Accounting valuation of assets
CJEU dismisses approach of the Belgian tax authorities
On 3 October 2013, the Court of Justice of the European Union (CJEU) confirmed that the accounting principle of the true and fair view requires the valuation of assets at their acquisition cost or production cost (CJEU 3 October 2013, C-322/12, GIMLE). As a result, the approach of the Belgian tax authorities in this matter is not compatible with the Fourth Company Law Directive.
In the case at hand, a newly incorporated Belgian holding company acquired a participation at a price of 100 Swedish Krona (SEK) per share and sold the participation a little over a month later at a price of SEK 340,000 per share. At the time of the acquisition, the holding company recorded the participation in its annual accounts for a value equal to the historical acquisition price. At the time of the sale of the participation, the holding company recorded a realized capital gain for the difference and claimed the tax exemption for capital gains on shares, which still applied at the time of the facts (under current legislation, the capital gain would be taxed at a rate of 25.75%).
The tax authorities claimed that the true and fair view requirement of accounting law imposed an obligation on the holding company to value the shares at their real value at the time of the acquisition of the participation (this position is also taken (under certain circumstances) by the Belgian Accounting Standards Board in standard 126/17 and by the tax authorities in different cases, amongst which the Artwork Systems case). The difference between the real value and the price paid constitutes a taxable profit at the moment of the acquisition in the opinion of the tax authorities.
The holding company took the matter to court. The Court of Appeal of Brussels confirmed the principle of the valuation of assets at their historical acquisition price and stated that the true and fair view of the financial situation in the annual accounts can also be attained by providing additional information in the notes to the accounts without requiring valuation at the real value.
On 1 June 2012, the Supreme Court issued a request for a preliminary ruling in this case to the CJEU, asking whether the Fourth Company Law Directive (hereafter “the Directive”), which forms the basis for the Belgian accounting rules, requires the valuation at real value of assets at the time of their acquisition in case the acquisition cost clearly does not reflect their real value and not only the provision of additional information in the notes to the accounts.
Decision of the CJEU
The CJEU rules that the Directive does not allow a deviation from the principle of the valuation at acquisition price when it is manifestly lower than the real value. The CJEU acknowledges that the principle of a true and fair view of the assets, financial position and the profit and loss of a company constitutes the basis for the annual accounts but reminds that the application of this principle must be guided by the general principles listed in article 31 of the Directive as far as possible, and more in particular by the prudency principle. This principle requires, amongst others, that only profits made at balance sheet date may be included in the annual accounts.
The CJEU confirms that the Directive allows companies to deviate from its provisions in exceptional cases where the application of a provision is incompatible with the true and fair view requirement but concludes that the undervaluation of assets as a result of the valuation at the historical acquisition cost in itself cannot be considered as such an exceptional case. It is merely a corollary of the choice of the European legislator for the valuation at the historical cost. The valuation at the fair value, on the other hand, would – contrary to the prudency principle - lead to the recognition of a profit that has not been made at balance sheet date.
The CJEU recognizes that this may have an impact for tax purposes in countries which use the annual accounts as a basis for the determination of the taxable profit but reminds that the Directive does not preclude the Member States to provide in tax law for corrections to the effects of the accounting rules.
Impact on corporate income taxation
This judgment dismisses the positions of the tax authorities and the Belgian Accounting Standards Board and does not seem to leave room for deviations. Consequently, a valuation at historical cost must be applied whenever assets are acquired at a price that is lower than their real value, even when there are gratuitous motives for the transfer of the assets.
As a result, no profit may be recorded at the moment of the acquisition of an asset at a price lower than its real value so that this acquisition in itself does not lead to taxation.
This judgment seems to close a discussion that has caused legal uncertainty for taxpayers and tax practitioners for a long time. Hopefully, the tax authorities and the Belgian Accounting Standards Board will now soon align their positions with this decision.
It should be kept in mind, however, that this judgment does not prevent the tax authorities to tackle these types of situations on other legal grounds in some cases (e.g. article 207 ITC 1992).