Over the last decade, Belgian tax authorities have been targeting Multinational Enterprises (MNEs) benefiting from the Belgian Notional Interest Deduction (NID) regime. Finnish energy giant Fortum was a victim of this witch hunt when the EUR 70 million NID applied by Fortum’s Belgian intragroup financing company was rejected back in 2009. After a setback before the Antwerp Tribunal of First Instance in 2014, a subsequent victory before the Antwerp Court of Appeal in 2016, ultimately Fortum’s hopes were dashed when the Belgian Supreme Court sided with the Belgian tax authorities in 2019 and referred the case back to the Ghent Court of Appeal for full retrial. It appears, however, that the Fortum saga carries on as only a few days ago the Ghent Court of Appeal ruled in favour of the Finnish group.
The Belgian “Notional Interest Deduction” Regime
Since 2006, the NID regime has allowed Belgian corporate taxpayers to deduct from their taxable income a fictional interest cost commensurate with their shareholder’s equity. The rationale is to reduce the favourable tax treatment of debt (interest is in principle tax deductible) versus equity financing (non-deductible dividend payments) of companies. Through 2017, many MNEs optimized their internal financing activities by using an “NID vehicle” in Belgium. Such vehicle would be financed using large amounts of equity, which was then loaned to group companies in return for arm’s length interest, while the NID vehicle eroded its own tax base by deducting the notional (or fictional) interest.
Since 2018, the NID regime has become a paper tiger, following which several international groups shifted their intra-group financing activities from Belgium to other countries (e.g., the ArcelorMittal-group shifted around EUR 35 billion intercompany loans from its Belgian finance company to a Luxembourg financing vehicle).
The Fortum Case
The Facts
In 2008, Fortum’s Finnish parent company (Parent) created a financing company in Belgium (BelCo or the NID vehicle) and financed it initially with loans for an aggregate amount of EUR 3 billion. BelCo then granted equivalent loans to a Swedish acquisition vehicle (SwedCo) in order for the latter to invest in the acquisition of a Russian energy company. As the investment was moving forward, Parent converted the loans to BelCo into equity. As BelCo’s equity rose, so did its NID, which allowed BelCo to shelter the bulk of its interest income on the receivables against SwedCo from Belgian corporation tax. In 2019, BelCo claimed the deduction of EUR 70 million of NID and paid Belgian corporation tax on EUR 22.75 million (instead of the gross amount of EUR 92.75 million of interest earned from SwedCo).
Position of the Belgian Tax Authorities
Referring to a precedent from the Belgian Court of Cassation, the Belgian tax authorities challenged BelCo’s NID claim based on a wide interpretation of Articles 79 and 207 of the Belgian Income Tax Code (BITC). In substance, these specific anti-abuse provisions disallow offsetting income derived from so-called “abnormal or benevolent advantages” received from a group company against a list of specific tax deductions, including the NID. The tax authorities claimed that the interposition of BelCo into the financing chain was totally artificial and tax-driven. Therefore, BelCo’s interest income was earmarked as resulting from “abnormal or benevolent advantages” and the NID was rejected. The tax authorities also highlighted that BelCo had no legitimate economic purpose and lacked substance in Belgium since its sole activity was to hold the receivables against SwedCo. Although BelCo rented office space in Belgium together with another group company, it did not have any staff on its payroll (making it a “letter-box company” in the tax authorities’ view). Fortum contested the tax authorities' interpretation and lodged a petition before the Belgian judiciary.
Antwerp Tribunal and Court of Appeal
In 2014, the Antwerp Tribunal of First Instance sided with the Belgian tax authorities and ruled that the conversion by Parent of BelCo’s debt into equity qualified as an “abnormal or benevolent advantage”. In other words, the Tribunal was of the view that BelCo had no right to offset its interest income against the NID computed on its equity.
In 2016, the Antwerp Court of Appeal quashed the Tribunal’s decision. According to the Court, the creation of BelCo was justified by genuine business purposes (i.e., managing financial needs and risks of the Fortum group). Not only is it characteristic for financing companies to own limited assets and have few, if any, employees on its payroll, but neither does the NID regime require the taxpayer to have any specific substance or carry out a minimum level of activities in Belgium. Imposing such requirements adds new conditions to the law, which neither the Tribunal nor the tax authorities are allowed to do. The Court also ruled that the wide interpretation of the notion of “abnormal or benevolent advantages” was not justified for the NID (unlike the compensation of carried-forward losses, which was the only tax deduction originally targeted by Articles 79 and 207 BITC).
The Belgian tax authorities disagreed with the Court’s analysis and filed an appeal with the Belgian Court of Cassation.
The Court of Cassation
In 2019, despite the favourable opinion of the Advocate General, the Belgian Court of Cassation repealed the ruling of the Antwerp Court of Appeal and supported a wide interpretation of Articles 79 and 207 BITC, based on a couple of precedents handed down by the same Court of Cassation. It referred the case back to the Ghent Court of Appeal for full retrial. For an in-depth analysis of the ruling of the Court of Cassation, please refer to our recently published article (in Dutch): Werner HEYVAERT, “Cassatie beslecht – voorlopig – het debat over abnormale of goedgunstige voordelen en de notionele interestaftrek”, T.F.R, 2020, pp. 151-157.
The Ghent Court of Appeal
On 16 June 2020, the Belgian trade press reported that the Ghent Court of Appeal had ruled in favour of Fortum and that the Belgian tax authorities have to reimburse the previously collected corporation tax plus compensatory interest (around EUR 200 million on aggregate).
Next Step?
It is not known yet whether the Belgian tax authorities are planning to submit the case again to the Court of Cassation. Technically speaking, they could do so, in which event the Court of Cassation will rule “in united chambers”, both on the merits and on the legality.
If the ruling from the Ghent Court of Appeal were to remain as it stands, this would be a turning point in the application of Articles 79 and 207 BITC. The right for the tax authorities to assess whether a structure leading to substantial tax benefits for the taxpayer makes sense from a business and economic point of view would be tempered. The fact that the main purpose of a structure is to take advantage of a beneficial tax treatment would not automatically lead to a rejection of the tax benefits listed in Article 207 BITC.
However, when the facts in the Fortum case played out (in 2009), Belgium’s General Anti-Abuse Rule (GAAR – Article 344, §1, BITC) was quite different from, and less effective than, the current version, which dates from 2012. In its present version, the GAAR allows the Belgian tax authorities to disregard a transaction or a set of mutually connected transactions that (a) put the taxpayer, contrary to the purpose of the relevant statutory provision, outside the scope of a disadvantageous tax provision, or (b) brings the taxpayer, contrary to the purpose of the relevant statutory provision, within the scope of a beneficial tax provision. In each instance, the tax authorities must make the assertion on the basis of objective facts and circumstances and the taxpayer has the right to corroborate that he had legitimate non-tax motives for entering into the transaction or set of mutually connected transactions.
We can only surmise that the facts underlying the Fortum case, under the 2012 version of the GAAR, could potentially be disregarded by the Belgian tax authorities.
Not clear yet, though, is whether the GAAR would allow the Belgian tax authorities (a) to stick to the fact that Fortum has set up a Belgian NID vehicle that granted loans to group companies and earned an arm’s length interest thereon, while (ii) disregarding the fact that the NID vehicle is financed with equity. It is reasonable to assume that Fortum would not have set up the Belgian NID entity and used it to grant loans to group companies if it had not been entitled to the NID on the interest earned from its group financing activities. Nevertheless, it remains to be seen whether this assumption would suffice for the tax authorities to tax the NID vehicle on the interest earned and deny the NID.
For more information, please contact Werner Heyvaert or Vicky Sheikh.
Over the last decade, Belgian tax authorities have been targeting Multinational Enterprises (MNEs) benefiting from the Belgian Notional Interest Deduction (NID) regime. Finnish energy giant Fortum was a victim of this witch hunt when the EUR 70 million NID applied by Fortum’s Belgian intragroup financing company was rejected back in 2009. After a setback before the Antwerp Tribunal of First Instance in 2014, a subsequent victory before the Antwerp Court of Appeal in 2016, ultimately Fortum’s hopes were dashed when the Belgian Supreme Court sided with the Belgian tax authorities in 2019 and referred the case back to the Ghent Court of Appeal for full retrial. It appears, however, that the Fortum saga carries on as only a few days ago the Ghent Court of Appeal ruled in favour of the Finnish group.
The Belgian “Notional Interest Deduction” Regime
Since 2006, the NID regime has allowed Belgian corporate taxpayers to deduct from their taxable income a fictional interest cost commensurate with their shareholder’s equity. The rationale is to reduce the favourable tax treatment of debt (interest is in principle tax deductible) versus equity financing (non-deductible dividend payments) of companies. Through 2017, many MNEs optimized their internal financing activities by using an “NID vehicle” in Belgium. Such vehicle would be financed using large amounts of equity, which was then loaned to group companies in return for arm’s length interest, while the NID vehicle eroded its own tax base by deducting the notional (or fictional) interest.
Since 2018, the NID regime has become a paper tiger, following which several international groups shifted their intra-group financing activities from Belgium to other countries (e.g., the ArcelorMittal-group shifted around EUR 35 billion intercompany loans from its Belgian finance company to a Luxembourg financing vehicle).
The Fortum Case
The Facts
In 2008, Fortum’s Finnish parent company (Parent) created a financing company in Belgium (BelCo or the NID vehicle) and financed it initially with loans for an aggregate amount of EUR 3 billion. BelCo then granted equivalent loans to a Swedish acquisition vehicle (SwedCo) in order for the latter to invest in the acquisition of a Russian energy company. As the investment was moving forward, Parent converted the loans to BelCo into equity. As BelCo’s equity rose, so did its NID, which allowed BelCo to shelter the bulk of its interest income on the receivables against SwedCo from Belgian corporation tax. In 2019, BelCo claimed the deduction of EUR 70 million of NID and paid Belgian corporation tax on EUR 22.75 million (instead of the gross amount of EUR 92.75 million of interest earned from SwedCo).
Position of the Belgian Tax Authorities
Referring to a precedent from the Belgian Court of Cassation, the Belgian tax authorities challenged BelCo’s NID claim based on a wide interpretation of Articles 79 and 207 of the Belgian Income Tax Code (BITC). In substance, these specific anti-abuse provisions disallow offsetting income derived from so-called “abnormal or benevolent advantages” received from a group company against a list of specific tax deductions, including the NID. The tax authorities claimed that the interposition of BelCo into the financing chain was totally artificial and tax-driven. Therefore, BelCo’s interest income was earmarked as resulting from “abnormal or benevolent advantages” and the NID was rejected. The tax authorities also highlighted that BelCo had no legitimate economic purpose and lacked substance in Belgium since its sole activity was to hold the receivables against SwedCo. Although BelCo rented office space in Belgium together with another group company, it did not have any staff on its payroll (making it a “letter-box company” in the tax authorities’ view). Fortum contested the tax authorities' interpretation and lodged a petition before the Belgian judiciary.
Antwerp Tribunal and Court of Appeal
In 2014, the Antwerp Tribunal of First Instance sided with the Belgian tax authorities and ruled that the conversion by Parent of BelCo’s debt into equity qualified as an “abnormal or benevolent advantage”. In other words, the Tribunal was of the view that BelCo had no right to offset its interest income against the NID computed on its equity.
In 2016, the Antwerp Court of Appeal quashed the Tribunal’s decision. According to the Court, the creation of BelCo was justified by genuine business purposes (i.e., managing financial needs and risks of the Fortum group). Not only is it characteristic for financing companies to own limited assets and have few, if any, employees on its payroll, but neither does the NID regime require the taxpayer to have any specific substance or carry out a minimum level of activities in Belgium. Imposing such requirements adds new conditions to the law, which neither the Tribunal nor the tax authorities are allowed to do. The Court also ruled that the wide interpretation of the notion of “abnormal or benevolent advantages” was not justified for the NID (unlike the compensation of carried-forward losses, which was the only tax deduction originally targeted by Articles 79 and 207 BITC).
The Belgian tax authorities disagreed with the Court’s analysis and filed an appeal with the Belgian Court of Cassation.
The Court of Cassation
In 2019, despite the favourable opinion of the Advocate General, the Belgian Court of Cassation repealed the ruling of the Antwerp Court of Appeal and supported a wide interpretation of Articles 79 and 207 BITC, based on a couple of precedents handed down by the same Court of Cassation. It referred the case back to the Ghent Court of Appeal for full retrial. For an in-depth analysis of the ruling of the Court of Cassation, please refer to our recently published article (in Dutch): Werner HEYVAERT, “Cassatie beslecht – voorlopig – het debat over abnormale of goedgunstige voordelen en de notionele interestaftrek”, T.F.R, 2020, pp. 151-157.
The Ghent Court of Appeal
On 16 June 2020, the Belgian trade press reported that the Ghent Court of Appeal had ruled in favour of Fortum and that the Belgian tax authorities have to reimburse the previously collected corporation tax plus compensatory interest (around EUR 200 million on aggregate).
Next Step?
It is not known yet whether the Belgian tax authorities are planning to submit the case again to the Court of Cassation. Technically speaking, they could do so, in which event the Court of Cassation will rule “in united chambers”, both on the merits and on the legality.
If the ruling from the Ghent Court of Appeal were to remain as it stands, this would be a turning point in the application of Articles 79 and 207 BITC. The right for the tax authorities to assess whether a structure leading to substantial tax benefits for the taxpayer makes sense from a business and economic point of view would be tempered. The fact that the main purpose of a structure is to take advantage of a beneficial tax treatment would not automatically lead to a rejection of the tax benefits listed in Article 207 BITC.
However, when the facts in the Fortum case played out (in 2009), Belgium’s General Anti-Abuse Rule (GAAR – Article 344, §1, BITC) was quite different from, and less effective than, the current version, which dates from 2012. In its present version, the GAAR allows the Belgian tax authorities to disregard a transaction or a set of mutually connected transactions that (a) put the taxpayer, contrary to the purpose of the relevant statutory provision, outside the scope of a disadvantageous tax provision, or (b) brings the taxpayer, contrary to the purpose of the relevant statutory provision, within the scope of a beneficial tax provision. In each instance, the tax authorities must make the assertion on the basis of objective facts and circumstances and the taxpayer has the right to corroborate that he had legitimate non-tax motives for entering into the transaction or set of mutually connected transactions.
We can only surmise that the facts underlying the Fortum case, under the 2012 version of the GAAR, could potentially be disregarded by the Belgian tax authorities.
Not clear yet, though, is whether the GAAR would allow the Belgian tax authorities (a) to stick to the fact that Fortum has set up a Belgian NID vehicle that granted loans to group companies and earned an arm’s length interest thereon, while (ii) disregarding the fact that the NID vehicle is financed with equity. It is reasonable to assume that Fortum would not have set up the Belgian NID entity and used it to grant loans to group companies if it had not been entitled to the NID on the interest earned from its group financing activities. Nevertheless, it remains to be seen whether this assumption would suffice for the tax authorities to tax the NID vehicle on the interest earned and deny the NID.
For more information, please contact Werner Heyvaert or Vicky Sheikh.