Belgium publishes new guidelines on business restructurings
The Ruling Committee of the Belgian Ministry of Finance has recently published an “Advice” which includes new guidelines for the application of anti-abuse rules on various types of business restructuring, such as a (partial) demerger and the contribution of a branch of activities. Geert De Neef of Lydian explains how these guidelines will impact taxpayers.
The Advice of the Ruling Committee provides further clarification on certain criteria which will be of particular importance in deciding whether or not the Ruling Committee is prepared (or not) to issue a positive ruling decision.
In general, Belgian tax law provides for the possibility to carry out a tax free demerger, a partial demerger or a contribution of a branch of activities if certain conditions are fulfilled (article 46 and article 211 Income Tax Code (ITC)). One of these conditions is that the transaction should comply with article 183bis ITC, which states that the transaction should not have as its main motive, or as one of its main motives, tax fraud or tax evasion. Article 183bis ITC further states that, if the transaction is not motivated by business considerations, such as the restructuring or rationalisation of the activities of the corporate taxpayers involved in the transaction, it can be presumed that tax fraud or tax evasion is the main motive or one of the main motives for the transaction. However, the taxpayer remains entitled to deliver proof that the transaction is not motivated by tax fraud or tax evasion.
The above business motive in practice is the most challenging element of proof to deliver by the taxpayer to enjoy a tax free (partial) demerger or a contribution of a branch of activities. The other two conditions applying on tax free (de)mergers and contributions are of a more formal nature and therefore much easier to comply with or at least to validate: (a) the acquiring company needs to be a Belgian company or an intra-EU company; and (b) the transaction needs to comply with the Belgian Code of Companies or with similar corporate legislation in the EU member state that applies on the contributing or acquiring intra-EU company (article 46 – article 211 ITC).
To obtain legal certainty on the tax consequences of any such transactions, and obviously also to avoid unexpected or unwanted surprises at the occasion of a tax inspection post-transaction, a significant percentage of rulings applied for specifically consider the question of whether the (partial) demerger or the contribution of a branch of activities complies with the various conditions of articles 46 and 211 ITC and, more specifically, does it pass the business motive test of article 183bis ITC?
It should be noted that it is not compulsory to request for a preliminary ruling. Also, a positive ruling only commits the Ministry of Finance with regard to a specific taxpayer for a specific transaction. At the same time however, and even though rulings have no binding power towards all, the decisions of the Ruling Committee are generally considered as important guidelines by taxpayers who are expecting to execute a (partial) demerger or a contribution of a branch of activities. Often, taxpayers not requesting an individual ruling, impose the conditions generally set forth by the Ruling Committee in similar transactions on themselves, and by doing so they expect that such compliance will avoid adverse consequences resulting from later tax inspections. As a result, the tax community attributes a specific interest to an Advice published by the Ruling Committee, since such Advice is considered to include future guidelines in judging ruling requests introduced, but at the same time is by many considered as a kind of "beacon" in tax planning for mergers, contributions, and so on.
The guidelines published by the Ruling Committee specifically consider the importance of certain anti-abuse rules the Ruling Committee may consider in dealing with future ruling requests.
I. Demerger, partial demerger or contribution of a branch of activities accompanied by an immediate or later transfer of shares
In the first instance, the Ruling Committee will examine, of course, the business motives underlying the transaction. For the purposes of this analysis, the taxpayer needs to indicate if he intends to transfer in a later stage the shares received as a result of the (partial) demerger or contribution of a branch of activities. It is not necessary to indicate any specific period of time during which the taxpayer commits to remain owner of the concerned shares. This level of flexibility is a new element compared to earlier rulings where the Ruling Committee often imposed a three year 'lock-up' of shares received out of the demerger or contribution.
In case the taxpayer indicates in his ruling request that such a transfer of shares is not intended, but nevertheless transfers the shares post-transaction, the Advice indicates that the "legal validity of the ruling can be challenged", which seems to indicate that the Ministry of Finance may still refuse the tax free nature of the transaction since the initial description of the operation has not been entirely respected by the taxpayer, because of the effective transfer of shares. The Advice indicates that in such a case both the general anti-abuse rule (GAAR, article 344, section 1 ITC) as well as the specific anti-abuse rule applying on (de)mergers, contributions of a branch, and so on (article 183bis ITC) could be applied and may allow the tax authorities to tax the profits or capital gains deemed realised during, or as a result of, the transaction. Although such review of the earlier granted tax neutrality does not seem to be limited to a specific period of time (such as for instance the earlier applied lock-up of three years), effective taxation of the transaction may, however, no longer be possible if the prescription period has already elapsed (the prescription period in general is three years, while in the case of tax fraud a prescription period of seven years applies – article 354 ITC).
In case the taxpayer indicates in his ruling request that a transfer of shares will take place, the Advice indicates that the business motives of the transaction (immediately) must be analysed to acknowledge or refuse the tax free regime of the transaction.
II. Related transactions
As related transactions to the (partial) demerger or the contribution of a branch are considered, certain transactions or acts which take place before or after the (partial) demerger or the contribution, and which may have an influence on the tax consequences of the main transaction itself. As an example of such a related activity, the Advice refers to the increase of the equity of a company involved in a merger transaction in order to optimise the pro-rata transfer of deductible losses. The Advice indicates that the GAAR of article 344, section 1 ITC can be applied on the related transaction, if all other conditions are fulfilled for doing so.
III. Inclusion of a "warning" in ruling decisions
The Advice indicates that the Ruling Committee will include in its future ruling decisions a clause stating that: "The present ruling decision is exclusively based on the elements and facts which were indicated in the ruling request. The Ruling Committee does not deliver any opinion or approval in the present ruling decision on any potential application of anti-abuse rules (article 183bis ITC or article 334, § 1 ITC, article 18, § 2 Registration Duties Code) as a result of transactions which have not been described in the present ruling decision".
Analysis and comment
It is clear that the Advice attributes high importance to whether or not the shares received as a result of the (partial) demerger or the contribution, will be transferred or not after the transaction. This is motivated by the fact that taxpayers have often used, and still use, a (partial) demerger or a contribution as a tax planning technique for the tax free transferring of assets from one company to another, followed by a tax free transfer of the shares received as a result or in exchange for the demerger or the contribution. The Belgian capital gains exemption in principle still provides for a 100% exemption of qualifying capital gains on shares (article 192 ITC – please note, however, that a separate tax of 0.40 % may apply on capital gains realised by certain categories of taxpayers – article 217, 3° ITC), although the capital gains exemption since recently only applies to shares which have been held in full property by the seller or transferor for a non-interrupted period of one year. If this one year holding period is not fulfilled at the moment of realisation of the capital gain, this capital gain will be taxed at a separate corporate tax rate of 25% (article 217, 2° ITC).
Still, the tax free carrying out of any of the above transactions still offers interesting tax planning opportunities, certainly in situations where the one year holding period on shares is fulfilled (and obviously also all the other conditions for applying the capital gains exemption on shares are complied with). Moreover, the transfer of shares of a real estate company (a company essentially owning real estate) is in principle not subject to the levying of registration duties, while the sale or transfer of the real estate asset itself will be subject to registration duties (10% registration duties if the real estate is located in the Flemish Region, 12.5% registration duties if the real estate is located in Brussels or in the Walloon Region. Please note that the transferring of "new" buildings and related land may be subject to the levying of VAT).
The conclusion would only be different – that is, the sale of the shares of the real estate company would be subject to registration duties (or VAT) – if the tax authorities would be able to demonstrate that the sale of shares essentially needs to be qualified as a form of "fiscal abuse" in accordance with article 18, section 2 Registration Duties Code (or article 1, section 10 VAT-Code).
As a result, taxpayers are often interested in structuring a transfer of real estate by means of a partial demerger, which can be carried out on a tax free basis (if all conditions are fulfilled) instead of directly selling the real estate asset which will trigger registration duties (or VAT) on the asset itself, as well as corporate income taxes on any profits or capital gains realised. In case of a partial demerger, the real estate is contributed by a contributing company into an acquiring company and, in exchange, shares in the acquiring company are attributed to the shareholders of the contributing company. A very effective technique which, if supported by genuine business motives and carried out by Belgian or intra-EU companies in accordance with Belgian corporate law rules (or similar foreign rules), can enjoy a full tax exemption from a corporate tax and registration duties point of view.
The Ruling Committee has been quite active recently in analysing and judging ruling requests for partial demerger operations, and has granted various favourable decisions.
For example, in a specific case the Ruling Committee decided that the centralisation of real estate owned by various group companies into one single real estate (group) company, could be considered to facilitate a more dedicated management of the real estate activities, also strengthened the credit and lending potential of the real estate company, and finally allowed a better focus by the operational companies on their specific commercial activities. For these reasons, the Ruling Committee concluded that the transaction did not violate the specific anti-abuse rule of article 183bis ITC, and in the same ruling decision confirmed the exemption for registration duties purposes on the transfer of the real estate involved (Ruling 2013.437 of November 12 2013). In this specific case, the individual taxpayers involved in the transaction committed themselves towards the Ruling Committee not to transfer any shares obtained as a result of the partial demerger during a period of three years. It should be noted that in other, similar rulings, the Ruling Committee imposed a holding period of three years as a condition to obtain a favourable ruling. The Ruling Committee clearly wanted to avoid that taxpayers were able to combine – within a relatively short period of time – the carrying out of a tax free partial demerger followed soon after by a tax exempt sale of shares received as a result of the demerger.
In a similar case, the Ruling Committee decided that the transfer of real estate by means of a partial demerger could be considered to qualify as a legitimate business motive, in a case whereby the operational headquarters of a group of companies was changed to a new location. The Committee considered that the envisaged transaction increased the flexibility of the companies involved and at the same time allowed these companies to improve the organisation and execution of a specific development project. At the same time, the Ruling Committee confirmed the application of the exemption applying for registration duties purposes (Ruling 2013.514 of December 24 2013). Also in this ruling request and decision, the taxpayers concerned committed themselves not to transfer any shares obtained from the partial demerger during a period of three years.
Based on the Advice of the Ruling Committee the transfer (or not) of shares obtained as a result of a (partial) demerger or a contribution of a branch will become a very relevant factor in judging the presence or absence of fiscal abuse. Also, even if the main transaction itself passes the fiscal abuse test, any related transactions may still be subject to the fiscal abuse test of article 344, section 1 ITC.
The Ruling Committee in fact confirms that any events or acts which occur in a later stage, or which occurred before but were not included in the ruling request, may still have a substantial impact on the question of whether or not fiscal abuse can be deemed present and may therefore challenge the tax free character of the main transaction (assuming the tax prescription period has not yet elapsed).
The Ruling Committee however no longer indicates a specific time period during which the shares obtained from the demerger or contribution can not be transferred by the taxpayer benefitting from a positive ruling decision. At the same time, the Ruling Committee considers such transfer of shares, regardless of the timing of the transfer, as an important (negative) element in considering the presence of fiscal abuse, if such transfer can be directly linked to the main transaction, and as such constitutes an act covered by a single purpose of tax avoidance or tax evasion.
However, the Advice does not change the basic rule applying on all mergers, demergers, partial demergers or contributions of branches: the transaction should not have as its main motive or one of its main motives tax fraud or tax evasion (article 183bis ITC). At the same time, the Advice states that also the general anti-abuse rule of article 344, section 1 ITC could apply on the transaction, which would be the case if the transaction qualifies as fiscal abuse. The definition of "fiscal abuse" is very broad, but in fact applies on any transaction seeking to obtain a tax advantage or to avoid the application of a tax rule without a legitimate justification for such behaviour. The taxpayer can prove the absence of fiscal abuse by demonstrating that the choice for a specific transaction or structuring is based on other motives than purely tax motives (though the taxpayer still has the right to tax optimise operations or transactions he is involved in, as long as his tax conduct is also based on genuine business motives and not exclusively on tax motives).
As a result, the fact whether or not the shares obtained as a result of the (partial) demerger or contribution of a branch are transferred after the transaction, will be considered in future rulings as a very important element or circumstance, without however automatically leading to a negative ruling in case of such a transfer of shares, provided the taxpayer can also demonstrate that genuine business motives have been relevant reasons for the way in which the transaction has been structured.
Finally, it should be noted that the Advice refers to various anti-abuse rules which may apply (article 344, section 1 ITC, article 18, section 2 Registration Duties Code), and not only to the specific anti-abuse rule applying on (partial) demergers and contributions of a branch of activities (article 183bis ITC).
This position of the Ruling Committee seems to take into account jurisprudence of the EU Court of Justice in Zwijnenburg (C-352/08), as a result of which the anti-abuse clause of the Merger Directive should not be applied in a situation whereby the taxpayer seeks to avoid other taxes than those envisaged by the Merger Directive. As a result, the Ruling Committee specifically states in its Advice that also fiscal abuse with respect to other taxes, such as for example indirect taxes or registration duties will be taken into account by the Ruling Committee in its future decisions.
Geert De Neef
Tel: +32 (0)2 787 91 12
Geert is a partner at Lydian where he heads the Tax practice.
Geert specialises in all tax aspects of M&A, real estate, international tax law and restructuring of companies. He is also involved in tax litigation. His expertise is mainly dedicated to multinational companies, investment funds, banks and real estate investors on a Belgian and international level.
Geert advises clients both on the structuring of their business and real estate assets, and on the structuring of private assets. His advice is based on a broad experience in corporate law, transfer of enterprises to the next generation or to third parties. His clients include investment funds, banks and real estate investors, as well as high-net-worth individuals.
Geert graduated with a degree in law in 1988 from the Catholic University of Leuven (KUL). In 2007, he obtained a diploma in financial management at the Brussels Business School. Geert was admitted to the Brussels bar in 1996.