The notional interest deduction is alive and kicking! The Fortum case

The Belgian tax authorities do not hesitate to deny, in certain situations, the notional interest deduction to Belgian companies belonging to multinational groups. Practice shows that they focus on Belgian intra-group financing vehicles lacking sufficient economic and organizational substance.
The tax authorities seem to be far from having won this game against multinationals. The Court of Appeal of Antwerp has indeed ruled, at the beginning of 2016, that the Belgian intra-group financing company of the Finnish energy giant Fortum was entitled to benefit from the notional interest deduction. And, on 26 June 2015, the Court of Appeal of Liège also ruled in favor of another multinational in a similar case.

I)    Fortum case

In the beginning of 2008, Fortum decides to incorporate an intra-group financing vehicle in Belgium (“BelFinCo”). The Finnish holding grants a loan to BelFinCo. BelFinCo on-lends the funds to a Swedish related company, in order to enable the latter to purchase a power plant in Russia. Shortly after, the Finnish holding makes a contribution in kind of its receivable in the share capital of BelFinCo. This debt-equity swap significantly increases the notional interest deduction basis of BelFinCo. As a result, the notional interest deduction may be offset against the interest income received by BelFinCo from the Swedish company.

The Belgian tax authorities, more precisely the Speciale Inspectorate of Taxes (“Inspection Spéciale des Impôts”/”Bijzondere Belastinginspectie”), denied to BelFinCo the notional interest deduction. Their position is based on a specific anti-abuse rule laid down in the Belgian income tax Code (Art. 207 ITC). Pursuant to this provision, the notional interest deduction cannot be used to set off that part of the profits that consists of “abnormal or benevolent advantages” received from a related entity. According to an established case-law of the Belgian Supreme Court (”Cour de Cassation”, “Hof van Cassatie”), this anti-abuse rule may apply to transactions that take place under “abnormal economic circumstances”, i.e. transactions that are exclusively driven by tax considerations. According to the tax authorities, Art. 207 ITC was applicable since the structure put in place by Fortum was artificial and purely tax driven. At first sight, it looked as though they would win the struggle against Fortum, as BelFinCo did not have much substance in Belgium:
  • BelFinCo’s activity was limited to the management and holding of one single receivable (against the Swedish company). Besides, the interest income was not reinvested but immediately repatriated to the Finnish holding through interim dividend distributions
  • BelFinCo rented only one office, together with another group company.

It was therefore not too surprising that, on 25 June 2014, the tribunal of first instance of Antwerp shared the tax authorities’ view. At the beginning of this year, the Court of Appeal overturned this ruling. According to the Court, the contribution of the receivable to the share capital of BelFinCo could not qualify as an « abnormal advantage », so that BelFinCo was entitled to benefit from the notional interest deduction.

It is actually not the first time that the Belgian tax authorities bite the dust in a discussion around an alleged “abuse” of the notional interest deduction. On 26 June 2015, the Court of Appeal of Liège has rendered a favorable decision in a similar case. From a practical point of view, it is striking to note that, according to the Court:
  • the use of the notional interest deduction is not subject to conditions relating to the creation of jobs or substance;
  • the granting of loans can be considered as an economic activity, even if it ais limited to the granting of a few loans. Hence, Art. 207 ITC should not apply, as the structure in place is not only driven by tax reasons.

II) Revival of the notional interest deduction?

In the last couple of years, several multinational groups have decided to transfer their intra-group financing activities out of Belgium to Luxembourg. By way of illustration, on 1 October 2012, Arcelor repatriated EUR 35 billion from its Belgian financing subsidiary (ArcelorMittal Finance and Services Belgium) to a Luxembourg financing vehicle (Global Holding). The steel giant will continue to carry out most of its intra-group financing activities out of Luxembourg.

Various tax considerations may explain this strategic decision. Luxembourg's competitive and stable tax regime has obviously played a crucial role. However, in my view, the fact that the Belgian notional interest deduction has lost a great deal of its appeal following Belgium's recent tax reform (capping of the notional deduction rate at 3% and the abolition of the possibility to carry forward excess notional interest), but also the above-mentioned investigations of the Speciale Inspectorate of Taxes, must also have been a significant factor.

As recent case-law has shown, the notional interest deduction is still alive and kicking! Let us hope that these favorable rulings will lead to a repatriation of financial headquarters to Belgium!