Fortum Project Finance (Fortum PF’) is a Belgian company, founded in 2008 by Fortum OYI, a Finnish company, and Fortum Holding bv, a Dutch company. The establishment of Fortum PF was part of an acquisition that the Finnish company Fortum OYI, through its Swedish subsidiary Fortum 1AB, had in mind in Russia. However, the financing of this Russian acquisition did not go directly through Sweden but through Fortum PF in Belgium. Two virtually identical loan contracts were drawn up simultaneously on 19 March 2008. First, Fortum OYI granted credit facilities of EUR 3,000,000,000 to Fortum PF and with a second loan, Fortum PF ‘passed on’ the same amount to Fortum 1AB of Sweden. The funds, intended for the acquisition in Russia, did not pass through Belgium but went directly to Russia. 10 days later, capital increases were made to Fortum PF, with the Finnish company Fortum OYI contributing part of its loan to Fortum PF. In this way, a total of 2,389,196,655.06 euros of capital was created. According to the Belgian tax authorities, the interest received by Fortum PF from Fortum 1AB was not obtained under normal economic circumstances, but only for the purpose of obtaining tax deduction. Consequently, the interest had to be regarded as an abnormal and gratuitous advantage, and the deduction for risk capital pursuant to Article 207, second(1) of the Belgian Income Tax Code 92 denied. The deduction for risk capital amounting to EUR 69,749,709.95 was rejected. Fortum PF had disputed this and won the case before the Court of First Instance. The Court of Appeal in Antwerp considered it important that the applicability of article 207 ITC 92 for the deduction of risk capital did not simply mean that the case law of the Court of Cassation on the recovery of losses after profit shifts could be extended to the present case as argued by the tax authorities. The Court of Appeal elaborated that, while the Court’s interpretation of the concept of “abnormal and gratuitous advantages” is justified in the light of the ratio legis of Article 79 ITC 92 as regards combating the compensation of previous losses, this is not the case in the light of the ratio legis of the deduction for risk capital, i.e. the elimination of the economically unjustified discrimination between financing by debt capital and financing by risk capital; as a result, the concept of abnormal and gratuitous advantages had to be interpreted narrowly, taking into account the operation which would have conferred the advantage, without taking into account an overly broad context. The Court of Appeal in its judgment ruled that there were no abnormal transactions. The Court examined whether both the establishment of Fortum PF, the granting by Fortum OYI of a loan to Fortum PF, the granting by Fortum PF of a loan to Fortum 1 AB, the contribution by Fortum OYT of its claim to the capital of Fortum PF and the granting by Fortum OYI of interest to Fortum PF should be considered unusual in the economic circumstances in question. According to the Court of Appeal the creation of Fortum PF could not be considered abnormal simply because a financing company already existed within the group; furthermore, the view that Fortum PF did not have any economic activity in Belgium cannot be accepted, since the granting of a loan and its management implies an activity and that activity cannot be ignored. In addition, the fact that Fortum PF possesses few assets and would call on the staff of another company via a payroll location cannot be considered abnormal either, since it is inherent to a financing company that it needs assets and staff only to a limited extent for its activities. Furthermore, the fact that the company would not have engaged in any activities other than the management of the loan to Fortum 1AB cannot be considered abnormal either, since it is a large loan and the administration should not be involved in assessing the quantity of a taxpayer’s transactions; Nor can the fact that Fortum PF was involved in the financing operation be considered abnormal for the sole reason that the existing financing company could have been used or that Fortum OYI could have granted the loan directly to Fortum 1AB; furthermore, the conversion of Fortum OYI’s claim into capital cannot be considered abnormal; according to the Court of Appeal, this even corresponds to the objective pursued by the legislator in introducing the deduction for risk capital; in addition, the administration did not dispute that the interest granted by Fortum 1AB to Fortum PF was in line with the market and therefore not abnormal; in short, the whole construction cannot be considered abnormal for the simple reason that it was also motivated by tax considerations; moreover, it must be noted that the deduction for risk capital is regulated in a detailed manner in the law and provides for its own conditions to avoid abuse as well as a specific anti-abuse provision (Article 205ter, § 4 ITC 92). The Court of Appeal added that the administration adds a condition to the law when it states that the deduction for risk capital cannot be applied when it appears that the incorporation of a company in Belgium and the generation of income in it is done in order to apply the deduction for risk capital. Before the cassation, the Belgian State argued that the Court of Appeal had gone too far in its interpretation of the concept of abnormal and gratuitous advantages. The Belgian State thus defended in particular the “broad scope” of the anti-abuse provision of Articles 79 and 207 of ITC 92, including as regards the deduction of risk capital. Fortum had invoked a ground of inadmissibility of the Belgian State’s plea. According to Fortum, the Court of Appeal had established and explained that all the transactions in question were economically justified and not artificial. The plaintiff’s criticism to cassation was directed entirely against the ‘strict’ interpretation of the concept of abnormal and gratuitous advantage, the ...

At issue in this case was whether Belgian arm’s length provision in article 344 infringed Article 170 of the Belgian constitution, according to which a tax in favor of the State may only be introduced by law. “Does Article 344(1) of the Income Tax Code 1992, in the version applicable to the assessment years 1996, 1997 and 1998, infringe Article 170 of the Constitution, in particular Article 1 of that article, which provides that a tax for the benefit of the State may be introduced only by a law, in that Article 344(1) gives the executive authority the task of determining the taxable circumstances or at least makes it possible to determine taxable circumstances either by means of a standard to be laid down by the State itself or by means of a blank form to be filled in?» The Decision of the CourtIn accordance with the principle of legality in tax matters, as set out in Article 170(1) of the Constitution, a person may be subject to a tax only if it has been decided by a democratically elected consultative assembly which alone has the power to introduce that tax. The legislature itself has laid down the strict conditions, set out in B.3.2 to B.3.5, under which the measure referred to in Article 344(1) of the 1992 Income Tax Code may be applied in order to achieve a legitimate objective, namely to combat tax avoidance, without however affecting the principle that the least taxed option may be chosen (B.3.1). The measure cannot be regarded as a general enabling provision which would allow the administration to determine the taxable object itself by means of a general measure, but as a means of evidence to assess specific situations individually in specific cases, if necessary, under the control of the judge. In this case, the constitutional principle of legality in tax matters does not require the legislature to specify in greater detail the substantive conditions for the application of the measure, since this is impossible by the very nature of the phenomenon it is intended to combat. For these reasons the court finds that article 344(1) of the Income Tax Code 1992 does not infringe Article 170 § Section 1 of the Constitution. Click here for translation ...

SA Etablissements Brepols, which had a profitable commercial activity in Belgium, transferred its entire activity to an new company, the SA Usines Brepols. At the same time, a loan was granted to the new company. The interest charge on that loan was so high that almost all of the profits of SA Usines Brepols were used to finance the loan and therefore no taxes were paid. However, S.A. Etablissements Brepols was taxed on the interest received, which at the time was at a reduced rate in Belgium. The tax administration considered that the taxpayer had only entered into the transactions for the main purpose of reducing the tax burden and disallowed the reduced taxation. The Court of Appeal agreed and held that the agreements concluded between the parties constituted evasion of the law. The Belgian Supreme court overturned the decision in its judgment of 6 June 1961 and stated the following: “There is no simulation prohibited in the field of taxation, nor does it prohibit fraudulent tax practices, when, in order to benefit from a more favorable tax regime, the parties, using the freedom of conventions, without violating any legal obligation, establish acts of which they accept all the consequences, even if the form they give them is not the most normal”. Click here for Translation ...