Key takeaways

In recent years there has been quite some commotion in Belgium around the question whether interest paid on loans taken out in the context of a capital reduction or dividend distribution (so-called "leveraged equity refinancing") could be deducted from an income tax perspective.

For decades the deductibility of such interest expenses had (almost) never been questioned or challenged, and in most of the situations the relevant deductibility condition (i.e., "whether such interest expenses are made or incurred with a view to acquire or maintain taxable income" — the so-called "finality condition") was deemed satisfied. Since the law refers to acquiring or maintaining taxable income, this indeed suggested that, even though the assets or income of the company were already financed (with equity) before the loan was taken out, the fact of taking out a loan to eventually refinance such assets and hence "maintain" the related income going forward seemed to clearly satisfy the finality condition.

However, some 10 years ago, the Special Tax Inspection started to heavily challenge this type of loans, arguing (in essence) that the finality of the loan (and interest expense) was to be seen in connection with the capital reduction or dividend distribution, hence with an operation that benefits the shareholders and leads to an impoverishment of the company itself, and that, as a result, the loan and related interest expenses could not be considered as "made or incurred with a view to acquire or maintain taxable income".

Apart from a first (and favorable) decision rendered by the Tax Court of Ghent in 2016 in relation to such a leveraged equity refinancing case (Trib. Ghent, 28 June 2016, Rol Nr. F/3991), all subsequent decisions on similar cases were unfortunately rendered against the taxpayers (including the appeal decision rendered by the Court of Appeal of Ghent against the aforementioned decision of the Tax Court, which was — until recently — the only positive decision).

Recently, the same Court of Appeal of Ghent has, in two new separate cases, rendered decisions allowing the deductibility of such interest expenses incurred in the context of a capital reduction or dividend distribution, which correctly apply the legal principals to the underlying facts Ghent, 10 December 2024 and Ghent, 18 February 2025). Baker McKenzie Belgium handled the second case.

In these decisions, the Court of Appeal of Ghent applied the fundamental principles confirmed in the decision of the Supreme Court in the Nyrstar case (Cass. 19 March 2020, F.19.0025.N), which are essential for determining whether such interest expenses incurred in the context of a capital reduction or dividend distribution can be considered deductible. In the Nyrstar case, the Court of Appeal of Antwerp (Antwerp, 8 May 2018, Rol Nr. 2016/AR/2018) had, in our opinion, failed to apply these fundamental principles to the facts before it. Unfortunately, the Supreme Court, after having confirmed those correct principles, did not annul the decision of the Court of Appeal of Antwerp (presumably because it considered that it would come down to (or at least require to) reassess the facts, which the Supreme Court cannot do).

In depth

Now things get more clear. Taking into account (and applying correctly) the aforesaid fundamental principles laid down by the Supreme Court case (in the Nyrstar case and another relevant Supreme Court decision referred to below), the Court of Appeal of Ghent has, in these two recent cases, judged that:

1. The simple fact that a capital reduction or dividend distribution is a free decision of the company, which leads to its impoverishment and benefits to its shareholders, does not ipso facto allow to conclude that the interest expenses related to a loan taken in this context do not meet the finality condition.
2. However, it remains important to be able to demonstrate that such interest expenses (rather than the capital reduction or dividend distribution itself) were incurred with a view to acquire or maintain taxable income.
3. The decision of the (shareholders of the) company to reduce its capital or distribute a dividend should indeed be distinguished from the decision on how to implement this capital reduction or dividend distribution (in casu, by taking out a loan). Only the latter decision (taken by the Board of the company) needs to be tested against the finality condition. Hence the finality of the capital reduction or dividend distribution may not be confounded by the tax authorities with the finality of the decision to take out a loan in order to implement the capital reduction or dividend distribution. The contrary position and approach taken by the tax authorities would, in essence, come down to refusing as a matter of principle the deductibility of interest expenses related to a loan taken in the context of a capital reduction or dividend distribution, which is wrong according to the Supreme Court decision in the Nyrstar case.
4. By refusing the deductibility of interest expenses merely on the basis of the fact that the capital reduction or dividend distribution (and the resulting decision to take out a loan in this context) is a free decision of the company (as opposed to a decision which has been imposed on the company by a third party), the tax authorities are making a forbidden opportunity assessment.
5. That being said, considering that the burden of proof as to deductibility of the expense lies with the taxpayer, the context in which the loan has been taken out and the use of the funds taken out obviously remain important elements to assess whether the related interest expenses meet the finality condition.
6. In this context, in line with the Supreme Court decision in the Nyrstar case, it is confirmed that the simple fact that the company does not have enough cash to implement the capital reduction or dividend distribution does not in itself suffice to justify the loan, and for the interest expenses to meet the finality condition. It remains to be demonstrated that taking out the loan and incurring the related interest expenses was made with a view to acquire or maintain taxable income.
7. In this context and still in line with the Supreme Court decision in the Nyrstar case, the Court of Appeal of Ghent recognized that such evidence can be brought by demonstrating that the loan was taken out to prevent the loss of assets that are used by the company to acquire or maintain taxable income, and it confirmed that such evidence had been brought in the two cases at hand:
   1. In the case of 18 February 2025, the company essentially had one asset, i.e., an intragroup receivable generating interest income at the rate of 7% per annum, and in this context, it was considered that taking out a loan at 6.5% to prevent the company from having to dispose of such asset (also considering the absence in cash — which the Court deemed demonstrated), was a decision that meets the finality condition.
   2. In the case of 10 December 2024, it appeared that the company mainly had share participations in other companies (for approximately 80% of its balance sheet), and for the remainder a short term receivable as well as a bit of cash, but from the balance sheet it was clear that the company did not have the cash to pay both the capital reduction and dividend distribution, and that the decision to take out the loan was therefore made to prevent the company from having to dispose of certain of its income generating assets. It was therefore decided that the finality condition was met.
8. The Court also stressed that the argument of the tax authorities according to which the loan would in fact have been taken out with the (real) intention and finality to fund a capital reduction or dividend distribution (benefitting the shareholders) does not contradict the fact that the company can demonstrate that it had an own substantial economic interest in taking out such loan, i.e., to preserve its own activities and future income. The Court further mentioned that the fact that these decisions (including the decision to take out the loan) possibly also benefit third parties (i.e., the shareholders) and may also be justified/prompted by external considerations does not prevent that the related (interest) expenses are deductible at the level of the company.
9. Finally, the Court of Appeal of Ghent countered the argument of the tax authorities according to which the company willingly (on its own initiative) created (new) expenses against which no (new) income had been generated, and in that way willingly reduced its taxable basis. The Court of Appeal referred in this respect to earlier Supreme Court case law confirming that the fact that a transaction or operation is carried out with a view to obtaining a tax benefit does not in itself prevent the costs related to such transaction or operation to constitute deductible expenses for tax purposes (Cass. 12 June 2015, F.14.0080.N).

Based on a reading of the two recent Ghent decisions, it seems quite unlikely that the tax authorities will be able to successfully challenge these decisions before the Supreme Court considering that the Court meticulously applied the principles outlined by the Supreme Court in prior cases to the relevant facts.

Meanwhile, taxpayers can now feel more confident that, if a loan taken out in the context of a capital reduction or dividend distribution can be justified (based on the facts) as being made with a view to preventing the loss of income generating assets of the company (and the latter justification is, ideally, already explicitly included in the decision of the Board of the company to take out the loan), interest related to such a loan should be recognized as being tax deductible.

Importantly, in order to bring that evidence and justification, it will be important for the company to be able to demonstrate that (a) it does not have enough cash or liquidities to implement the decision of capital reduction or dividend distribution (or that it needs such cash for other purposes); and (b) the assets it is willing to preserve by taking out the loan (instead of disposing them in order to pay the capital reduction of dividend distribution) generate taxable income, and such income is higher (or can at least reasonably be expected to be higher) than the costs needed to preserve such income, or in other words that the income or expected income from such assets is higher than the interest payable on the loan taken out to preserve such income.

We are pleased that after years of unfavorable case law, the Court of Appeal of Ghent has followed our approach in this context, which is expected to provide taxpayers with more legal certainty on this topic going forward.