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Can the Belgian domestic general anti-abuse rule be invoked to determine which double taxation treaty should apply?

  • Belgium
  • Tax planning and consultancy

19-10-2021

The general anti-abuse rule (GAAR) in the Belgian income tax code (BITC) defines tax abuse by reference to the provisions of the BITC. The question was therefore already raised in the doctrine whether the tax authorities could invoke the domestic GAAR to determine whether a double taxation treaty is applicable. For the first time, a tribunal has ruled on the question (Brussels tribunal of 1st instance, 24 January 2020).

The GAAR

In short, the GAAR allows tax authorities to disregard a legal act or a series of legal acts implementing a same transaction, if they can prove that tax abuse is at play. Tax abuse is composed of an objective and a subjective element.

The objective requirement is fulfilled if by posing these legal acts, the taxpayer either:

  • placed himself, contrary to the purposes of a provision of the BITC, outside the scope of such provision; or
  • sought to obtain a tax benefit provided for by a provision of the BITC, the granting of which would be contrary to the purpose of such provision.

The subjective component requires that the taxpayer chose to proceed that way with the essential objective to obtain the tax advantage.

It is the objective element that is of interest in this case. The tax authorities invoked the GAAR to disregard a series of operations that resulted in the application of the Belgian-Luxembourg double taxation treaty (BE-LUX DTT) instead of the Franco-Belgian one (BE-FRA DTT), whereas the objective element of the GAAR is defined by reference only to the BITC.

Facts of the case

The facts were the following:

  • Two French individuals (X and Y) moved their tax residence to Belgium at the very end of 2012. They were at the time directors of a French company (Frenchco), in which they held a stake together with seven other shareholders;
  • In March 2013, the nine shareholders of Frenchco decided to incorporate a Luxembourg holding company (Lux Holdco). The shareholders subsequently contributed 100% of the shares in Frenchco into Lux Holdco;
  • X and Y resigned as directors of Frenchco and became directors of Lux Holdco;
  • Lux Holdco became director of Frenchco.

 

The situation before the restructuring can thus be depicted as follows:

 

The situation after the restructuring was the following:

 

 

The Belgian tax authorities’ claims

X and Y declared the directors’ remuneration they received in 2013 and 2014 from Lux Holdco as exempt by virtue of art. 16, par. 1 of the Luxembourg-Belgian DTT. That provision pertains to fees paid to directors in their capacity as members of the board of directors.

The tax authorities claimed that Belgium had the authority to tax the said remuneration based on the following two arguments:

  1. The activities of X and Y pertained to daily management, which qualifies under the second paragraph of art. 16 of the Luxembourg-Belgian DTT and would therefore be taxable in Belgium. The Tribunal rejected that argument given the absence of effective proof that X and Y were involved in the daily management of Lux Holdco.
  2. The tax authorities may disregard the restructuring operation whereby Lux Holdco was interposed between Frenchco and X & Y, as that operation constituted tax abuse in the sense of the GAAR. One should therefore examine Belgium’s taxing authority by virtue of the BE-FRA DTT (not the BE-LUX DTT). The tax authorities further asserted that under the BE-FRA DTT, Belgium has the authority to tax X and Y’s director’s remuneration.

Ruling of the Tribunal

The Tribunal ruled that the restructuring only resulted in the taxpayers ending up outside the scope of application of the BE-FRA DTT. Therefore, none of the provisions of the BITC was avoided. The GAAR could therefore not be applied.

The Tribunal also pointed out that there is no actual tax benefit that ensued from the restructuring. In other words, the tax authorities’ interpretation of the BE-FRA DTT was erroneous. Even if X and Y had remained directors of Frenchco as Belgian tax residents, Belgium still wouldn’t have had the authority to tax their directors’ remuneration by virtue of the BE-FRA DTT (art. 9, par. 1 should have been applied instead of art. 9, par. 2, as the Belgian tax authorities asserted). Absent the tax benefit, the subjective element of tax abuse could thus by definition is not fulfilled.

Comments

This ruling may seem logical at first glance but should be considered with a certain degree of caution.

A double taxation treaty only allocates taxation rights between two states. For income to be taxable in a state having the taxing authority, national law must still provide for the taxable character of that income. Hence, the sensible argument was made in the doctrine that a treaty can be a means to set aside specific provisions of the BITC that enunciate the taxable character of the income. If one were to take that perspective, it could seem defensible to argue that the objective requirement of the GAAR could be fulfilled in a case where the application of a specific treaty is avoided, if that treaty grants the taxing authority to Belgium.

One must however bear in mind that the fulfilment of the objective requirement also requires that the taxpayer places himself outside the scope of a provision of the BITC in violation of the purpose of that specific provision. The Constitutional Court has ruled that this implies that the object and purpose of the relevant tax provision must be clearly and unequivocally clarified (Nr. 141/2013, October 30, 2013). Therefore, if the ratio legis of a provision cannot be clearly identified, the tax authorities should not be able to apply the GAAR.

Finally, the relevance of this ruling may be somewhat reduced given the fact that Belgium introduced a principal purpose test into many of its double taxation treaties by virtue of the OECD Multilateral Instrument (MLI). There nevertheless still are some treaties that do not contain such test. Also, the MLI entered into force at the earliest in 2020 for qualifying treaties concluded by Belgium. The question whether the domestic GAAR could be used for determining the applicable treaty could therefore remain relevant for a while.