The Court of Appeal of Ghent recently ruled that the Tax Authorities are not authorized to apply the tax avoidance principle and the anti-abuse rule (art. 344, § 1 of the Belgian Income Tax Code – “ITC”) by requalifying the relevant facts of a private equity restructuring case (Court of Appeal Ghent, January 3, 2023). The Court’s decision is important since it imposes clear boundaries on the Tax Authorities’ right to challenge the freedom that taxpayers have to structure their transactions in a tax-efficient manner.
The facts in the specific case brought before the Court are very complex. To summarize, the situation concerned an international private equity restructuring scheme, in which a Belgian individual acquired, from one group company, shares in another group company. The individual was professionally active in the group of companies concerned. The individual also incorporated a Dutch foundation, which then incorporated a Luxembourg investment company. Furthermore, the individual transferred the acquired shares in the group company to the Dutch foundation, which then sold the shares to the Luxembourg investment company. Finally, the Luxembourg investment company sold the shares in the group company to other parties and final buyers and in the end received a substantial amount in return for the sale of the shares.
The Belgian Tax Authorities considered that the final sales price for the shares in the group company received by the Luxembourg investment company, constitutes taxable income for the Belgian individual. The Tax Authorities apply the anti-abuse rule of article 344, § 1 ITC in order to take a “look through” approach and to disregard all intervening companies and entities, fiscally speaking.
The Tribunal of First Instance already ruled in favor of the taxpayer, and now the Court of Appeal has done the same. The Court states that the fiscal “conversion” allowed by the anti-abuse rule primarily concerns the non-opposability of a legal act, without, however, justifying any change of the facts of the matter concerned. The Court sees no reason why the intervening companies or legal entities are to be fiscally disregarded since the various transactions were effectively carried out by the intervening companies and legal entities.
The Court’s judgement is important since it confirms the obligation for the Tax Authorities to respect the facts as they are, the reality of the case at hand, which also means that the parties involved in a private equity scheme do not per se need to deliver a (financial or economic) justification for structuring a private equity scheme in a specific way. Often, the Tax Authorities are tempted to challenge a complex structuring scheme by arguing that it primarily serves a tax purpose, lacks business substance and should therefore be disregarded from a tax point of view as “non-opposable”. As a consequence, the taxpayer would be obliged to prove that the transaction is indeed justified by other motives than purely tax considerations and has solid business substance (art. 344, § 1, 3rd indent ITC). Obviously, such factual proof always entails a degree of uncertainty, especially if the tax motive is also very much present (even if it is not the only relevant motive).
The Court of Appeal has ruled in a very clear manner in favor of the taxpayer.