Traditionally, Belgian tax law has been rather flexible in accepting the tax deductible character of interest due on leveraged financing structures. Recent court decisions, however, seem to challenge this principle.
In a decision of 9 January 2018, the Court of Appeals of Ghent disallowed the tax deductibility of interest payments made in the context of a so-called “leveraged dividend distribution".
The case related to a Belgian company that had acquired the shares of another Belgian company (the 'target company') and that had financed (part of) the purchase price with debt. The reimbursement of this acquisition debt was, in its turn, financed by a post-acquisition “super dividend distribution" by the target company. Since the target company lacked sufficient cash to actually pay out the dividend, it entered into a loan agreement with a third party financial institution to that end. The Court decided that the interest paid in relation to that third party loan was not tax deductible since the target company had not incurred these interest expenses “with a view to acquiring or preserving taxable income".
This decision follows on another judgment of the Tribunal of First Instance of Antwerp of 29 June 2016, in which the tribunal ruled, on equivalent grounds, that interest expenses incurred in relation to an intragroup loan that was entered into to finance a decrease and reimbursement of (statutory) capital were not tax deductible either.
An appeal has been lodged against the latter decision and is currently still pending, and taking into account the very controversial nature of the reasoning applied by both the Court of Appeals of Ghent and the Tribunal of First Instance of Antwerp the expectation is that both procedures will in due time lead to a ruling by the Supreme Court. It is hazardous, however, to predict how the Supreme Court would eventually rule on the matter.
This new trend in (lower) case law (even if not final yet, and strictly speaking not binding for taxpayers that were not involved themselves in the relevant underlying cases) should nevertheless already be taken into account when structuring acquisitions. In the past, and given the absence of tax consolidation in Belgium, organizing a tax efficient acquisition of a Belgian target company typically involved some form of debt push-down, which often took the form of a leveraged dividend distribution or capital decrease (or a combination of both). If the aforementioned new case law trend would be confirmed, this may obviously jeopardize the fiscal feasibility of these types of structures, as a result of which the organization of a tax efficient debt push-down would become even more challenging than it was in the past. It goes without saying that we will carefully follow up on this matter and will let you know when there are any relevant evolutions.
To end on a positive note: in the context of the Corporate Tax Reform Act of 25 December 2017, a new tax consolidation regime (the so-called “group contribution rule") has been introduced, which will in principle apply as from tax assessment year 2020. It is, however, questionable whether this new rule will have a material positive impact on the tax effectiveness of leveraged share acquisition structures, since one of the conditions for this consolidation regime to apply is that the consolidating companies should have been affiliated without interruption throughout the four preceding taxable periods. It would be helpful that this condition be amended to either shorten the 4 year waiting period or to allow tax consolidation by anticipation already during the aforementioned period (subject to a claw-back in case the affiliation would not be maintained throughout the entire period).