Positive ruling on deductibility of interest costs on loans contracted in order to finance capital reduction in case of an ‘over-capitalised’ company


The Belgian ruling office recently published a positive decision deciding that interest costs related to the intercompany loan are deductible for tax purposes since the costs are borne by the company with the purpose to preserve or generate taxable income.

In the case at hand, a factoring company with ‘an excessive amount of equity’ is convinced that, from an economic point of view, a shift in its financing needs for the execution of its factoring activities from equity to debt would be logical step. This shift encompasses a capital reduction. However, the company does not have sufficient cash to finance the capital reduction, as most of the cash is needed for its factoring activities from which taxable income is generated (i.e. cash needed to (i) finance future working capital and (ii) sustain its factoring portfolio).

In order to avoid that ‘income generating assets’ need to be sold, the company contracts an intercompany debt. The cash available from the new intercompany loan will enable the company to pay for the capital reduction.

Given that contracting an intercompany debt resulted in an adverse tax effect (i.e. double taxation due to exceeding the thin cap threshold), it was clear for the ruling commission that the tax reason (i.e. interest deductibility) was subordinate to the economic business drivers to refinance the activities.

Although, recent case law did not accept the tax deductibility of interest on loans contracted to finance a capital reduction or dividend distribution, this ruling is in line with the case law of the Court of Appeal of Antwerp. It accepts the ‘finality concept’ that the loan is not taken out ‘to finance the capital reduction’, but ‘to avoid that other (taxable income generating) assets need to be sold’.