Proportionality principle limits the offsetting of disputed tax receivables against tax payables

Under Belgian tax law, disputed (income) tax assessments are typically automatically off-set against any tax payables the same taxpayer has, such as notably refundable VAT. As a result, in practice taxpayers often have little choice as to whether they want to pay a tax assessment whilst it is still being contested or not.  

In a recent judgment, the Brussels Court of Appeal has put some limits on this practice of automatically off-setting contested tax debts against tax payables, on the basis of the principle of proportionality. 

More specifically, the Court decided that even though the Tax Authorities have the right to offset tax receivables against (contested) tax payables, the exercise of this right must comply with the principle of proportionality. In the case at hand it was noted that, on the one hand, the company's financial situation was deteriorating (negative evolution of its solvency, absence of fixed assets, etc.) but that, on the other hand, the company maintained a positive working capital and was profitable. Hence, there was no indication that the company was in financial troubles such that it would not be able to pay its tax debts. The Court also found that the contestation of the corporate tax debt by the company was prima facie serious and had a serious chance of success. It finally referred to the long period between the issuance of the assessment and the off-setting of the contested tax debt against the tax payables. The Court concluded that, in these circumstances, the offsetting of the taxpayer's refundable VAT credit against its corporate income tax debt was disproportionate. As a result, the Court ordered the Tax Authorities to repay the refundable VAT to the company (pending the dispute on the corporate income tax assessment) increased with interest.  

This case is a useful precedent, which – depending on the facts of each case - can be invoked in view of preventing the automatic offsetting of disputed (income) tax assessments against any tax payables in the hands of the same taxpayer.