressed that various good reasons exist to justify tax deductibility of such interest payments in comparable situations. Such justification and the business purpose of the loan should, however, be well documented in advance.
Now, the Court of Appeal of Ghent, based on the principles laid down in the Nyrstar case law, has recently ruled in favour of taxpayers twice. In both cases, the Court upheld the taxpayers’ position that the interest-bearing debt was contracted to prevent the loss of assets used to acquire or maintain taxable income.
In the case leading to a judgment of 10 December 2024 (2023/AR/901), the company held shares in other companies (amounting to approximately 80% of its balance sheet) and short-term receivables. The shares generated taxable income of EUR 12,927 for the tax year 2012 and EUR 124,930 for the tax year 2013, while the short-term receivables produced EUR 26,562 for the tax year 2012 and EUR 304,00 for 2013. Furthermore, the annual accounts revealed that the company’s liquid assets were limited to EUR 436,112 in 2012 and EUR 212,286 in 2013. Consequently, the available liquid assets were insufficient to cover both the capital reduction and the dividend distribution of EUR 600,000 and EUR 1,230,000 respectively. The Court of Appeal emphasised that the tax authorities had disregarded the company’s independent legal personality by focusing on the use of funds (received from the capital reduction and dividend distribution) by the shareholder. Although the shareholder may have used the funds for personal purposes, this is not relevant for assessing the company’s business rationale for contracting the loan. The core issue is whether the company itself, at the time of borrowing, was acting with the purpose of acquiring or maintaining taxable income. In accordance with the Nyrstar case doctrine, the Court concluded that the decision to take out the bank loan was made to prevent the company from selling any of its income-generating assets.
In the second case, leading to a judgment of 18 February 2025 (2023/AR/1520), the company was used as an international project financing vehicle with the following assets: an intragroup receivable generating interest income at the rate of 7%, and a small amount of cash. The company carried out two capital reductions, financed by a promissory note issued to the majority shareholder, with a seven-year duration and bearing interest at the rate of 6.5%. The Court, comprising three judges in this instance, observed that, although the company incurred interest expenses of 6.5% on the loan, it concurrently continued to earn 7% annual interest income from the retained receivable. As this income remained higher than the expenses even after the capital reduction, the company maintained a positive and taxable result. The Court thus concluded that the loan was intended to prevent the company from having to sell its only (income-generating) asset, thereby fulfilling the condition of finality of Article 49 ITC92.
4. Final remarks
We strongly concur with the down-to-earth and pragmatic reasoning of the Court of Appeal of Ghent in its recent case law. It applies the Nyrstar case doctrine to the condition of finality of Article 49 ITC92 with the necessary sense of (economic) realism. It is imperative that the assessment of the conditions of deductibility with respect to loans related to decreases in a company’s equity is not made more difficult than the burden of proof with respect to other loans contracted by a company.
As explained in our previous contribution on this subject, after the negative case law of the Courts of Appeal of Antwerp and (previously) Ghent, and under some pressure from the Central Tax Services, the Ruling Commission has started refusing to issue (positive) rulings on the deductibility of interest payments on loans related to capital reductions and/or dividend distributions. We sincerely hope that the Ruling Commission will now reconsider its policies and start applying Article 49 ITC92 in a balanced way.
Despite these positive developments, to avoid lengthy litigation and difficult discussions during tax audits, we recommend properly documenting, in tempore non suspecto, the business rationale of substantial debt operations, in order to be able to demonstrate the economic interest a company has when contracting a loan.
Please do not hesitate to contact us if you have any questions in this respect or require any assistance.
