Interest payments to (semi-)public organizations not subject to thin cap rules

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A ruling of 18 March 2014 issued by the Belgian Ruling Commission and published 31 July 2014 clarifies the application of the thin capitalization (thin cap) rules on a financing structure wherein a “opdrachthoudende vereniging/ association chargée de mission” (hereafter “charged association of municipalities”) is involved (ruling n° 2014.007, available on

Thin cap–rules

The Belgian thin cap rules are embedded in article 198, 11° of the Belgian Income Tax Code (ITC 1992). These rules limit the deduction of interest if the total amount of the underlying loans exceeds a 5/1 debt/equity ratio. The equity is defined as the sum of the taxed reserves at the beginning of the taxable period and the paid-up capital at the end of this period.

The deduction limitation applies only to:

  • loans whereby the beneficial owner is not subject to any income taxation, or with regards to the interest income, is subject to a tax regime that is substantially more advantageous than the Belgian tax regime;
  • loans whereby the beneficial owners are part of a group of companies to which the debtor belongs (‘intra-group loans’).


The Ruling Commission was asked to decide whether or not the interest paid to a charged association of municipalities can be subject to the thin cap rule in an intra-group context. Such an association is a joint venture of municipalities or towns with separate legal personality to which specific management competencies are transferred. The charged association of municipalities is a (semi-) public organization regulated by regional legislation (Flemish Decree of 6 July 2001 for the Flemish part). Based on the Flemish Decree, the activities of such associations do not have a commercial character. Moreover, irrespective of its activities, the association is by virtue of law subject to the income tax regime for legal entities and as such excluded from corporate income tax.

The question raised before the Ruling Commission was to what extent interest paid by a (private) subsidiary of such an association is subject to the intra-group thin cap rule. In the case at hand, a Belgian NV/SA, subject to Belgian corporate income tax, was partly being debt financed by one of its (indirect) shareholders, being an “opdrachthoudende vereniging”. The shares of the NV were indirectly held by two of such associations.

The issue at hand regards the interpretation of the notion of “group of companies” in article 198, 11° and 198, §3 ITC 1992. The legislator describes the notion “group” as the whole of associated companies in the sense of article 11 of the Company Code.

In its turn, the Company Code describes the notion “company associated with a company” in article 11 Company Code as a company and the companies which it controls, or control it, with which it forms a consortium, or other companies which, to the knowledge of its board of directors, are controlled by the before-mentioned companies.

To conclude that the aforementioned interest does not fall within the scope of the thin cap rule, the Ruling Commission points at several substantial differences between a charged association of municipalities on the one hand and companies on the other hand.

Although the regional legislator states that to a certain extent the Company Code is applicable to the association of municipalities, it only regards the provisions on the organizational structure. These provisions however do not change the essential characteristics of the association of municipalities as described by the regional legislator. The regional legislation as such creates a sui generis legal form which leads to the conclusion that an association of municipalities does not constitute a company in view of the Company Code, and consequently for the purpose of the application of the thin cap rules.


EY Tax Consultants welcomes the clarifications given by the Ruling Commission with regard to thin cap rules. These may also be relevant for other cases of non-profit organizations and/or cooperation between public entities and private entities.

EY has a team of specialists available in its Public Sector Group as well as in its specialized thin cap task force. Do not hesitate to get in touch with the contact persons listed here or with your regular contact at EY Tax Consultants for more information or assistance in this matter.