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Tax neutrality of Belgian corporate reorganisations: new approach?

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Patrick Smet

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12 August 2009

A recent opinion given by the ECJ's Advocate General Kokott may fundamentally affect the current stance taken by the Belgian tax authorities in corporate reorganizations.

A company transferring assets to a third party is normally taxed on the realized capital gain but no such taxation occurs if the transfer takes place within the framework of a tax neutral reorganization (as a contribution of a branch of activity, a merger or a - partial - split). The sale of real estate also gives rise to transfer taxes but no taxes are due if the real estate is transferred as a result of a reorganization, regardless of neutrality being available or not.

It is generally accepted that the capital gains tax (or transfer tax) cannot be avoided, for instance, by contributing a business to a new company against new shares - under an exempt regime - and then selling the new shares to the purchaser. Technically, the capital gains exemption would be refused by the Belgian tax authorities on the basis of the anti-abuse provision contained in the Merger Directive (recently introduced in Belgian domestic law). According to that provision, the transaction's main goal must not be fraud or tax avoidance, or in other words the transaction must be justified by non-tax reasons. 

It is now clear that the business-purpose test must be interpreted in line with the Merger Directive, even for purely domestic transactions.

A recent opinion given by the Advocate General (AG) of the European Court of Justice (C-352/08 - Zwijnenburg) on the Directive business-purpose test may substantially affect the Belgian tax authorities' current stance in relation to both domestic and cross-border reorganizations.

This opinion relates to a case where the parties wanted to transfer Dutch real estate but opted for a corporate reorganization solely for purposes of avoiding the transfer tax that would be due in case of a straight transfer of the real estate. The Dutch tax authorities refused to grant the neutrality set out in the Merger Directive, on the basis that the transaction was tax-driven (ie the desire to avoid the transfer tax). The Dutch Hoge Raad asked to the ECJ whether the avoidance of transfer taxes - which do not fall into the scope of the Merger Directive - could justify a refusal to apply the neutrality regime provided by the Directive based on the anti-abuse provision.

In her opinion, the AG was of the view that the avoidance of transfer tax cannot justify the refusal of the tax neutrality under the anti-abuse provision of the Merger Directive. But the AG went further by stating that under the Directive, the anti-abuse provision applies to the business transaction (which must be justified by non-tax reasons) and not to the legal steps implemented in order to achieve this transaction (which can be tax-driven). In other words, the taxpayer can choose which structure to use from the various legal structures to implement the desired transaction, as long as that transaction is not tax-motivated.

If the ECJ confirms the AG's opinion, the Belgian tax authorities will need to accept neutrality in case a Belgian company wishes to sell a business (or assets) - which is for valid economic reasons - and opts for a tax-efficient technique (taking the form of a contribution of a branch of activity to a company followed by the transfer of the new shares, or taking the form of a partial spin-off). The Belgian tax authorities will only be able to refuse neutrality for purely tax-driven transactions (ie those with no substance other than creating a tax advantage).

Further information
For further information, please contact Patrick Smet  patrick.smet@allenovery.com or Stéphane Martin  stephane.martin@allenovery.com

Please contact Evelien Bekaert evelien.bekaert@allenovery.com if you wish to receive a copy of Patrick Smet and Stéphane Martin's full article (as published in Fiscoloog no 1168). Please specify whether you would like the copy in Dutch or French.