Law concerning the continuity of enterprises: The tax administration strikes back illegally

More than one year after the coming into force of the law on the continuity of enterprises (LCE), the tax administration still seems unwilling to accept its minor role in the preparation process of a reorganization plan in accordance with article 44 of the LCE.

It appears that the tax administration is, notwithstanding previous negative decisions, always using the same arguments in procedures before commercial courts [in order to avoid any reduction of taxes in a reorganization plan]:

“Exemptions or reductions of taxes cannot be enacted other than by law. Since the law concerning the continuity of enterprises does not specifically clarify the tax reduction, article 172 of the constitution is violated when any tax reduction or exemption is made. Plans which provide in a reduction of tax debts are therefore unconstitutional.”

The arguments put forward by the tax administration to request the annulment of reorganization plans are however not accepted by the current case-law:

“the principle of exemption or reduction of tax as general preferential claims has a legal status since it is determined by law. A reduction of tax does not have to be explicit.”

(Brussels 11th of march 2010, not published);

"At the hearing, the tax collector stated that the proposed plan would be unconstitutional because the claim of the tax administration has been reduced significantly. The tax administration states that this is impossible and in violation with article 172 of the Constitution.

However, the tax administration’s debt is only generally privileged and it is accepted, even under the old law of the Judicial Moratorium, that i may be reduced.

(Commercial court of Antwerp, 22nd of April 2010, not published);

Aside from the repeated procedures in annulment of reorganization plans containing tax reductions, the tax administration has found an alternative, and possibly illegal, way to recover its sustained losses. The tax administration is now using article 334 of the Program Law of 27 December 2004 to recover tax debts that were reduced in application of the LCE.

Article 334 of the Program Law states that when there is a sum to be returned or paid by the tax administration (VAT or Corporate tax) to an enterprise, this sum can, without any formalities, be compensated with outstanding tax debts.

In a recent case, where the outstanding corporate tax debts were, in application of the LCE, reduced to 10% of their original value, the tax administration used this article on VAT returns although a reorganization plan was approved by all creditors and homologated by the commercial court of Antwerp.

A procedure has been started in order to recover the so-called “outstanding” 90% corporate tax; the court still has to rule on the merits of the case.

In our opinion, the application of article 334 of the Program Law after the homologation of the reorganization plan is illegal.

Article 57 of the LCE stipulates very clearly that an approved and homologated reorganization plan is binding for all creditors. This means not only that the reduction of the debt, but also the conditions wherein the debts have to be repaid are legally binding for the creditors they apply to.

Upon official approval of the reorganization plan, the cause of the debts contained therein is no longer present meaning that a compensation with any so-called “outstanding and historic debts” is not possible. Article 334 of the Program Law can therefore not be used for a circumvention of the LCE.

We therefore advise all companies executing a reorganization plan containing tax reductions to be very attentive to this – in our opinion illegal practice – of the tax administration.