A 24 May 2019 judgment of Belgium's Court of Cassation (Supreme Court) was recently published on whether a structure established to take advantage of the Belgian notional interest deduction (NID) may be considered abnormal and thus limiting a NID claim. The case involved a Finnish parent that took over a Russian company through its Swedish subsidiary. The takeover was financed with the insertion of a Belgium company, and involved a EUR 3 billion loan from the Finnish parent to the Belgian company and a EUR 3 billion loan from the Belgian company to the Swedish company.
As the funds transfer for the acquisition of the Russian company was finalized, the Finnish parent increased the capital of the Belgian company by transferring part of the debt claim on the Swedish subsidiary. The Belgian company then used the NID for its increased capital to offset the interest income from the Swedish company and passed on the income to the Finnish parent in the form of dividends.
The Belgian tax authority determined that the structure was only put into place to take advantage of the NID and the Belgium company added no economic value. As such, the tax authority denied the deduction based on Article 207 of the Income Tax Code (ITC), which provides that no deductions or loss offsets may be taken in certain cases if coming from abnormal or gratuitous advantages.
The tax authority's decision was appealed, with the Antwerp Court of Appeal finding that the establishment of the company to benefit from the NID did not constitute abnormal artificial tax planning and, therefore, the NID deduction should be allowed. However, on appeal to the Court of Cassation, the Court agreed with the tax authority and overturned the decision of the Court of Appeal. The Court of Cassation found that the tax-driven structure is abnormal because no economic reason for the Belgian company exists. Based on this, the provisions of Article 207 apply and the NID should be denied.