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#Tax & Legal #Business & International Tax #Interest #Dividends #Corporate Income Tax

Court of Cassation rules interest deductible

Tuesday 23/03/2021
Interesten zijn aftrekbaar

Is the interest on a loan taken out to finance both a capital decrease and dividend distribution deductible for corporate tax purposes?

This question is the subject of considerable controversy but the Court of Cassation has provided more clarity. Deductibility is possible, providing objective justification and documentation is submitted as to why the loan is in the company’s business interests. 


Two brothers, aged 67 and 80, decide to sell their operating company (OpCo) to a third party (HoldCo). HoldCo takes out a short-term bank loan to finance the purchase of the shares. Shortly after the acquisition of the OpCo shares, the operating company pays out a 'super dividend' to HoldCo, which is mainly financed by the bank loan. OpCo deducts the interest from its taxable base.

Justification provided by the tax authorities

The tax authorities do not accept this deduction. In their view the share agreement is in the interest of the brothers who sold the business. They realised considerable capital gains on the OpCo shares. The share agreement is not in the interest of the operating company itself, which is why the interest must be rejected for corporate income tax purposes.

OpCo justification

OpCo responds that, in relation to the financial year in which the bank loan to finance the dividend payment was taken out, it had few liquid assets and outstanding liquid claims. The operating company consequently had no other option but to take out a bank loan. Moreover, without a bank loan it would have been forced to sell part of its assets that generate business income. Furthermore, both the turnover and the workforce increased following the takeover by HoldCo.

Ruling of the courts

OpCo wins the case at first instance, but on appeal the court agrees with the tax authorities. According to the judge, the operating company has not demonstrated why the bank loan enables it to maintain or increase its own income - a reasoning that receives a lot of criticism in legal literature.

Court of Cassation’s approach

On 12 December 2019, the Court of Cassation ruled that OpCo's appeal should be dismissed on purely procedural grounds. Careful perusal of this judgment does show that the Court brings some nuance to the reasoning of the appeal judge. In essence, it all comes down to decisive evidence: the operating company has to demonstrate why the bank loan is in the company’s structural and business interests. It could be, for example, to maintain or increase income and thus safeguard continuity. If this is adequately corroborated, the interest is tax deductible for the operating company.

Belgian ruling commission on the same wavelength

On 11 September 2018, the Belgian ruling commission made a similar decision. It concluded that a company that takes out a bank loan can deduct the interest to finance a capital decrease. In the absence of sufficient available cash flow, it would otherwise be forced to sell assets in order to generate cash.

Conclusion: provide appropriate documentation

Do you want to safeguard the deduction of interest borne by your company for the purpose of a capital reduction and/or dividend distribution? If so, you, the borrower, will have to provide specific documentation covering the objective and business reasons as to why the loan and corresponding interest are in the business interests of your company.

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Wouter Brackx

Wouter Brackx

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Kurt De Haen

Kurt De Haen

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