Tax authorities publish administrative circular on general anti-abuse provision

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The tax authorities published an administrative circular on the new general anti-abuse provision (article 344, §1 ITC, article 18 Code of registration duties, article 106 Code of inheritance duties) on their website (click for the full text in French or in Dutch).
This circular mainly summarizes the positions taken by the Finance Minister in the parliamentary documents without adding many new insights or examples. Please click here for prior coverage on this provision.

Main differences between the old version and the new version
The objective of the new version of the article is to provide for a solution for the problems encountered by the tax authorities in the application of the previous version. The following changes were made to meet this objective:

  • The object of the non-opposability is changed;
  • A concept of “abuse of tax law” is introduced;
  • The burden of proof is allocated more clearly between the taxpayer and the tax authorities;
  • The application of the provision results in the repair of the tax situation of the taxpayer.

Object of the non-opposability
The object of the non-opposability has become the legal act itself, and no longer its characterization.
The provision still encompasses the step-by-step doctrine, i.e. the situation whereby several legal acts establish an operation, which is divided into those different legal acts in an artificial manner and whereby the tax authorities can prove the existence of a unity of intent between the different legal acts.
Examples of legal acts mentioned in the circular are the sale or rent of real estate and the establishment of a right of usufruct.

Abuse of tax law
The focal point of the new provision is the concept of “abuse of tax law”, which has both an objective and a subjective aspect.
The objective aspect is present when the taxpayer:

  • puts himself outside of the scope of application of a tax provision of the Income Tax Code or its related decrees in a way which is incompatible with its objectives; or
  • puts himself within the scope of application of a provision of the Income Tax Code or its related decrees granting a tax benefit in a way which is incompatible with its objectives.
According to the tax authorities, the scope of application is not limited to the provisions of the Income Tax Code and its related decrees, but also includes special tax laws.
In the framework of identifying the objectives of a tax provision, the circular states that:
  • there is no need to resort to the parliamentary documents when the meaning of a provision is clear based on its textual and contextual interpretation (based on the principle interpretatio cessat in claris);
  • if the textual and contextual interpretation method do not provide for an answer, the objectives of the provision must be sought in the parliamentary documents of the law (and in exceptional cases in the parliamentary documents relating to previous laws or similar laws);
  • the compatibility with the objectives of the tax provision must also be assessed in the light of the concept of “wholly artificial arrangements”, i.e. legal acts that do not meet the economic objectives of the tax provision concerned or that are not performed under normal economic or financial conditions (e.g. mailbox companies) are not in line with the objectives of the provision.
The subjective aspect requires that the essential objective for the choice of the legal act(s) by the taxpayer is obtaining the tax benefit or tax avoidance.

Burden of proof
The tax authorities must first establish the existence of abuse of tax law. However, they only have to prove the existence of the objective aspect of the abuse. They do not have to prove that the only objective of the taxpayer is to obtain the tax benefit or tax avoidance.
The tax authorities may use all legal means of evidence, with the exception of the oath. The administrative circular confirms that the tax authorities will probably rely mostly on the use of presumptions.
If the proof of abuse of tax law is delivered, the taxpayer must invoke the existence of other underlying objectives for his act(s) than Belgian income tax avoidance.
The tax authorities will proceed with the application of the general anti-abuse provision when:

  • there is only a tax objective for the legal act(s);
  • the non-tax objectives are not specifically connected with the legal act(s), but are so general that they are present for any similar legal act;
  • the non-tax objectives are specifically connected with the particular legal act(s), but are so immaterial that no reasonable person would perform the legal act for this non-tax objective.

Repair of the situation of the taxpayer
If the tax authorities apply the new provision, they will bring the situation of the taxpayer in line with the objectives of the tax rule that was avoided or the tax benefit that was unsuitably applied.
In this regard, the administrative circular mentions that:

  • the tax authorities are not required to substitute the legal act with another legal act;
  • it has to be assessed on a case-by-case basis whether the non-opposability applies to both parties to the contract or to only one of the parties;
  • the legal consequences of the legal acts themselves are not changed, only the consequences for income tax purposes (or registration duties or inheritance taxes).

Other clarifications
The administrative circular also confirms that:

  • the Ruling Commission can deliver rulings on the existence of other objectives than tax avoidance but not on whether or not the tax authorities will apply the new provision;
  • the new provision applies both in the private area and in the economic area;
  • the general anti-abuse provision will only be applied when the normal interpretation method, the technical provisions of the Income Tax Code, the special anti-abuse provisions and the simulation doctrine cannot be applied and the tax authorities consider that there are sufficient reasons to resort to the general anti-abuse provision;
  • the applicability of this provision does not mean that the taxpayer has committed tax fraud (so that it has to applied within the normal period of assessment of 3 years) but that tax increases may be imposed.

Entry into application
For income tax purposes, the administrative circular confirms that the new provision applies to legal act(s) performed in:

  • tax year 2013 or
  • tax year 2012 insofar the accounting period is closed on 6 April 2012 at the earliest.
Consequently, the provision in some cases also applies to legal act(s) performed in calendar year 2011 for companies with an accounting period that does not correspond to the calendar year so that there may be some retroactive effect.
For registration duty and inheritance tax purposes, the new provision applies as from 1 June 2012.

The administrative circular provides little additional guidance regarding the application of the new general anti-abuse provision. The large majority of the positions in this circular were taken from the parliamentary documents of the Program Law of 29 March 2012.
For a reliable upfront assessment of the application of this provision by the tax authorities, there is a need for a more detailed administrative position with specific examples. Otherwise, the level of legal certainty will decrease and litigation will surely increase.

EY strongly recommends to analyze the potential impact of the new provision on any contemplated legal act(s), and to properly document the specific and material non-tax objectives connected with such act(s).
As it is not clear yet how this anti-abuse measure will be applied in specific cases, EY has dedicated a team of tax specialists to further analyze the new provision and to follow-up on developments in its application.