Belgium: Belgian Constitutional Court Issues Two Judgments On Position Of Tax Claims Under Law On Continuity Of Enterprises

In two judgments, dated 18 February 2016 and 24 March 2016, the Constitutional Court decided on the constitutionality of two provisions of the Law of 31 January 2009 on the Continuity of Enterprises (Wet van 31 januari 2009 betreffende de continuïteit van de ondernemingen/Loi de 31 janvier 2009 relative à la continuité des entreprises) ("the Law").

First case – Mortgage for benefit of tax authorities during suspension period

In the first case, the Constitutional Court held that Article 31 of the Law violates the principles of equality and non-discrimination as it does not preclude the tax authorities from registering a mortgage during the period of suspension, although creditors are barred from making a seizure of the assets of the distressed company during that same period.

In the case at hand, the distressed company introduced a request to enter reorganisation proceedings on 12 March 2012. The Court granted a suspension period until 12 September 2012. However, on 10 April 2012 and on 5 September 2012 the tax authorities requested the registration of mortgages on the distressed company's real estate. After the approval and homologation of the reorganisation plan, the company requested the Court to lift these mortgages but the Court rejected the request.

In the appellate proceedings, the Court of Appeal requested the Constitutional Court to provide a preliminary ruling on whether Article 31 of the Law violates the principles of equality and non-discrimination, since it bars creditors from seizing the assets of the distressed company during the suspension period but does not extend that prohibition to mortgages for the benefit of the tax authorities. The Court of Appeal considered that such mortgages have in fact largely the same consequences as a preventive seizure on assets. In particular, both measures cause the assets over which an attachment or mortgage has been registered to become non-transferable. In fact, the impact of a mortgage registration is even more far-reaching as it provides the tax authorities with a priority rank over the other creditors. This is not the case for a seizure by a private party.

In its judgment, the Constitutional Court noted that the judicial reorganisation procedure aims to protect the continuity of the distressed company and its activities, while reconciling this principle with the protection of creditors' rights. The Constitutional Court added that it was the intention of the legislator to ensure the equal treatment of all creditors, both public and private. Therefore, in accordance with the Law, the tax authorities have to be treated on an equal footing with any other creditor. Since the possibility to register a mortgage provides the tax authorities with the possibility to obtain a better starting position after termination of the suspension period, the Constitutional Court held that the provision at issue violates the Constitution to the extent it does not prohibit the tax authorities from registering a mortgage during the suspension period.

Second case – Claim for salaries and withholding taxes on salaries

In contrast, the Constitutional Court held in a second case that Article 49/1, 4th indent of the Law does not violate the equality and non-discrimination principle because it does not allow for a waiver or reduction of the tax authorities' claim for withholding tax in relation to services provided before the opening of the judicial reorganisation procedure.

Three separate cases of the Belgian state against distressed companies had been joined. The companies at issue had introduced a reorganisation plan that apparently included a partial write-off of claims relating to withholding tax. The plans were subsequently approved and homologated. The Belgian State appealed this judgment and claimed that the plans should not have been homologated as they violated the prohibition set out in Article 49/1, 4th indent of the Law to provide for a write-off on "salaries", which term should be read to include claims for withholding taxes due on such salaries.

The Court of Appeal subsequently requested the Constitutional Court to issue a preliminary ruling on whether or not Article 49/1, 4th indent of the Law violates the principle of equal treatment as it (i) provides for a difference in treatment between the claims of the tax authority itself, depending on whether or not they could be considered to be part of the term "salary" as referred to in Article 49/1, 4th indent; and (ii) grants a preferential treatment to such claim considered to be part of the "salary" as compared to other creditors that are affected by the plan.

The Constitutional Court confirmed that the prohibition to waive or reduce claims for salary in relation to work performed prior to the opening of the proceedings serves a legitimate objective as it provides additional protection to the employees of a company in distress. In line with the Law of 12 April 1965 on the protection of salaries of employees (Wet van 12 april 1965 betreffende de bescherming van het loon der werknemers/Loi de 12 avril 1965 concernant la protection de la rémunération des travailleurs), the Constitutional Court further confirmed that claims relating to withholding taxes on wages and salaries should be considered to be "salaries" as referred to in Article 49/1, 4th indent of the Law.

The fact that the employees cannot claim the withholding tax directly from the employer does not alter this conclusion. After all, the withholding tax is essentially a prepayment of the taxes due by the employee. As a result, the Constitutional Court held that section 49/1, 4th indent does not protect the interests of the tax authorities, but those of the employees since it aims to safeguard fully their salary claims. The Constitutional Court concluded that there was no violation of the Constitution.

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