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Belgium Tax: Court denies deduction for recharged capital losses on shares in global stock option plan

The Court of First Instance of Brussels ruled on 16 April 2022 that capital losses on shares recharged by a foreign group parent company to its Belgian subsidiary may not be deducted for tax purposes. This appears to be the first time a Belgian court has issued a (negative) decision on this issue.

Under the stock option plan of a foreign group, the foreign quoted parent company granted options on its shares to some employees of its Belgian subsidiary. The plan was executed through a foreign-based special purpose vehicle (SPV) and trust. The costs of the plan (i.e. plan administration costs and capital losses incurred as a result of the difference between the cost of the shares and the lower exercise price for the employees) were recharged to the Belgian subsidiary, which then claimed a deduction for both costs.

The Belgian tax authorities accepted the plan administration costs as deductible expenses, but disallowed a deduction for the recharged capital losses on the shares based on article 198, indent 1, 7° of the Belgian Income Tax Code (BITC), a provision that disallows write-offs and capital losses on shares as expenses. The application of article 198, indent 1, 7° BITC was based on the following:

- The provision does not contain any condition of ownership or possession of the shares; and

- The recharge does not alter the legal classification of the expense as being a capital loss on shares (notably, the invoice specifically mentioned the "loss on the sale of shares as per the agreement").

The Court of First Instance ruled in favor of the tax authorities and disallowed a deduction for the recharged expenses related to the capital losses on the shares.

The court decision, however, is contrary to the opinion of the majority of tax practitioners and we believe that valid arguments can be made that article 198, indent 1, 7° BITC cannot apply because:

- The determination of the taxable base follows the accounting rules to the extent the tax rules do not specifically deviate from the accounting rules;

- In the absence of a definition of the concept of "capital loss" in the BITC, reference should be made to accounting law; and

- From an accounting law perspective, a capital loss can only be booked if the company has capitalized the underlying asset in its financial accounts.

In the case, absent a capitalization of the shares by the Belgian subsidiary, the subsidiary, in principle, could not record a capital loss in its accounts. A deduction for the recharged capital loss should not be disallowed insofar that the transaction is not simulated (i.e. it is not a sham transaction), the general anti-abuse provision cannot be applied and there is no basis for tax transparent treatment.

The taxpayer has apparently decided to appeal the decision.
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