Key Belgian Court decision on intra-group financing and transfer pricing

On 6 June 2025, the Court of First Instance in Leuven ruled on the arm’s length nature of a number of financial transactions in which a Belgian company was involved. The Court’s judgement includes interesting insights on various transfer pricing aspects of intra-group financing, e.g. the determination of credit ratings, the impact and justification of subordination on the interest rate, the use of the CUP method, the deductibility of interest expenses as a result of participation into a cash pool, etc. 

On 29 April 2011, a Belgian company that was part of a US headquartered multinational group entered into a EUR 800 million loan agreement with a Luxembourg group entity for a period of 10 years at a fixed interest rate of 7.22% per annum. The purpose of the loan was to finance equity investments in another group entity. The loan was subordinated and early repayment was possible, subject to the approval of the counterparty. Actual repayment of the loan took place on 22 December 2016.

The Belgian company was also a borrower in a third-party financing transaction and deposited the funds in a cash pool lead by another Belgian group entity. Thereby, the company incurred interest costs without receiving a remuneration for its cash pool deposits. 

Furthermore, the company granted a loan to a UK group company on 20 March 2009 with a tenor of 10 years. According to the loan agreement, interest was only payable at the maturity date of the loan. However, the principal was repaid early, leaving the accrued interest outstanding. This interest was paid several years later, but before the maturity date of the loan.

In July 2019, the Belgian company received a notice of amendment from the Belgian Tax Authorities (“BTA”) stating amongst others that:

• the BTA challenged the arm’s length nature of the interest rate of the loan with the Luxembourg entity;
• the interest expenses related to the loan granted by an unrelated party were not tax deductible as the funds were deposited in a cash pool and the company did not receive any interest on the deposited funds; and
• the Belgian company had granted an abnormal or benevolent advantage to the UK group company by not compounding interest (i.e. by not charging interest on the interest accrued up to the date of early repayment of the principal amount until the UK group company paid the outstanding interest).

The company and BTA went through the administrative tax procedure, but ultimately no agreement was reached. Subsequently, the case was brought before the Court of First Instance in Leuven.

Below, an overview of some of the key transfer pricing elements included in the judgement is provided.

At the time of entering into the loan agreement, the company determined the interest rate of 7.22% by taking into account the following elements:

• A risk-free rate of 4.33% (based on the yield of the 10-year OLO[1]);
• A risk premium consisting of:
  • a credit spread of 2.44%, based on the applicable credit rating of the Borrower (BBB), based on the Bonds Online Databank, and
  • a 0.45% premium for the subordinated nature of the loan, based on empirical research.

According to the BTA, the arm’s length interest rate was 4.88%[2]. The BTA’s conclusion was based on, what the BTA considered an internal Comparable Uncontrolled Price (“CUP”), i.e. a USD 500 million of unsecured fixed rate notes, issued in the first quarter of 2011, with a 10-year maturity at an interest rate of 4.25%. This issuance was made by the US Ultimate Parent Entity (“UPE”) of the group. The credit rating of the UPE was determined at BBB+. The BTA determined its interest rate by applying the EURO swap rate (3.59%) and adding a margin for the credit rating (i.e., BBB) of 0.68%, resulting in an interest rate of 4.27%.

In the context of the investigation by the BTA, the company commissioned an additional study to substantiate the interest rate, which concluded that the arm’s length interest rate ranged between 6.95% and 7.65%. This study was performed by:

• Determining the stand-alone credit rating of the Borrower;
• Applying the applicable yield curves for the credit rating obtained in the first step; and
• Performing comparability adjustments, i.e. charging a:
  • Liquidity premium;
  • Premium for potential early repayment; and
  • Premium for the option to extend the loan.

As part of this additional study, it was concluded that no internal CUP was available, resulting in the appropriateness of applying the modified CUP method (OECD recognized).

The main point of contention was that the BTA classified the company as a “core entity”, which would result in applying the Group Credit Rating (“GCR”) of the UPE to the Belgian company. In contrast, the corroborative analysis of the company classified the company as a "strategically important entity" resulting in the use of its stand-alone credit rating plus an uplift of 1 to 3 notches to reflect implicit group support. Hereby, the BTA argued that the financial statements of the company indicated that the company is exposed to limited market and liquidity risk, as it could always rely on financial support from its UPE.

Furthermore, the BTA challenged the impact of subordination, arguing that it was included solely to artificially increase the interest rate.

The Court stated that the mere fact that the BTA arrived at a lower interest rate by using a different method does not demonstrate that the company’s method does not result in an arm’s length outcome. It is first and foremost the responsibility of the BTA to prove that the method applied by a taxpayer results in a non-arm’s length result.

The Court concluded that the differences identified between the transaction under review and the unsecured notes issued by US parent company are reasonable and justified, leading to the conclusion that the unsecured notes are not sufficiently comparable to serve as an internal CUP.

The Court generally agreed with the application of methodology of the company. However, the Court noted that the company did not sufficiently explain the rationale for the loan’s subordinated nature. The company did not succeed in providing a reasoning for the purpose or necessity for the subordination. As a result, the Court determined that subordination should not be considered as an element which needed to be taken into account to establish the arm’s length pricing of the loan, thereby setting the arm’s length interest rate at 6.93%. The difference between 7.22% and 6.93% (i.e., 0.29%) was added to the taxable base pursuant to Article 26 ITC92 and Article 185 §2 ITC92. 

The company has entered into a financing transaction with an unrelated party for which it incurred interest expenses of  EUR 12.6 million. Initially, the BTA denied the deductibility of the full interest cost but later on accepted the partial deductibility (i.e. EUR 6.6 million), leaving EUR 6 million in dispute.

The BTA argued that the disputed interest expenses did not meet the requirements of Article 49 ITC92, as the funds were not used to retain or generate taxable income but instead were deposited in a cash pool for which the company did not receive any compensation.

The company contended that the interest was deductible under Article 52,2° ITC92, which creates a rebuttable presumption that the finality condition of Article 49 ITC92 is met. The taxpayer also argued that the administration should not question the business rationale of expenses linked to transactions with unrelated parties.

The Court found that the BTA had sufficiently rebutted the presumption of deductibility, as the taxpayer failed to demonstrate a concrete link between the interest expenses and the generation or retention of taxable income. The Court concluded that the finality condition of Article 49 ITC92 was not satisfied and thus the disputed interest expenses were considered as non tax deductible. The Court rejected the deductibility of around EUR 6 million. 

On 20 March 2009, the company granted a USD 41.5 million loan with a tenor of 10 years to a group entity at a fixed interest rate of 8.34% According to the terms of the agreement, the interest was payable upon maturity date (unless earlier requested) and the agreement was governed by Belgian law. The principal was repaid (early) in December 2012, while the at that time accumulated interest of USD 13.2 million remained outstanding and was only paid in December 2016, before the maturity date.

The BTA argued that the company granted an abnormal or benevolent advantage by not compounding interest (i.e. charging interest on the USD 13.2 million accumulated interest amount until the moment of actual payment). The BTA challenged the arm’s length nature and added USD 1 million to the company’s taxable base.

The company disagreed, referencing the loan agreement, which specified that interest was only payable at maturity date, unless an earlier request was made. The taxpayer further argued that Belgian law (Article 1154 of the Civil Code) prohibits the charging of interest on interest except under specific conditions, which were not met in the case at hand.

The Court found that both the loan agreement and the parties’ conduct were consistent with the contractual terms and Belgian law. The BTA did not provide sufficient evidence that the arrangement was not at arm’s length. As such, the burden of proof was not met and the tax adjustment was rejected.

This case underscores that robust transfer pricing documentation is necessary to substantiate the arm’s length nature of (intra-group) financing transactions. Based on this case, we can draw the following conclusions:

• Intra-group financing transactions remain to be considered high-risk areas for transfer pricing purposes. Detailed transfer pricing documentation and strong evidence of the arm’s length nature of such transactions are essential to manage potential future audit scrutiny. Thorough documentation of loan characteristics and their economic justification (i.e., subordination, prepayment, etc.) is essential;
• The existence of financial transactions with unrelated companies does not necessarily mean that an internal CUP is available. If reasonable and well-supported arguments are provided as to why the external financing is not sufficiently comparable to the intra-group transactions at hand, the external CUP can still be used to support the arm’s length nature of transactions;
• It is up to the BTA to provide thorough arguments to reject the company’s transfer pricing methodology and documentation. The burden of proof rests at the level of the BTA;
• Interest expenses, in addition to being assessed for arm’s length character, must also meet the requirements of Article 49 ITC92 in order to be tax deductible. A clear link between the interest expense and the generation or retention of taxable income must be demonstrated;
• Although this point was not explicitly addressed, the arm’s length debt quantum and repayment capacity of a borrower must be demonstrated. These elements remain high on the agenda of transfer pricing audit teams in Belgium.

The company and the BTA still have the option to file an appeal. However, as per today, no further information on such actions is available.

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