Relief on royalties and factoring, setback on interest

On 24 March 2025, the Court of First Instance of Brussels^[1] issued a split decision in a transfer pricing case. The Court sided with the taxpayer on royalties and factoring fees, finding the tax authority’s full rejection arbitrary, but upheld the disallowance of interest deductions, agreeing with the Administration’s position. This case underscores both the importance of robust transfer pricing documentation and the need for careful substantiation of intra-group financing arrangements.

The facts and key takeaways for each of the three topics are presented below, organized and analyzed separately by topic: 

• License Fee (Royalties)
• Factoring
• Interest Payments

A Belgian company paid EUR 11.6 million in licence fees to its Dutch holding company for the use of Intellectual Property (“IP” - trademark, brand, logo, business know-how, and international networks) and related strategic services, based on a group-wide licence model (1.3% of turnover).

The Belgian Tax Authorities (“BTA”) challenged the full deduction of the licence fee under Article 49 ITC92^[2] (deductibility of professional expenses) and Article 26 ITC92 (abnormal or gratuitous advantage). The BTA argued that:

• The trademark had no demonstrable value for the Belgian company.
• Payment for intra-group use of IP, especially when the local entity itself contributes to the brand value by bearing marketing and branding costs, is contrary to OECD guidelines.
• The licence fee constituted an abnormal or gratuitous advantage.
• At most, only a limited amount (around EUR 1.1 million) could be accepted as compensation for routine activities.

The taxpayer argued that:

• The IP and related services were valuable and the Dutch holding company was performing the DEMPE^[3] functions and bearing necessary risks.
• The licence fee was incurred to obtain taxable income fulfilling the Article 49 ITC92 finality condition.
• The fee was calculated based on a consistent group-wide methodology and properly documented through transfer pricing studies using the CUP method.
• The BTA’s complete rejection was arbitrary, and the legal reasoning for the disallowance was insufficient.

The Court of First Instance of Brussels upheld the taxpayer’s appeal, concluding that:

• IP and Services Have Value: Despite the absence of a signed “License and Management Services Agreement”^[4], the court found—referencing the TP report—that the holding company’s IP and strategic services had genuine value for the Belgian company, performing DEMPE functions, assuming risks, investing in IP, and employing staff to provide these services.
• Costs Incurred to Obtain Taxable Income: The licence fee was made in the context of professional activity with the intent to generate taxable income, satisfying Article 49 ITC92. The court rejected the BTA’s argument requiring proof of actual added revenue.
• No Abnormal or Gratuitous Advantage: Under Article 26 ITC92, the court found no evidence that the payment was gratuitous or outside common business practice. Payments to a holding company for IP and strategic services aligned with the arm’s length principle.
• Rejection of Routine Activities Only: The administration’s suggestion that only a small “routine activities” component should be deductible was dismissed as irrelevant, since the licence fee was distinct from routine service costs.

The court annulled the full rejection of the licence fee on the grounds of arbitrariness, without needing to further investigate the transfer pricing method or the arm’s length nature of the fee at that stage.

• Arbitrariness Is Critical: Courts will annul tax adjustments that entirely reject legitimate intercompany payments without sufficient factual or legal basis.
• Intent vs. Outcome: For Article 49 ITC92, the intent to generate taxable income is sufficient; actual revenue contribution is not required.
• IP and Strategic Services Are Recognized: Courts acknowledge the value of intra-group IP and related services, even when local entities contribute to marketing.
• Documentation Matters: While missing agreements were noted, courts rely on evidence of contractual arrangements, transfer pricing studies, and factual support demonstrating value and purpose.
• Arm’s Length Principle Supported: Payments made in line with group-wide methodologies and properly documented do not automatically constitute an abnormal or gratuitous advantage.

The second ground of appeal relates to the so-called “Fee Discount” or “Contract Discount” in the amount of EUR 3.2 million in the context of a factoring agreement.

The Belgian company used a Singaporean group entity for factoring its trade receivables. Under the factoring agreement, the Belgian company transferred its trade debtors in exchange for immediate partial payment, while the factoring entity collected the balances and transferred them later. The agreement included a “contract discount”^[5] in addition to a “non-payment risk discount”^[6] and a “handling fee”^[7].

The BTA challenged the full deduction of the contract discount, arguing that:

• It was a superfluous/double compensation for the same risk already covered by the non-payment risk discount.
• Being a ‘core entity’ in a strong operational group, the Belgian company had no real risk and no evidence of failing to transfer funds, so extra payment to the Singaporean entity wasn’t needed.
• The expense should be disallowed under Article 26 ITC92 as an abnormal or gratuitous advantage.

The taxpayer argued that:

• The contract discount compensated for a distinct risk—the obligation to transfer funds to the factoring entity after receiving customer payments and the time value of money.
• Even if the Belgian entity is regarded as the most creditworthy entity (core entity) within the group, some residual payment risk remains, and since it is impossible to exclude every risk in continued payment, such risk may be contractually compensated
• The BTA acted arbitrarily by assuming zero risk (or equating it to the interbank rate, i.e., negative Euribor) and rejecting the entire discount.

The Court of First Instance of Brussels upheld the taxpayer’s appeal, concluding that:

• Contract Discount Is Justified: The discount compensates for a separate risk from the non-payment risk, related to the transfer of funds and working capital management.
• Residual Risk Exists: Being a “core entity” does not eliminate all risks; such residual risks can be contractually compensated.
• BTA’s Rejection Was Arbitrary: The administration’s complete disallowance of the contract discount ignored the distinct nature of the compensated risk and was therefore arbitrary.

• Separate risks within a factoring arrangement can justify additional compensation.
• Courts recognize that even “core” group entities may face risks warranting deductibility.
• Arbitrary disallowance of expenses without distinguishing between different risk components is unlikely to hold.

The Belgian company paid EUR 2.8 million in interest on a EUR 415 million loan from a Swiss group entity on 1 Jan 2017, with a maturity of three years. The loan was used to refinance another loan concluded in 2006, which enabled the purchase of a company’s shares.

The BTA argued that:

• The loan was not a genuine refinancing of a previous acquisition loan but was linked to capital reduction and dividend payments in 2016.
• The real purpose of the loan is to circulate funds within the group, not to generate or retain taxable income, and therefore the interest expense does not meet the finality condition required by Article 49 ITC92.
• The interest rate was not at arm’s length, and the expense represented an abnormal or gratuitous advantage under Article 26 ITC92.

The taxpayer argued that:

• The loan was a legitimate (second/third) refinancing of the 2006 acquisition loan that allowed the purchase of shares.
• The interest payments were directly linked to generating taxable income, satisfying Article 49 ITC92.
• The BTA’s new legal arguments were arbitrary and disproportionate, asserting that this constitutes prohibited compensation and questioning the full amount of interest paid, instead of disallowing the portion.

The Court upheld the BTA’s position, concluding that:

• Purpose of Loan Not Sufficiently Proven: The taxpayer failed to demonstrate that the loan and related interest were used to acquire or retain taxable income.
• Loan Linked to Dividend and Capital Reduction: Evidence supported that the loan’s real purpose was intra-group fund circulation, not business activity generating taxable income.
• Interest Expense Not Deductible: Accordingly, the interest did not satisfy Article 49 ITC92’s finality condition, and the BTA’s disallowance was confirmed.

• Intra-group loans must clearly demonstrate a business purpose linked to taxable income.
• Courts and tax authorities scrutinize the real purpose of financing and may disallow interest if linked to dividends or capital movements.
• Interest deductibility requires more than TP benchmarks — strong evidence of economic substance is critical.

The taxpayer requested a waiver of the 10% tax increase, arguing good faith and reliance on transfer pricing studies. The tax authorities maintained the increase, and the court, citing the seriousness of the interest payment facts, rejected the plea. The 10% increase stood for the loan interest payments.

This case underscores the critical importance of robust transfer pricing documentation and demonstrating economic substance:

• Courts can overturn arbitrary disallowances (royalties, factoring).
• Intra-group loans and interest remain high-risk if not clearly linked to taxable income.
• Strong TP documentation is essential but may not prevent a 10% tax increase or disallowance of intra-group interest if purpose and substance are unclear.

The Belgian Lower Court has issued the aforementioned judgment with a mixed outcome. Both the taxpayer and the tax authorities retain the right to appeal before the Court of Appeal. At this stage, it is not confirmed whether an appeal has been lodged by either party.

For further information or tailored advice, please contact your KPMG tax advisor.

This newsflash is for information purposes only and does not constitute legal advice.