Belgium, December 2021, Constitutional Court, Case No 184/2021

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By a notice of December 2020, the Court of Appeal of Brussels referred the following question for a preliminary ruling by the Constitutional Court :

Does article 207, second paragraph, ITC (1992), as it applies, read together with article 79 ITC (1992), in the interpretation that it also applies to abnormal or gratuitous advantages obtained by a Belgian company from a foreign company, violate articles 10, 11 and 172 of the Constitution? “.

The Belgian company “D.W.B.”, of which Y.S. and R.W. were the managers, was set up on 4 October 2006 by the Dutch company “W.”. On 25 October 2006, the latter also set up the Dutch company “D.W.”

On 9 November 2006, bv “W.” sold its shareholdings in a number of subsidiaries of the D.W. group to its subsidiary nv ” D.W. “. It was agreed that 20 % of the selling price would be contributed by e.g. “W.” to the capital of the latter and that 80 % would be converted into a five-year interest-bearing loan between e.g. “W.” and “D.W.”.

On 16 March 2007 the capital of “D.W.B.” was increased. This increase in capital was achieved by a contribution in kind by “W.”. of its claim against nv “D.W.” by virtue of the aforementioned loan. The contribution of the claim was partly booked in the account “Kapital” and partly on the account “Issuance premiums”, which were not available.

On 17 March 2007, “W.” sold all its shares in ” D.W.B. ” to the “D.W.”

On 31 August 2009, “D.W.B.” was put into liquidation and the liquidation was completed. Y.S. and R.W. were the liquidators.

Pursuant to the loan agreement, the interest from “D.W.” to “D.W.B.” was not to be paid until 8 November 2011.

In accordance with the accounting principle of accrual, according to which costs and revenues must be allocated to the period to which they relate, “D.W.B.” added the annual interest, due by the ” D.W. ” on 31 December 2007, 31 December 2008 and 31 August 2009, to its profit and loss account and to its amounts receivable after more than one year in its accounts on 31 December 2007, 31 December 2008 and 31 August 2009. It declared the amounts of interest in its returns for the assessment years 2008, 2009 and 2009 special, in which it then applied the deduction for risk capital (code 103).

The tax administration rejected the aforementioned deductions for risk capital with application of Article 207(2) of the Income Tax Code 1992 (hereinafter: CIR 1992), as applicable for the assessment years 2008 and 2009. According to the administration, the capital on which “D.W.B.” wanted to make the deduction for risk capital comes from a transaction obtained under abnormal circumstances and which is not justified by economic objectives, but only by tax objectives. A tax increase of 10 pct. was applied.

Y.S. and R.W. lodged an administrative appeal against that decision, but it was rejected by the regional director.

Thereupon, Y.S. and R.W. filed a claim with the Dutch-speaking Court of First Instance in Brussels. By judgment of 18 November 2014, the Court dismissed the claim as unfounded.

Y.S. and R.W. subsequently lodged an appeal with the Court of Appeal of Brussels.

The court ruled that the interest on the intra-group loan was at arm’s length and that the contribution in kind to “D.W.B.” constituted a transaction with an actual quid pro quo, but that it was acquired in the context of transactions which cannot be explained by reference to economic objectives, but only by reference to the fiscal purpose of the deduction for risk capital. However, Y.S. and R.W. argue that the application of Article 207(2) (now Article 207(7)) of the CIR 1992 to the benefits obtained from a foreign company is contrary to the constitutional principle of equality. The Court of Appeal of Brussels therefore decided to raise of its own motion the above question.

Judgement of the Constitutional Court

The Constitutionals Court’s answer to the question is that “Article 207 of the Income Tax Code 1992, read in conjunction with Article 79 of that Code, as applicable for the assessment years 2008 and 2009, does not violate Articles 10, 11 and 172 of the Constitution.”

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Belgium Arrest van het Grondwettelijk Hof 161221 184-2021

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