CUP method under the spotlight

On June 16, 2025 the Court of First Instance of Antwerp^[1] issued a negative decision for the taxpayer in a  transfer pricing case. The court concurred with the tax authorities’ position that the interest rate on the intra-group loan was excessive. This conclusion was based on the existence of a comparable loan with third party (ING Bank), which, after adjusting for the specific terms of the intra-group loan, was deemed an appropriate internal Comparable Uncontrolled Price (“CUP”).

The facts, the Court’s Decision and the key takeaways are presented below.

A Belgian company acquired the shares of its parent holding company for approximately EUR 16 million. The acquisition was financed through:

• An external bank loan with a variable interest rate of 1.75%, and
• A subordinated shareholder (intercompany) loan with a fixed interest rate of 5%.

The Belgian Tax Authorities (“BTA”) challenged the arm’s length interest rate of the intercompany loan. The BTA argued that:

• During the audit, the taxpayer was unable to provide substantive justification for the 5% interest rate applied to the intercompany loan, stating that 5% is the standard rate to all intra-group loans.
• The external loan concluded with third party (ING Bank) by the taxpayer on the same day was equivalent to the intercompany loan, with the only distinction being the subordinated nature of the latter. Also, the purpose of both loans was the same, an adjustment may be made to reflect the specific characteristics of the intercompany loan.

The taxpayer argued that:

• The market-based character of 5% is supported based on the external market interest rates (external CUP analysis) showing  a range of 4,69% to 7,32%. The analysis also clarified that the external bank financing with ING was not comparable to the intercompany loan due to insufficient similarity between the terms and conditions of the two loans. Please find below the overview of the two loans:

The BTA adjusted for the differences between the two loans, argumenting that the external loan can be used as an internal CUP. Moreover, the tax authorities determined that the taxpayer did not sufficiently substantiate why the internal CUP could not be used as a starting point to determine the interest rate on the intra-group loan. Furthermore, the BTA demonstrated that the applicable market interest rates at the start date of the loan (i.e., 23/02/2018) were below 5%. Taking all factors into account, the BTA concluded that an arm’s length interest rate for the intra-group loan would be 3.32%. The BTA used the variable interest rate of the internal CUP as the starting point of their analysis, making the necessary adjustment for the specific characteristics of the intercompany loan (i.e., adjustments for the floating-to-fixed interest rate, the subordinated nature and the non-interim repayment character of the intercompany loan). The BTA determined the interest rate using internal CUP as follows:

1.76% variable pension third-party loan (ING Bank)

+ 0.79% correction corresponding fixed rate

+ 0.25% correction subordinated nature of the loan

+ 0.53% correction for non-interim repayment of the loan

= 3.32%.

Based on the above arguments, the BTA rejected the excessive portion (i.e., the difference between 5% and 3,32%) as a deductible expense pursuant to Article 55 ITC92^[3].

The Court emphasized that based on the Article 55 of ITC92^[4], it is the responsibility of the taxpayer to demonstrate that the interest paid is not excessive, taking into account the specific characteristics of the loan. The analysis in the taxpayer’s Transfer Pricing study, asserting that no internal CUP was available, is based on an incorrect premise.

Although the taxpayer could obtain a loan at a variable rate of 1.75% from ING for the purchase of the shares, the parent company charged the taxpayer a fixed rate of 5% for a loan with similar characteristics and for the financing of the same asset. Moreover, this rate turned out to be much higher than the prevailing rates on the market on the date of taking out this loan (23 February 2018). The Court also referred to the fact that even the average interest rate, charged for households for consumer loans with a fixed-rate period of more than 5 years, was less than 5% in February 2018, namely 4.69%

The Court agreed with the BTA’s approach and ruled that both loans are sufficiently comparable, allowing the external loan to be used as a reference (i.e., internal CUP), based on the fact that the principal amount, purpose of the loan, start date, and term are similar and that necessary adjustments (i.e., adjustments for the floating-to-fixed interest rate, the subordinated nature and the non-interim repayment character of the intercompany loan)) could be made . Furthermore, the Court emphasized that the BTA relied on objective and verifiable elements, which were not refuted by the taxpayer.

The Court decided that a 10% tax increase was rightfully applied due to the incorrect filing of the corporate income tax return, as a first-time offense, without the intention of tax evasion.

This case underscores that robust transfer pricing documentation is necessary to substantiate financing transactions. We can draw the following key takeaways:

• Intra-group loans and interest charges are considered high-risk areas unless properly supported by clear documentation. Strong evidence of arm’s length interest rates is essential.
• An important initial step is to assess potential internal CUPs. If these are not sufficiently comparable, it is essential to provide a justification for this assessment. Without explaining why external financing is not considered as a potential internal CUP, an analysis based on an external CUP has limited relevance.
• Adjustments can be made to the characteristics of the loan, which means that external financing cannot always be dismissed as non-comparable. There are several methods accepted by the BTA for making adjustments to the characteristics of the loan.
• Although this point was not adressed expicitly in the Court case, the arm’s lenght character of the debt equity ratio remains as well a point of attention.

The taxpayer has the option to file an appeal; however, we do not have any information regarding this at this time.

It should be noted that, in prior cases concerning this issue, another court in Belgium reached the same conclusion—that the internal CUP should be applied and cannot be disregarded arbitrarily.

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

_{2. Non-interim repayment,” also referred to as “bullet repayment,” describes a loan structure in which the entire principal amount is repaid in a single lump sum at the maturity date, with no principal payments made during the term of the loan}

_{3. ITC92 refers to the Belgian Income Tax Code of 1992, a comprehensive legal framework governing taxation in Belgium.}

_{4. The Court stated in its judgment that the taxpayer bears the responsibility to demonstrate that the interest charged is at arm’s length and not excessive. With respect to business expenses (i.e., interest expenses), we would like to emphasize that the taxpayer must be able to prove that the interest qualifies as a business expense by meeting the requirements of Article 49 ITC92. We would also like to highlight that there may still be room for discussion as to whether the burden of proof regarding unreasonable or excessive expenses lies with the taxpayer or the tax authorities, depending on the facts of the case.}