Why is this important?

Interest charges are tax deductible subject to the conditions set out in Article 49 ITC 92 being fulfilled. One of the conditions (the so-called finality condition) requires that costs which a taxpayer wishes to deduct were incurred to obtain or preserve taxable income. 

In recent years, the Belgian tax administration has continuously challenged the deductibility of interest charges related to debt-leveraged capital reductions or dividend distributions, arguing that they do not fulfill the finality condition. While previous case law confirmed that such interest charges could in principle be deductible, Belgian courts consistently held that taxpayers had failed to demonstrate that the interest was incurred to obtain or preserve taxable income.

Following the previous strict approach to the deduction of interest charges related to debt-leveraged distributions, the Ghent Court of Appeal has now accepted the application of the asset stripping theory as proof that the finality condition in Article 49 ITC 92 is fulfilled. 

For the first time, taxpayers successfully demonstrated that the interest charges were incurred to obtain or preserve taxable income by showing that the external financing allowed them to retain their income-generating assets, rather than having to sell or transfer those assets to proceed with the distribution (i.e. the asset stripping theory). 

Notwithstanding this positive case law, the Belgian tax administration is expected to maintain its stringent position in this respect for the foreseeable future.

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