Belgium’s response to aggressive tax planning: state of play
Pierre – François Coppens
« I can hang a notice on my door saying that I intend to escape Belgian law and that it is for that reason and that reason only that I am going to set up a company abroad under foreign law. And no one can legally prevent me from doing so... » wrote Professor of Tax Law Raymond Vander Elst some years ago.
In a country like Belgium, where the tax burden is on the higher side of the scale, the inclination to evade tax becomes all the greater. This can manifest itself in various ways. Firstly, taxpayers can decide to cease an activity for which a large portion of the proceeds is known to go to the taxman. Others will choose to take the proceeds but, deliberately violating tax law, won’t bother to declare them and cheerfully resort to tax fraud. Another possibility is to avoid the application of the tax legislation by ensuring that the income received is not subject to Belgian tax. In that case, we are talking about tax evasion. And finally, a taxpayer can decide to set up a company in a country where the tax rate is similar to the Belgian one in principle but where certain forms of income enjoy more favourable treatment.
The object of our contribution is to answer the following questions: faced with a variety of ways and means to evade tax, with the complexity of international fiscal engineering mechanisms designed to evade tax and with the fertile imagination of distinguished tax consultants, what instruments does the Belgian tax administration have at its disposal to challenge the legality of certain transactions performed via the incorporation of a company abroad or to thwart certain profit transfers to that foreign company? Are these instruments used enough and are they actually effective? What critical eye can we cast on the manner in which the Belgian taxman deals with aggressive tax planning? Following an exposé of the existing anti-abuse rules, we will look at the effectiveness of these measures and at their scope.
An impressive legal arsenal
Out of a legitimate desire to plug all the gaps some taxpayers were all too keen to sneak through, the Belgian legislator has, year after year, come up with various new anti-abuse provisions, be it general or specific ones.
The general anti-abuse measure and simulation
Under Belgian tax law, case law of the Court of Cassation upholds the principle of freedom to choose the path of least taxation.
This freedom to choose presupposes, however, that there is no simulation, a fundamental principle of Belgian tax law. Simulation is a misrepresentation of the truth. If the administration (notably by way of presumption) can establish the fictitious or simulated nature of any transactions it comes across, the transactions in question lose all probative effect. This misrepresentation of the truth ensues from a situation that precedes the tax return. The taxpayer ‘paves the way’ with fiscal errors, intellectual errors, etc. There are no shortage of examples: falsification of inventories, of the annual accounts, backdated documents (such as invoices, payslips), misrepresentation of the truth in agreements the taxpayer concluded. Simulation comes in many forms.
For a few years now, the tax administration can also invoke tax abuse in respect of certain tax transactions (article 344§1 of the 1992 Income Tax Code, hereinafter: ITC). Tax abuse comprises an objective and a subjective element. The objective element implies that the taxpayer opts for a legal transaction or a series of legal transactions that allow him to arrive at a situation that contravenes the objectives of a provision of the ITC or its implementing decrees. The subjective element implies that the taxpayer opts for this legal transaction or for this series of legal transactions with the essential objective of obtaining a tax benefit. The administration only has to prove the objective element. When it comes to the subjective element however, it is up to the taxpayer to demonstrate that it does not exist by proving that his choice of legal transaction or series of legal transactions is justified for reasons other than trying to avoid income tax.
In matters of corporation tax, however, transactions that might once have been deemed to come within the scope of choosing the path of least taxation will henceforth get the taxman’s full attention as he now has a legal instrument to counter (or at least to try to counter) certain well-known transactions: breaking-up of ownership, the use of management companies, intercompany transfers, the leasing of property followed by sub-leasing, the creation of financial vehicle corporations (which the taxman qualifies as artificial arrangements if their legal and economic reality is not demonstrated), the liquidation of one company followed by the incorporation of a new company with an identical corporate objective, the abuse of the favourable tax regime governing copyright, the inappropriate use of risk capital deductions (notional interests), leasing of clientele or goodwill, etc.
These are only some of the transactions the taxman may examine in light of the anti-tax fraud provision but, in our opinion, with limited chances of success.
The administration may find that exposing tax fraud is easier said than done.
Let’s take one-man companies for instance: is it abusive to set up a one-man company to avoid being liable for Belgian personal income tax and to a priori avail oneself of the more favourable Belgian corporation tax? In reality, the mere fact of creating a management company brings the taxpayer legally within the scope of the provisions of the ITC that fix the corporation tax rates and tax bases. As a result, by opting for corporation taxrates, the management company is only complying with the objective of the Belgian legislator, who is happy to grant companies a different tax rate than the one he applies to natural persons. Furthermore, it will be far from easy for any tax inspector to resort to this provision when genuine economic, family or financial reasons justify the creation of a company and this, in spite of the tax benefits that come with it.
Numerous specific anti-abuse measures
Over the decades, the Belgian legislator also worked out a set of rules to combat tax avoidance in well-specified cases. Among these numerous provisions, which this article is unable to examine in their entirety, we will first look at substantive article 26 of the ITC, which allows the tax administration to add, « abnormal or gratuitous advantages, » to the taxable profits, whether they have been granted to interdependent companies or to third parties. Benefits like these can come in the form of expenses or ensue from a lack or shortage of income. This provision therefore constitutes a fundamental exception to the principle that only profits are taxable.
The Law of 21 June 2004 (MB [Belgian Official Gazette] dd. 9 July 2004) also inserted a provision comprising two principles into the ITC. Article 185 § 2, a) of the ITC introduces the, « at arm’s length, » principle, which entails that where two companies are, in their commercial or financial relations, linked by conditions agreed upon between independent companies, the profits that one of these companies would have made without these conditions, but not because of those conditions, may be included in the profits of that company. Article 185 § 2, 6, for its part, provides for the principle of correlative adjustment, which « corrects » the previous principle.
Article 207, paragraph 2 of the ITC opposes any deduction or compensation (by way of investment-related deductions, tax losses and so on) on that part of the results of the tax period that are (notably) generated by abnormal or gratuitous advantages. Such advantages may be derived, directly or indirectly, from a company located in Belgium or in a country other than the country where the company in question is located and with which the company in question has a direct or indirect link of interdependency. The purpose of this provision is to prevent a company moving profits generated by one company to another company so as to allow the other company to offset the profits by means of a physical deduction (definitively taxed income, earlier tax losses, etc.).
Article 54 of the ITC establishes a presumption under which certain types of payments (interests on bonds or loans, royalties for the right to use patents, manufacturing processes or other similar rights or fees for services) paid or granted to non-residents (or to foreign establishments of foreign companies located in tax havens) are fictitious or excessive. Thus, article 54 of the ITC deems that payments of this type are not deductible professional expenses unless the taxpayer proves that the payments correspond to real and genuine transactions and do not exceed the normal limits.
Following the enactment of a law of 29 March 2012, Belgium has tightened its regime aimed at combating the undercapitalisation of companies. This regime limits the deduction of interests on loans when the relationship between funds borrowed and the company’s own capital is too disproportionate. Before the law of 29 March 2012 came into effect, interests on loans like these were not deemed to be professional expenses if the beneficiary was located in a country that operated a tax system that was considerably more favourable than the Belgian tax system and if the amount of the loans (other than bonds and comparable securities issued in a public offering) exceeds by a factor of seven the sums of the taxable reserves at the beginning of the taxable period and the capital released by the end of this period. This new law reduced this ratio of 1:7 to 1:5. But that ratio will henceforth apply to any loans taken out within a group of companies and is irrespective of the type of loan involved. However, a special derogation for so-called cash-pooling companies, i.e. companies that ensure the centralised management of cash within a group, has been provided for.
The system of definitively taxed income (DTI) referred to in articles 202 and 203 of the ITC was introduced into Belgian tax law to stamp out certain adverse effects in relation to tax on corporate dividends. These are in fact at risk of being subject to a cascading tax if the shareholders of the company paying out the dividends are themselves companies who remunerate their own shareholders. Thus, a system that prevents this cascading taxation was put in place. Under this DTI system, if the dividend is taxed at the base, it will pass through all the other companies without being subject to tax.
However, various conditions must be met before these dividends can qualify for the DTI system, one being that the dividends must come from a company that is liable for corporation tax or a comparable tax. Definitively taxed income can consequently not be deducted if it is attributed or paid by a company that is not liable for corporation tax or a comparable foreign tax or which is located in a country where the provisions of common law in matters of taxation are considerably more favourable than in Belgium, i.e. in a tax haven. The code also provides for a number of other exclusions.
Note should be taken of the measure, listed under point 10° of article 198 of the ITC, introduced under the Programme Act of 23 December 2009, which compels companies to declare any payments of minimum EUR 100,000 if they are directly or indirectly issued in favour of persons located in a tax haven. In addition to this obligation to produce said declaration, the taxable company targeted by this provision must also be able to prove, by any legal means, that any such payments issued feature, « within the framework of actual and genuine transactions, » and were made, « to persons other than artificial constructions. » If that proof is not furnished, the expenses in question may, aside from being non-deductible, also be subject to a penalty of 309 %, as provided for under article 219 of the ITC.
The impact of EU and OECD law
Towards the demise of Belgian banking secrecy?
In line with European Union directives and OECD recommendations to promote greater fiscal transparency and intensify the exchange of information between tax authorities, Belgium did respond by adopting a number of concrete legislative measures. The most newsworthy of these is undoubtedly the measure that aims to stamp out banking secrecy.
Various amendments to the Income Tax Code have been introduced to allow banking secrecy to be dispensed with in cases of suspected tax fraud and when there are plans to resort to a risk-based assessment. In this context, a central contact point within the National Bank of Belgium was set up in 2011, tasked with recording certain details, which the financial institutions are henceforth obliged to disclose about their clients (the identity of clients, account numbers and contracts). The information thus collected can be checked by the tax administration in suspected cases of tax fraud or if the tax administration is contemplating resorting to taxation on the basis of signs and indicators of affluence.
A Royal Decree of 3 February 2014 furthermore gives banking and lending institutions access to the records of the national register of natural persons to ensure that the information at this central contact point is registered correctly.  A doctrine at large in Belgium is concerned that these recent legislative changes are merely a prelude to the compilation of a general wealth registry.
The exchange of information.
In its article 338 of the ITC (and in equivalent provisions of inheritance law and registration law), Belgium almost fully transposed the European Union’s Savings Directive. The scope of the system of exchange of information was actually widened in the Belgian legislation because it does not only refer to persons with a legal personality but also to any legal constructions such as trusts, investment funds, civil-law partnerships, not to mention foundations. Moreover, article 338 of the ITC provides for the automatic and spontaneous processing of information in addition to the exchange on request that has been in place for a few years now and which is governed by internal rules of procedure.
This automatic exchange of information, which came into effect on 1 January 2015, and which relates to tax periods commencing on 1 January 2014, concerns persons residing in other Member States who have received certain types of income and capital. The assets targeted by this automatic exchange range from anything from thesalaries of workers or directors, the proceeds of life insurance policies and pensions to property and the income generated by said property. The so-called spontaneous exchange the Belgian authorities can engage in refers to any information about suspect transactions that imply a loss of Belgian taxes. By way of example of suspect transactions, we can cite intragroup profit transfers presumed to be fictitious. This exchange of information Belgium implemented recently also aims to promote greater transparency in taxpayers’ assets.
Conclusion: from the fight against tax fraud to a « tax contract »
Is Belgium adequately equipped to deal with all forms of tax fraud or tax evasion? Is the legislative arsenal outlined here complete or should it be improved or amended? Does the Belgian tax administration have enough means of action at its disposal to combat tax abuse?
For starters, we feel that a set of legislative or administrative rules that list the transactions that are likely to fall under the general anti-abuse provision would be welcome. A list like that which already exists for matters relating to indirect taxation would serve as a guide to the Belgian taxman and would offer words of caution to any taxpayers contemplating an incriminating transaction. In reality, the most important changes needed cannot merely be confined to the Belgian domestic sphere but must essentially be dealt with at European level.
In the face of globalisation, which opens the door for tax bases to be moved around frequently, in the face of the complexity of uncooperative jurisdictions who refuse to play their part in the game of fiscal transparency and who accentuate fiscal competition, we feel that some initiatives aimed at stopping certain fiscal erosion mechanisms might be in order. One of the first measures would be to further intensify the fiscal cooperation between Member States by developing a more direct system of information exchange.
A more coordinated approach to the actions of EU Member States with a view to combating tax fraud is also desirable. These exchanges could take the form of bilateral or multilateral political agreements covering an increasingly broader range of capital or income or by the strengthening of the means to help states recover taxes. These means remain underdeveloped and the rate of recovery is extremely poor.
The Member States could also step up their fight against any form of abuse of the double taxation conventions in a concerted fashion. On a regulatory level, Belgium, in collaboration with the other Member States, could defend the principle of a harmonisation of the term, « purely artificial arrangement, » which we find in case law of the Court of Justice of the European Union and which aims to combat all forms of tax abuse. So far, this term lacks precision and is affected by variable interpretations. European rules that define the term of a common consolidated tax base should be transposed and implemented swiftly. This would facilitate the fight against all forms of indirect profit transfers and, at the same time, eliminate fiscal competition and the losses linked to an aggressive transfer pricing policy between companies located in different Member States.
Tax compliance and legal certainty.
Necessary as it may be to step up all the measures to tackle harmful tax evasion, it is equally important not to violate taxpayers’ most elementary rights. The desire for greater fiscal transparency should not lead to calling into question the legal certainty every citizen is entitled to or to fiscal injustices. New tax governance does not go hand in hand with the gagging of taxpayers or with violating the idea of freedom to chose the path of least taxation.
Of course, it cannot be disputed that the taxman is entitled to apply all the tax laws and to ensure that taxes are collected correctly, but it must be remembered that he must do so within limits that are acceptable and reasonable. As Professor Baltus wrote, « an administration can only use its powers to attain the objectives it was granted these powers for and must tailor its actions to these objectives« .
Scrupulous compliance with the tax laws furthermore implies that the legislation is also intelligible. The fact is that the tax legislation, and particularly Belgian tax laws, has become frighteningly complex, leading to errors of interpretation and blatant circumvention. This is obviously not a plea for a naive simplification of the tax legislation. Besides, simplification does not necessarily lead to legal certainty. Behind every law there are social and political challenges that contribute to its complexity. Rather than simplifying them, fiscal texts should be made more intelligible.
The Oxford English Dictionary defines intelligible as, “that what can be easily understood”. In the art of poetry, Boileau wrote: « There are certain minds whose sombre thoughts are by a thick cloud always blocked; The daylight of reason never could shine through. Thus before learning to write, learn to think. (…) That which is well conceived is set forth clearly, and the words to say it come easily. ». Fiscal texts are often highly confusing. Additionally, the process of writing laws or circulars seems to be disconnected from the concrete process of implementing this legislative or regulatory work.
It becomes indeed difficult, not to say impossible, to apply texts that were hurriedly thought out to begin with. That is where the paradox lies. While it is necessary to promote greater tax compliance and to compel citizens to follow mandatory rules, it is equally important to provide the latter with the means to understand the reason for and the scope of the fiscal standard, if we want them to consent to it. This consent also implies a commitment from the state to guarantee legal certainty and stability. We should therefore work towards a tax contract, a kind of pact between citizens and the state, where each party is a winner, where, I, the citizen, agree to comply with the tax system imposed on me provided that it clear, fair and efficient. « When it comes to tax, the freedom of the people means everything, » exclaimed the revolutionist Barère. To get taxpayers to comply with all the existing and future anti-abuse measures, they must first of all enjoy a legitimate sense of freedom.
 Pierre-François Coppens, Tax Consultant, Lawyer, Head of the IAB Research Department, Training Officer at the Catholic University of Mons.
Vander Elst R., »La fraude à la loi en droit international privé (Fraud in Private International Law) », in Mélanges Baugniet, p 799.
As the author states, one of the most traditional ways to evade tax, for a Belgian taxpayer, is to resort to companies in tax havens that do not impose any corporation tax or a corporation tax that is laughable.
In a famous judgment (Cass. [Court of Cassation] 16 June 1961, Pas.1962, I, 1082) The Court of Cassation ruled that « There is no question of unlawful simulation vis-à-vis the taxman or of tax fraud if the taxpayer, for the purpose of benefitting from a more beneficial tax treatment, making use of his right to freely conclude contracts, conducts transactions for which he accepts all the consequences, even if they are not the most regular ».
 At that, it must be added that taxpayers are also obliged to specify whether they have any bank accounts abroad, and where, when they are filing their tax returns.
 Marc BALTUS, Principes de droit fiscal (Principles of tax law), Ecole Supérieure des Sciences Fiscales (ESSF) course, 1992, p 37