On 24 February 2016, Brussels Court of Appeal handed down an umpteenth decision on internal capital gains, but one worth dwelling on.
In this area, the courts’ manifest attachment to the “choice of the least-taxed route” certainly needs to be reiterated, especially given how the practice of the Rulings Service all too often goes beyond the bounds of this basic principle, even if it continually states that it takes the case law as a basis for its rulings.
1. The facts
A classic case: contribution and sale (50/50) to a holding company of shares held by its founder (a private individual) in an operating company (a chemist’s in this case).
The contribution is remunerated in shares, the sale price settled by an entry in the transferor shareholder’s loan account.
The tax office taxes (at 33%) the entire capital gain realised by the individual as miscellaneous income on the ground that the transaction falls outside the normal administration of private assets. In its view, it is abnormal:
-
for the individual to retain control over the shares transferred via the holding company that they control, which would not have been possible had the transfer been made to a third party, and
-
for the transfer price to be paid by a loan that the holding company can only repay by way of the dividends and/or management fees it receives from the company that is transferred.
2. Decision of 24 February 2016
From the outset, the court found that no economic, family or other motive was advanced by the taxpayer and that the transaction seemed to have been carried out solely for tax reasons.
On that score, the court (and this is the crux) considers that that finding was not per se a persuasive argument for saying the transaction was “abnormal”. On the contrary, the reasonable, prudent person ensures that their assets flourish by choosing the path that attracts the least tax: what is involved here is sound asset management!
Furthermore, the court added that the abnormality of a transaction has to be assessed from the viewpoint of the individual. The simple fact that the holding company had granted a loan to acquire the shares is not therefore relevant.
Despite the victory in principle, the court nonetheless pointed out that:
-
the loan needed to acquire the shares was not granted by a third party (like a bank) but was simply an entry of the transfer price in the transferor’s loan account;
-
the deed of transfer did not set out the procedures for repayment or the loan terms;
-
a reasonable, prudent person placed in a similar situation would have made sure the repayment procedures were known and identified.
Here, however, the taxpayer could succeed because the transaction was a (very) old one and the court applied the old case law on determination of the tax base – which no longer applies due to a change in the law in 2008.
3. The lessons to be learned
-
Share transfers (contribution or sale) by a taxpayer to a holding company that they control do not per se fall outside the normal administration of private assets, even where the purpose is (virtually) exclusively fiscal in nature.
-
Normal administration nonetheless means that the transferor has to act appropriately from an economic viewpoint: transferring shares to a third party (regardless of whether or not one controls it) without there being any payment provision laid down is not “normal” conduct for a reasonably prudent, diligent person.
-
However, the facts of the case pre-dated the new general anti-abuse measure, which could in future be cited to recharacterise “purely fiscal” transactions.
That said, even if caught by the anti-abuse provision, such recharacterisation ought not to lead to the capital gain being charged to tax (at 33%) as miscellaneous income, since the anti-abuse provision pre-supposes that the taxpayer has effected a transaction without valid economic motive and “in breach of the aim or aims of a tax provision”. The fact is that it could not be argued that the transfer of shares to a holding company breaches the aim or aims pursued by the relevant applicable provision.
At the most, the internal capital gain transaction could be regarded as allowing the taxpayer to save a dividend distribution, thus thwarting the objective of the provisions that seek to tax that type of profit distribution (at a rate of 27%).
It is only in this context that citation of the notion of “excess liquidities” as developed by the “casuistic” of the Rulings Service can be understood.
However, this notion could only be of relevance in a “purely fiscal” case or where the non-fiscalmotives are so tenuous that no reasonably prudent, diligent person would have entered into the transaction as contracted without the tax gain.
A general, systematic application of this notion ought therefore to be ruled out and it could never apply where the transfer is based on duly identified substantive motives of an economic, financial, family or other character.
For the rest, the notion is of no utility in assessing the taxability of the capital gain itself and ought not therefore to play a role in this regard.
The official approach, and especially that of the Rulings Service on this basis therefore remains controversial, on more than one score.
