Borrowing for dividends: interest deduction or not

The authorities are of the opinion that interest on loans used to pay dividends is, by definition, not tax deductible. These are after all expenses which do not serve to obtain taxable income, a key condition in the Income Tax Code. The Court of Cassation has a different opinion.

Borrowing to spend

Since a couple of years, there is a discussion going on in case law and doctrine on the deductibility of interest on loans to pay dividends or to perform a capital reduction.

According to the Court of Cassation, interest on such loans should fulfill the usual conditions of article 49 section 1 ITC92. This means that the company should prove that the goal of this interest is to obtain or keep taxable income.


According to the Court of Cassation, in order to deduct interest, the tax payer should prove that the interest, and not the capital reduction or dividend payment, fulfills the conditions of article 49 ITC92. The mere fact that a company, at the time that it should make payment, does not have sufficient liquidity and therefore takes out a loan, is not sufficient for the Court.

Essential in the judgment is that the tribunal or the court which should judge on such situation, has the right, or the obligation if you want, to conclude whether the expense is meant to obtain or keep taxable income.

In this case, the Antwerp Court of Appeal came to the conclusion that the tax payer provided such proof, but notwithstanding that it accepted that the company at the time of the capital reduction and dividend payment did not have sufficient liquidity to make the payments to the shareholders.

What you should pay attention to

When you take out a loan to pay out dividends or for a capital reduction, the tax authorities will look for the reason why you take out a loan instead of using your own means. Even the fact that the dividend payments or capital reduction is a perfect logical or economically informed decision, this does not mean that the loan is taken out to obtain or keep assets or taxable income.

As indicated the Court was of the opinion that the fact that the company holds insufficient liquidity is as such not enough. What the Court would accept, is proof that the company could only pay its shareholders by monetizing 'income generating assets' or to disburse these in kind. But such evidence would then have to be provided very concretely.

Opportunity judgement

The tax authorities do not have the right to reject expenditure because they believe that this expenditure is not the best possible decision. This would be a not allowed opportunity judgement. The tax payer used this argument before the Court of Cassation, but it was easily put aside by the Court. However, the danger is just around the corner.

In the decision of the Court of Cassation we read that you do not have the right to take out a loan because it 'suits you better'. If you hold sufficient liquidity, you should use these for the dividend payments or capital reduction. Even when you have insufficient liquidity, you do not have the possibility to just take out a loan like that. If your assets do not generate income, case law has no problem with the fact that you first monetize these before taking out a loan (at least when you want to deduct interest as professional expenses). However, one could raise the question that whether or not the tax payer should monetize assets for the dividend payment, is a choice which can be made by the tax payer.

In any case, conclusion is that the tax authorities cannot reject the interest deduction automatically. Even when the burden of proof is quite high, the tax payer has the possibility to prove that the interest payments were made to obtain or keep income.