Recent case-law of the Court of Appeal of Ghent marks a positive evolution in the deductibility of interest on loans taken out to finance a dividend distribution or capital decrease. This situation is commonly referred to as a leveraged distribution, and it is a topical issue in Belgian corporate income tax. After prior case-law which refused the deductibility, this recent case shows that the interest on such loan can indeed be deductible in the right circumstances.
Historically, the interest on leveraged distributions was generally considered to be deductible. Interest paid or incurred by a company is an expense. For an expense to be deductible, the expense should be made to obtain or maintain taxable income. There were little doubts that this was the case for interest paid in the context of a leveraged distribution.
That situation changed drastically more than a decade ago when the tax authorities started challenging the status quo. To the surprise of many, they were successful in doing so. The tax authorities argued that a leveraged distribution benefits the shareholders, and not the distributing company. As a result, the conditions for the deductibility of the interest charge on such debt could not be met. The tax authorities were followed by tribunals and courts as of 2016, which gave rise to case-law in which the deductibility of interest on loans to finance a distribution was refused.
There is one important nuance that has been confirmed up to the Supreme Court: the interest charge of a leveraged distribution is not per se excluded from deductibility. It is a matter of evidence. If the company demonstrates that the loans are necessary to maintain other assets, the interest on the loans can be deductible. The reasoning is the following: a company has the right to decide on a capital decrease or a dividend distribution. The question is then how such distribution is financed. The distinction between the decision to distribute and the way it is financed is subtle yet essential. The availability of cash is no prerequisite for a valid distribution. Absent sufficient levels of cash, the distributing company has the choice between realising certain assets or distributing them in kind, or borrowing to finance the distribution. Borrowing prevents the company from losing other assets, and those assets presumably contribute to the revenue of the company. Therefore, a leveraged distribution can indirectly contribute to obtaining or maintaining taxable income.
In those earlier cases, it has been ruled that the indirect link between the loan and the taxable profits that results from maintaining other assets, was not sufficiently demonstrated. Subsequent case-law followed the same line. The result was puzzling: the Supreme Court had confirmed the possibility for those interest expenses to be deductible, but in practice, it seemed (almost) impossible to meet the required burden of proof.
Until now. In recent judgements of 10 December 2024 and 18 February 2025, the Court of Appeal of Ghent seems to override earlier jurisprudence by confirming that the burden of proof is met in these two cases. The loans taken out in the context of a leveraged distribution prevent the company from disposing of other assets, and as a result, they contribute indirectly to obtaining or maintaining taxable income. As a result, the deductibility of the interest is upheld.
The facts of those recent cases do not seem fundamentally different from previous cases, and the evidence brought forward does not seem that much stronger. As a result, it seems that the threshold for the burden of proof to demonstrate that those interest expenses are deductible, has been reduced to reasonable levels, in line with the earlier case law of the Supreme Court and the applicable legal provisions.
This is an important positive evolution for companies that have implemented a leveraged distribution in the past or that contemplate doing so in the future.
One fundamental point of criticism remains. In my opinion, a company should not be required to demonstrate in detail such indirect link between the interest charges related to a leveraged distribution and obtaining or maintaining taxable income. A leveraged distribution decreases the equity of a company and increases its debt. It thus boils down to a decision on the capital structure of a company. The liabilities as a whole finance all assets and fund all operations of a company. A company should have the discretionary power to reshuffle its capital structure. When doing so, it should not be hindered by considerations on the deductibility of interest in some cases, and the refusal of the deductibility in other cases. That would lead to unlawful discriminations. As long as the assets and operations of the company are linked to business activities (which is almost always the case), the interest on loans to finance those assets and fund those operations should easily meet the statutory requirements of deductibility. As a result, despite the positive evolution in the case-law, I believe that the burden of proof should be even lower than in those recent positive cases.
If you have any questions or require assistance, feel free to contact the author Thomas Gernay
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This newsletter is not a legal advice or a legal opinion. You should seek advice from a legal counsel of your choice before acting upon any of the information in this newsletter.
