Belgium: Recharged Costs And Expenses Of Stock Option Plans Not Tax Deductible For The Belgian Employer

Last Updated: 13 October 2014
Article by Howard M. Liebman and Werner Heyvaert

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.

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