This article focuses on two topics:
- a recent Belgian case, being among the first applying EU case law on the anti-abuse provisions in international group flows, here on dividends;
- new tax which entered into force on February 26, 2021, applicable to Belgian companies (or Belgian establishments) having a securities account, and to non-Belgian companies having a securities account in Belgium.
Holdings—Case Law on Tax Abuse in Application of Parent–Subsidiary Directive
A method of tax optimization consists in transforming flow generated by profits into capital redemption free of tax for the shareholders. However, in recent years, various changes have made the tax treatment of capital redemption less straightforward. Anti-abuse provisions were adopted in national law and in EU directives, especially in the Parent–Subsidiary Directive (PSD). The first cases applying these anti-abuse provisions are of the highest importance for interpreting such provisions.
After the important “Danish Cases” ruled on by the Court of Justice of the European Union (CJEU) on February 26, 2019 about abuse of withholding tax exemptions on dividends and interest (cases T Danmark (C-116/16) and Y Denmark (C-117/16), and cases N Luxembourg 1 (C-115/16), X Denmark (C-118/16), C Danmark (C-119/16) and Z Denmark (C-29916)), the application of these cases by national jurisdictions is very interesting.
The Ghent Court of Appeal ruled on December 1, 2020 (Ghent, December 1, 2020, 2019/AR/306 307) on a tax abuse case relating to the exemption of withholding tax (WHT) laid down in the PSD, based on the Danish Cases.
The facts as analyzed by the Court included a series of complex restructuring events executed within a multinational group and which permitted as a final step the repatriation of cash proceeds in a tax-exempt manner to a Luxembourg holding company through a capital reimbursement and dividend distribution.
In 2003, a U.S. private equity group acquired a Belgian group via a Dutch company. That Dutch company held the shares of a Belgian holding company, which in turn held the shares in a Belgian operational company that subsequently held shares in an operational company located in the Czech Republic.
In a first phase, a restructuring took place whereby, among other things, a double holding company structure had been implemented, capital reductions and increases took place, shares were transferred within the group with an external debt financing, a debt-push down was achieved by a merger, and the generated cash was distributed in a tax-exempt manner to the ultimate shareholders.
A second restructuring phase occurred in 2012 following the entry of a third-party investor, whereby, among other things, Belgian holding companies merged (as a result of which capital was created), a new sub-holding company was incorporated in Luxembourg (a location without any link with the investors or the underlying business operations of the group), a transfer of shares occurred between group companies on terms that were not at arm’s length; and by way of external debt financing, a new Czech company was incorporated followed by a debt-push down by merging the Czech companies, the surviving Belgian company made a capital reimbursement following merger and distribution of the generated income to the ultimate shareholders in a tax-exempt way in the context of the PSD.
The Belgian tax authorities considered the restructuring events that occurred (and which preceded the ultimate realization of the tax-exempt proceeds) as abusive, and consequently decided to levy a WHT on both the capital reduction and the dividend distribution that would, under normal circumstances, have been exempt in respect of the PSD as implemented in Belgium.
The Decision of the Court
The Ghent Court of Appeal confirmed the position of the tax authorities based on the abuse of rights under EU law, which implies that abusive or fraudulent practices are prohibited under EU law. For the interpretation and application of the EU provisions, the Court also referred to the general anti-abuse rule (GAAR) as set out in Article 344, § 1 of the Belgian Income Tax Code (ITC92), although such Belgian provision in its new wording (resulting from a change of law which entered into force as from tax year 2013) was not fully applicable in this case.
The existence of abuse is assessed by the Court of Appeal by reference to the objective and subjective elements stated by the CJEU in the Danish Cases. The CJEU stated in the Danish Cases that “a proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it.”
As stated above, the objective element of “abuse” in the Belgian case is assessed on the basis of the GAAR as laid down in Belgian national legislation, and which implies that the taxpayer has arranged a (series of) legal act(s) which allow it (i) to avoid the application of a tax-increasing measure in the ITC or the Royal Decree thereto, or (ii) to obtain the application of a tax benefit included in the ITC or the Royal Decree thereto, whereas such result is incompatible with the purpose of these provisions.
In that respect, the Court of Appeal relies on the Danish Cases, where the CJEU stated that a group of companies could be considered as an artificial construction when the arrangements are not set up for reasons that reflect economic reality but only to obtain a tax advantage, which is contrary to the aim of the PSD (Article 184, al. 4, ICT 92 and parliamentary doc. Chamber, 2016-2017, no 54-2208/8, p. 17).
According to the Ghent Court of Appeal the following are indications of abuse:
- income is upstreamed shortly after receipt via the transfer of group companies, creation of capital, dividend distributions, capital reimbursements, etc., to ultimate beneficial owners that cannot directly benefit from the PSD;
- a Luxembourg holding company is interposed in the group structure: on one hand, that holding structure seems to have had limited substance (no details are provided in the decision—this would appear from the facts of the case at hand), and on the other hand, the group had no other economic activity in Luxembourg;
- the restructuring had two phases, the first phase in 2006 already implementing a “double holding” structure for the purpose of upstreaming cash and capital gains to the shareholders in a tax-exempt manner.
Considering the subjective elements, the Court of Appeal analyzed whether there were sufficient non-tax motives raised by the taxpayer to justify the operations that occurred. Multiple economic motives were presented by the taxpayer to support the various transactions, but the Court of Appeal concluded that these were not convincing and could not outweigh the apparent tax motives.
The Court rejected various general justifications raised by the taxpayer which were considered to be too general and insufficient, including:
- such structures are part of everyday practice for multinational groups—such argument is general and cannot serve globally as a motivation for all restructurings;
- international groups finance themselves externally in order to maintain a healthy debt-to-equity ratio—in the case at hand, this was not concretely demonstrated, and it does not constitute an economic justification for such rapid flows of external funds up to the ultimate beneficial owners;
- entry of a new partner through the joint venture—when the structure serves after such entry as a “flow-through company” to upstream benefits and tax exempt internal gains to the initial shareholders, this argument does not reverse the tax motives;
- the realization of a group simplification and related cost savings—when the complex structure results from operations conducted by the taxpayer itself, this argument is not acceptable.
Based on the specific facts of this case, the Court of Appeal ruled that the entire context provided sufficient proof of the subjective and objective elements of abuse of the PSD. The complex restructuring operations fell within the scope of the anti-abuse provision and cannot benefit from WHT exemption.
Clarification of Interpretation of “Beneficial Ownership”
The Court of Appeal also clarified the interpretation of the term “beneficial ownership,” in the same line that was previously stated by the CJEU (substance over form approach). The Belgian Court considered that the concept of beneficial owner of interest must be interpreted as designating an entity which actually benefits from the interest that is paid to it and has the power to freely determine the use to be given to that received income. This approach is broader than the formalistic approach in the past by the Belgian Minister of Finance. Such new interpretation could cause some issues to arise.
We highly recommend taxpayers who would like to set up cross-border investment structures and/or restructuring transactions to develop an action plan in advance and to prepare an adequate supporting file. Such file includes proper documentation of the business reasons for the use, the local substance of the structures, the investors’ fund flow management, a formalized TP policy and WHT compliance.
In addition, since the interpretation of “beneficial ownership” has evolved into a broader economic concept, it will be imperative to monitor the cash flows going forward where third countries are involved.
Tax on Securities Accounts
A previous law introduced in 2018 a tax on securities accounts held by individuals. After the annulment of that tax by the Constitutional Court of Belgium, a new version has been introduced by a law of February 25, 2021. This new version is also applicable to securities accounts held by companies and legal entities. A securities account is defined as an account on which financial instruments can be credited and debited.
Overview of New Tax
This new tax targets only securities accounts, not other types of bank account, with a mean value per account of more than 1 million euros ($1.19 million).
Some exceptions apply in order to “prevent repeated double taxation and to preserve Belgium’s participation in the professionally developed international system of securities transactions in a way that effectively aims at the legal conversion of an indirectly held securities account.” The financial sector in Belgium is thus (partially) in a safe harbor.
The mean value is assessed on the average value of the bottom line of the securities account (including all financial instruments and cash on the securities account; the nature of financial instruments held is irrelevant) at four reference dates (end of each quarter) for each reference period (which starts on October 1 and ends on September 30 of the following year). The first reference date will be March 30, 2021, and the first reference period will end on September 30, 2021. The threshold is assessed per securities account, irrespective of how many securities accounts are held.
The tax rate amounts to 0.15% computed on the above-mentioned mean value (full amount considered only when the threshold of 1 million euros is exceeded; a specific limitation applies when the mean value just exceeds 1 million euros).
Belgian companies, Belgian establishments of foreign companies, Belgian legal entities, and Belgian individuals, fall in the scope of this tax on any tax account they hold, in Belgium or abroad, whether directly or through specific legal arrangements.
Holders who are non-Belgian resident (without establishment in Belgium) are taxable on securities accounts held in Belgium (except in cases where the tax treaty concluded between Belgium and their state of residence protects from a wealth tax).
The new law introduces two sets of anti-abuse provisions, resulting in the levy of the tax as if the abuse did not take place when in scope of these provisions.
The split of a securities account into multiple accounts held at the same intermediary, or the conversion of financial instruments held on the securities account into registered instruments held out of the securities account, are situations irrefutably presumed to be abusive.
Other situations could also be abusive when the main purpose of the action taken is to avoid this tax. This could be the case, for example, when a Belgian company transfers excess cash to a foreign group company with instruction to that foreign company to open a securities account outside Belgium.
In the same manner as the previous tax on securities accounts, we believe that this second version contains unconstitutional measures that would lead to its annulment in full. However, this law is currently applicable, and all measures must be taken to comply with its consequences.
Belgian companies (as well as Belgian establishments of foreign companies and the other holders in scope of the tax) having securities accounts have to be aware of this new tax, especially when the account is outside of Belgium (for which only the holder is in principle liable for the due declaration and tax payments). This measure could be one argument (among others) impacting their cash management and policy.
Foreign companies with a bank account in Belgium also have to be aware of the tax, especially when there is no tax treaty protection (most tax treaties do not protect against a wealth tax), and could contemplate transferring their securities from a Belgian account to another account (but keeping the Belgian account open until October could make sense).
Each (quick) action has of course to face the anti-abuse provisions and their consequences.
Anti-abuse provisions have illustrated for some years to what extent tax optimization cannot drive the decision process. Recent cases and laws demonstrate that it is of first importance to collect and document the non-tax-related motives, aside from defining a compliant policy shared with the company’s advisers.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Laurent Donnay de Casteau is a Partner and Nawel Benaisa is an Associate with Advisius, Belgium.
The authors may be contacted at: email@example.com; firstname.lastname@example.org