On June 25, 2014, the Brussels Court of Appeal confirmed an
earlier ruling (dating from 2010) from the Tribunal of First
Instance. The tribunal had found that costs and expenses in
connection with an international stock option plan recharged by a
South African parent company to its Belgian subsidiary are not tax
deductible by the latter to the extent a capital loss has been
suffered on the shares that had to be acquired in order to be
delivered to Belgian optionees following the exercise of their
stock options.
Under Belgian corporate income tax rules (Article 198, §1,
7º, Income Tax Code 1992), capital losses incurred on the sale
of shares are, in principle, not tax deductible for corporations by
virtue of the participation exemption regime. Although this has
been disputed for some time, the Belgian tax authorities and the
majority of court decisions take the position that this rule also
applies when a Belgian corporate taxpayer acquires shares at a high
price in order to deliver them to an optionee exercising his or her
stock options at a discounted price (normally the fair market value
of the shares at the time of grant or vesting).
Until recently, it was less clear what the tax treatment should be
for costs and expenses incurred by a non-Belgian group company,
e.g., a foreign parent company, when recharged to the Belgian
subsidiary in connection with stock options granted to and
exercised by employees or other optionees of that Belgian
subsidiary. Under this scheme, the costs and expenses booked by the
Belgian subsidiary are not (entirely or partially) earmarked as a
capital loss on shares in the commercial books of the Belgian
subsidiary, and there are good arguments to treat them as personnel
(labor) costs for accounting purposes. Except if the tax law
explicitly provides differently, the tax treatment of costs and
expenses follows the accounting treatment. As a result, many
practitioners in Belgium have taken the position that the total
amount of recharged costs and expenses should in fact be tax
deductible for the Belgian subsidiary.
In the case at hand, the taxpayer adhered to that position and
contended that the costs and expenses that were recharged to it by
its South African parent company did not (partially) constitute
capital losses on shares and, therefore, should be tax deductible
subject to the normal conditions, i.e., that the costs and expenses
are properly documented and meet the arm's-length standard.
However, both the Tribunal of First Instance and now also the Court
of Appeals ruled that to the extent the recharged costs embody or
include the amount of any capital loss on the shares that were sold
to the Belgian employees and other optionees at a discount, they
should then not be tax deductible for the Belgian subsidiary, as if
the latter would have otherwise incurred the capital loss
directly.
The first commentaries to the Court of Appeals ruling indicate
that there is no unanimity among commentators and that there is a
good chance that the taxpayer will take the case to the Court of
Cassation for a definitive decision.
No Corporate Income Tax on an Undervaluation of Shares Acquired by Belgian Holding Company
Following a very long and winding road in several courts, it has
finally been confirmed that Belgium cannot impose corporate tax on
any undervaluation of or underpayment for shares acquired by a
Belgian corporate taxpayer. Thus, when a Belgian corporation buys
shares at a price below fair market and subsequently sells those
same shares at the higher market value, the capital gain so booked
qualifies, in principle, for the participation exemption. For more
than 10 years, the Belgian tax authorities have contended that the
difference between the low purchase price and the fair market sales
price constitutes a so-called undervaluation of assets, which is an
element of any Belgian corporate taxpayer's taxable base
(Article 24, 4º, Income Tax Code 1992). Following a ruling
from the European Court of Justice ("ECJ") (see below),
the Belgian Court of Cassation (Supreme Court-equivalent) has now
confirmed that there is no legal basis to impose tax on any
undervaluation of assets. Hence the normal rules of the
participation exemption will apply.
More specifically, on October 3, 2013, the ECJ ruled that there is
no EU rule that forces enterprises to mark up the accounting value
of shares in order to bring them in line with the higher fair
market value (no mark-to-market principle). Case C-322/12, Gimle
S.A. By contrast, the Belgian tax authorities had contended that
any failure to mark up the substantially-below-fair-market
acquisition value of a participation constitutes an infringement of
the "true and fair view principle" contained in the
Fourth Council Directive 78/660/EEC of July 25, 1978. As a result,
such a failure should give the authorities the right to impose
corporate tax on the difference between the low acquisition price
and the substantially higher fair market value, in accordance with
Article 24, 4º of the Belgian Income Tax Code 1992.
Since it was the Belgian Court of Cassation that submitted the
issue to the ECJ in the form of a preliminary question, the court
still had to render its final verdict based on the ECJ's
ruling. At last, on May 16, 2014, the Court of Cassation confirmed
that it would follow the view of the ECJ that no accounting rule
had been breached by the taxpayer when it refrained from marking up
the acquisition value of its participation in its statutory books
to reflect the (higher) market value. As a result, the capital gain
that was crystallized in the books of the taxpayer when it sold the
participation at market value constituted a capital gain on shares,
which is eligible for the participation exemption (Article 192
Income Tax Code 1992), if all other relevant conditions are
satisfied.
Quite a few cases along the same lines were pending in various
Belgian tribunals and courts, and most were put on hold pending the
outcome of the Gimle case. It can be expected that those cases will
now be settled in accordance with the outcome described above.
"Protectionist" French Excise Tax on Certain Types of Beer Complies with EU Law
On September 13, 2014, it was reported by the trade press that
the European Commission had found that the increase by 160 percent
of French excise tax on certain types of high-alcohol-content and
luxury beers that was introduced on January 1, 2013 did not fall
afoul of the free-market principles of the EU.
Under pressure from a coalition of domestic brewers, Belgium had
complained to the Commission that the sharp increase of a very
specific excise tax in France was, in reality, aimed at hindering
the sale of beers that are typically brewed in Belgium and exported
to France. Belgium felt that the French tax was aimed at protecting
the domestic French beer and wine producers because it was so
specifically tailored in terms of the types of beers it targeted in
practice.
However, after a second complaint from Belgium, the Commission
stuck to its initial conclusion that the additional French excise
tax is not sufficiently specific to be earmarked as a protectionist
measure shielding the French market from beers imported from
Belgium.
The Belgian brewers have allegedly lost €58.6 million in
sales since the introduction of the increased French tax on January
1, 2013. At the time of writing, it was not clear yet whether or
not Belgium or (a coalition of) Belgian brewers would take the case
directly to the European Court of Justice. Normally, when the
Commission declines a complaint, the odds of obtaining a favorable
ruling from the ECJ are against the complainants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.