The new General Anti-Abuse Rule revisited: introduction of the “Tax Abuse” concept in Belgian tax law

After taking into consideration the fundamental criticism of the Council of State, the Belgian government approved last Friday a new draft text of the General Anti-Abuse Rules (“GAAR”) to be introduced in the Belgian Income Tax Code and the Belgian Registration Tax Code (Article 344, §1 ITC and Article 18, §2 Reg. C.).

The new proposed text reads as follows:

Not enforceable towards the administration is the legal act or series of legal acts carrying out the same transaction, when the administration can, on the basis of objective circumstances, prove with presumptions or by other [legal] means that fiscal abuse occurs.

Fiscal abuse occurs when the taxpayer carries out, by means of a legal act or a series of legal acts, one of the following transactions:

1. a transaction by which he places himself, contrary to the purpose of a provision of this Code or its executory decrees, outside the scope of application of such provision;

2. a transaction by which he claims a tax benefit provided for by a provision of this Code or its executory decrees, the aim of which is essentially the obtaining of such advantage, when the granting thereof would be contrary to the purpose of the provision.   

It is up to the taxpayer to prove that the choice of the legal act or series of legal acts is justified by other motives than the avoidance of tax.

If the taxpayer does not provide this counter proof, then the taxable base and tax computation are restored so that the transaction is subject to a tax assessment according to the purpose of the law, as if no abuse had occurred.”

The most remarkable and innovative change in this new provision is the introduction of a legal definition of tax abuse.  Tax abuse occurs when the taxpayer carries out a transaction whereby he either avoids tax or claims a tax benefit and such would be contrary to the legislative intent of the tax provision. In other words, tax optimization will now have to be divided into acceptable optimization on the one hand and optimization which frustrates the intent of the law and is to be regarded as tax abuse, on the other hand. Key in this distinction will be the aim of the law, which of course is not always clear.

It is up to the tax administration to establish, by all legal means of proof, that the taxpayer committed fiscal abuse.

According to our first analysis of the new text and the Explanatory Note, the tax administration will have to indicate which tax provision the taxpayer intended to avoid or which tax benefit he is claiming in disregard of the legislative purpose of the tax provision and establish, on the basis of  objective elements, such as the existence of an “artificial construction” or a transaction which is not in accordance with the economic reality or the economic purposes underpinning the fiscal provisions, that tax abuse has been committed.

If the taxpayer cannot prove that the transaction was made for other reasons than tax reasons, the tax administration can establish the taxation in respect of the transaction as if the tax abuse had not taken place.

It is important to note that according to the Explanatory Note the other non-fiscal motives should be material enough as compared to the tax motivation.

Furthermore, the new text seems to suggest that the tax administration, in order to establish the taxation in respect of the transaction, is no longer required to re-characterise the legal acts of the taxpayer.

Through the mechanism of fiscal abuse whereby the tax administration necessarily has to indicate which tax provision was abused, the tax administration can establish, or as the text says, “restore” the tax on the basis of the abused tax provision by either applying or refusing the application, as the case may be, of such provision.

In the absence of a requirement for the tax administration to re-characterise the transaction, it is at this stage unclear to what extent the tax administration would (have to) apply other tax rules or respect other tax effects which would have applied if no tax abuse had been committed. Guidelines of the tax administration in this regard will be welcome.

In this respect, the Explanatory Note confirms that the ruling commission will be able to rule on the question of whether a specific transaction constitutes in given circumstances a fiscal abuse and such ruling will be binding on the tax administration.

Finally, the new GAAR to be introduced in the income tax code will, according to the draft law, be applicable as of tax assessment year 2013 (i.e. financial year 2012) as well as to transactions carried out during a 2011-2012 financial year provided such financial year closes on a date after the publication of the law in 2012.  The new law therefore is introduced with a certain limited retroactive effect, as it could apply to transactions carried out before publication of the law.  On the basis of the position taken by the Constitutional Court in its ruling of 17 May 2006 on the retroactive introduction of the old Article 344 ITC it seems that such retroactive application may run contrary to the constitutional principles.

For registration duties, the new provision will apply to transactions as of the first day of the second month following the publication of the new Law.

If you have any questions please do not hesitate to contact Olivier Van Ermengem (+32 2 501 95 61) or your usual Linklaters contact