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 plea was inadmissible for lack of interest. In other words, if the Court of Appeal had accepted the broad interpretation of the concept of abnormal and gratuitous advantage, the Court would have reached the same conclusion.
The Court of Cassation did not agree with this: “the appellate judges did not only judge that the various transactions were not abnormal and that the whole construction could not be considered abnormal for the simple reason that it was also motivated by tax considerations. They also consider that an operation or series of operations cannot be considered abnormal simply because they are intended to enable the deduction for risk capital to be made, (…). Consequently, it cannot be inferred with certainty from the considerations of the appellate courts, which, moreover, do not indicate the non-tax motives which contributed to the transactions, that even if the interpretation advocated by the plaintiff had been applied, they would have come to the conclusion that there was no abnormal and gratuitous advantage in the present case’.
The Court of Cassation concludes that, in so far as, on the basis of the erroneous interpretation that the concept of abnormal and gratuitous advantages must be interpreted ‘strictly’ and ‘without taking too broad a context into account’ in the context of the deduction for risk capital other than in the context of the deduction for previous losses, the defendant held that the interest earned by the affiliated company Fortum 1AB does not constitute abnormal advantages, the courts of fact are in breach of Articles 79 and 207(2) of CIR 92.
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