Notional interest: new anti-abuse measures

The Chamber recently adopted a bill “laying down various provisions relating to income tax”, which, at the time of going to press, had been submitted for Royal Assent.

Some of the new measures adopted include an anti-abuse provision to combat notional interest being deducted twice, a practice known as double-dipping.

To do away with that particular practice, capital contributions will no longer be taken into account in the basis for calculating the risk capital allowance of companies that benefited from the contribution if the company injecting the capital took out a loan to fund the capital increase and deducts the interests of that loan as an expense.

The objective is to prevent a double deduction: on the one hand by the company that injects the capital, in the form of an allowance for the interests on the loan taken out and, on the other hand, by the beneficiary company, in the form of a risk capital allowance.

Henceforth, the basis for calculating the risk capital allowance in cases where a company higher up in the chain of a cascade of companies within the same group funds the capital injection by means of a loan will no longer be taken into account.

Furthermore, article 205ter, § 2, 92 Income Tax Code (92 ITC) has been supplemented with two specific anti-abuse measures which respectively exclude claims and capital injections by a non-resident taxpayer, or by a foreign company based in a country that does not exchange information with Belgium from the basis for calculating the risk capital allowance, unless the company can demonstrate that the transactions were effected for legitimate economic or financial purposes.

According to the explanatory memorandum, the inability to receive information from a country where non-residents or foreign companies are based hampered the application of the general anti-abuse measure referred to in article 344 of the 92 ITC and warranted the enactment of specific anti-abuse measures.

The new measures will come into effect as of the 2019 fiscal year and will affect tax periods starting on 1 January 2018 at the earliest, on the understanding that any changes made on the date financial years commencing on 26 July 2017 were closed will be pointless.

Future reform of the matrimonial property regimes, life insurance policies and inheritance tax: an excellent step forward

Everyone is aware of the fact that the reform of civil inheritance law, which is due to come into effect in September 2018, will have implications for the tax structuring of people’s assets.

And so will the announced amendment of matrimonial property regimes regulated by the Civil Code.

For the legislator, this is an occasion to settle a controversy about the tax treatment of certain life insurance policies between spouses which has been raging for more than 30 years now.

Albeit still in the draft stage, the authors of the text deserve to be commended because, in line with the stance the Tax Ruling Commission adopted against the central federal administration’s position for many years, they decided to side with the taxpayer.

The clarification refers to the tax implications of the death of the spouse of the policyholder, in cases where they married under the regime of community of property, and where the death of that spouse does not lead to the payability of the insurance benefit (and hence not to the termination of the policy or to payments in favour of the surviving spouse).

The Civil Code stipulates that the rights ensuing from a life insurance policy, underwritten by the beneficiary in person and acquired by the latter on the death of his or her spouse, are his or her personal (and not their joint) asset, without prejudice to a disbursement to the joint assets if the regime is wound up in cases where the insurance policy was funded with their joint funds.

The Insurance Policies Act stipulates that any sums due to a spouse in a communal estate by virtue of a life insurance policy are his or hers to keep, even if the premiums were paid for by the community. There is no need to recompense the community unless the premiums exceeded the normal capacities of that community.

As we see, these two articles contradict each other in places, but they do have one thing in common which is to rule for once and for all that the entitlements under a life insurance policy fall to the surviving spouse, even if the spouses married under the regime of community of property. The tax consequence of that is that the surviving spouse who has a life insurance policy he or she took out in person is not liable for inheritance tax, even if the premiums were paid out of the joint assets. The benefits paid out, which increase the assets of the estate, are not subject to inheritance tax when there are joint children.

In 1999 however, these articles of the Insurance Policies Act were ruled to be unconstitutional, albeit for a different reason, which only muddled the waters of two hierarchically equivalent standards even further.

Doctrine and administrative case law became divided on how these policies should be treated from a taxation point of view, and most unusually, the central tax administration services and the Tax Ruling Commission (TRC) found themselves in opposite camps.

The first theory, supported by the tax administration, meant that the surviving spouse, even if he or she had not received anything on the date of the death, was liable for inheritance tax; the second one, supported by the TRC, held that there was no tax due at the time of death.

There was no alternative but for the legislator to intervene, which is what he is about to do by clearly concurring with the TRC’s point of view and amending the texts and expressly and unarguably stipulating that, if a couple has joint children, the surviving spouse in a communal estate is not liable for tax on the value of the life insurance policy at the time of death.

In Flanders, the legislation was already amended in December 2016, and now stipulates that, in the event of death of the spouse in a communal estate, the surviving spouse is liable for tax as the benefits under the policy are paid and, at the latest, at the time the policy is terminated.

However, in doing so, the Flemish legislator failed to address an obvious inconsistency between the two texts, and did not take account of the fact that when there are joint children the benefits due to the joint assets must be exempt from inheritance tax; in view of the amended legislation, that exemption became impossible to apply in practice.

With this, the federal legislator also aims to settle the issue of insurance policies, jointly taken out by spouses in a communal estate, and the last deceased: another clarification which is equally welcome and which, within the applicable principles, fits in with the above. In cases where the reciprocal rights are assigned upon the first death, and if there are joint children, the surviving spouse may, on the basis of an explicit legal text, qualify for an exemption of inheritance tax.

By contrast, the legislator will consider that, in situations like that, the surviving spouse acquires the surrender value of the policy as a personal asset following the death of his or her spouse. This also means that, under the new regime, inheritance tax may still be due on half of the surrender value of the policy on the date of the first death in the context of a policy jointly taken out by two spouses in a communal estate who do not have any joint children.

However, as commented in numerous articles, this doesn’t change anything with regard to policies jointly taken out by spouses who married under regimes other than the regime of community of property and where, in function of the way the policy is structured, people may still qualify for a full exemption of inheritance tax.

In a most divisive landscape, this legislative initiative is obviously most interesting, not only for residents of the Brussels-Capital and the Walloon Regions, but also for their counterparts living in the Flemish Region, because matrimonial property law is a federal matter, with the result that the Flemish tax legislator will have to deal with this amendment to the baseline of the civil legislation that regulates the rights between parties.

The application of the anti-abuse provision to capital decreases in practice

In a judgment of 19 February 2018, the Court of First Instance of Bruges concurred with the administration by ruling that it had correctly applied article 344, § 1 of the 92 Income Tax Code (ITC), arguing that, on the basis of the facts presented, the capital decrease at issue should be regarded as a distribution of dividends.

The Programme Act of 29 March 2012 replaced the general anti-abuse provision of §§ 1 and 2 of article 344 of the 92 ITC.

In this particular case, the transaction the Court was asked to rule on related to a holding set up by means of a contribution in kind in 1999, which subsequently proceeded to a number of capital reductions between 2005 and 2013.

In the case at hand, the administration argued that the capital decrease of 5 million euro effected in 2013 should be regarded as a distribution of dividend given that, just before this capital reduction, the holding company had received a dividend of about 5 million euro.

Accordingly, the Court of First Instance of Bruges confirmed the administration’s position on the grounds that this series of legal transactions was inconsistent with the objective of article 18, paragraph 1 of the ITC.

In this particular case, the Court applied article 344, § 1, 2° of the ITC to uphold the tax abuse allegation.

However, this provision is applicable only if the tax break the taxpayer obtained in accordance with this provision is inconsistent with the objectives of that provision [material element] and that the pursuit of that tax break was the essential objective of the transaction [intentional element]

In this respect, the Court of First Instance pointed out that, in this context, the transaction fell within the scope of article 18, § 1 of the 92 ICT which stipulates that any benefits allocated by a company, including full or partial reimbursements of share capital, shall be taxed as dividend.

The Court also pointed out that the holding company placed itself outside the scope of that provision but intentionally within the scope of the exception which stipulates that reimbursements of capital ensuing from a regular decision of the general meeting taken in accordance with the provisions of the Companies Code should not be qualified as dividend.

With respect to this provision, the Court also stipulated that the objective of that provision was clear in that it provides that capital reimbursements should be regarded as taxable dividend.

The Court held that it was not appropriate to take the exception which gives immunity to such reimbursements into consideration because that exception must be interpreted restrictively.

As a consequence, since the taxpayer was unable to justify the reduction in capital for reasons other than this tax break, the Court concluded that the holding company’s sole intention was to distribute the dividend it had received among its shareholders.

The Court also pointed out that this transaction was based on an artificial construction that did not tally with the economic reality.

Thus, according to the Court, the capital decrease of 5 million euro was taxable under the personal income tax system.

In this particular case, we cannot reasonably agree with the Court’s reasoning.

In adopting article 18 of the 92 ITC, the legislator clearly wanted to, inter alia, exempt capital repayments, provided they were effected on the basis of a regular decision.

That objective is evident from the way the text is worded.

And if one was to consider that the legislator’s aim was not sufficiently clear from that provision because of the exception in question, the Court should have referred to the preparatory work for the law to ascertain its original intention, as the judgment of the Constitutional Court of 30 October 2013 clarified.

Now, in this particular case, the Judge only based himself on the text of article 18 of the ICT to interpret the legislator’s intention.

Furthermore, the Court based its rationale on the theory of economic reality while that particularly theory was already expressly denounced in a judgment of the Court of Cassation which explicitly stated that there is no such general principle of law and that tax law does not prescribe taking into account an economic reality that is different from the reality of what the parties agreed upon without simulation and which they accepted all the consequences of – i.e. an economic reality that would be different from the legal reality.

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  1. Constitutional Court 30 October 2013, no. 141/2013
  2. Court of Cassation, 29 January 1988, Pas., I, p 633
  3. Article 18 § 1, 2° of the 92 ITC
  4. Constitutional Court 30 October 2013, no. 141/2013
  5. Court of Cassation, 29 January 1988, Pas., I, p 633

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