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.

  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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