Belgian Supreme Court confirms the tax consequences of the receipt of foreign abnormal or benevolent advantages

• Belgian corporate taxpayer receiving an abnormal or benevolent advantage from a foreign associated enterprise is subject to the minimum corporate tax basis rule, unless demonstrating the inclusion of the said advantage in the tax basis of the associated enterprise tax resident of a Treaty jurisdiction

  Belgian corporate taxpayers receiving from an associated enterprise an “abnormal or benevolent advantage”, i.e., an enrichment which is not justified under normal market conditions, are subject to the minimum corporate tax basis rule pursuant to Art. 79 and (former) 207 (now Art. 206/3) of the income tax code, under which the tax basis may not be offset, for the amount of the advantage received, against the tax attributes or the current-year loss.

  This rule leads to an effective tax cash-out for Belgian taxpayers only if and to the extent their final corporate tax basis is lower than the amount of the advantage they received.

  In the case leading to the decision of 25 November 2022, one of the two questions the Supreme Court had to tackle was whether this minimum corporate tax basis rule also applies when the associated enterprise granting the advantage is not subject to tax in Belgium.

  From an economic standpoint, this question is worth asking, as in the case of an advantage granted by an associated enterprise which is tax resident abroad, the Belgian State is not facing any potential loss of tax revenue (the loss inherent to the grant of the advantage is not fiscally considered in Belgium), and the application of the minimum tax basis rule could in most cases trigger a double economic taxation (i.e., taxation of the advantage granted in the jurisdiction of the grantor while Belgian recipient is subject to the minimum corporate tax basis rule on the same amount).

  The Supreme Court did not follow this economic reasoning and stuck to a strict reading of the relevant Belgian tax provisions, from which it appears that the location of the tax residence of the foreign associated enterprise granting the advantage is not expressly designated as a criterion to determine the scope of application of the rule.

  Interestingly, the Supreme Court confirms in its judgment the view of the Minister of Finance as it relates to the compatibility of the minimum corporate tax basis rule with the downward adjustment mechanism provided by Art. 185, section 2b of the income tax code, under which Belgian taxpayers enjoy a corresponding downward profit adjustment for corporate tax purposes for the profits effectively included in the tax basis of the foreign associated enterprise, provided the latter is tax resident of a country with which Belgium has concluded a double tax treaty.

  According to the Minister’s view, in the event of a Belgian taxpayer being entitled to enjoy a downward adjustment of his/her tax basis for the amount of the abnormal of benevolent advantage he/she received because the individual successfully demonstrated that this advantage has already been subject to tax in a Treaty jurisdiction, then the minimum corporate tax basis rule, while still being virtually applicable, has no income on which to be effectively applied since there is no received advantage in the Belgian corporate tax basis anymore. Hence, there is no risk of potential double economic taxation.

  From this judgment, the view of the Court on the application of the minimum corporate tax basis rule is crystal clear: Belgian corporate taxpayers are subject to it on the abnormal or benevolent advantages they received from abroad. The only way out for them is to demonstrate that their corporate tax basis must be decreased by the amount of the abnormal or benevolent advantage in accordance with Art. 185, section 2b of the income tax code, on the motive that this advantage has already been included in the tax basis of the associated enterprise located in a country with which Belgium has concluded a double tax treaty. It follows that the mere statement from the Belgian taxpayer that the advantage received will be taxed in the hands of the associated enterprise, with no solid evidence, is not enough to rule out the application of the minimum corporate tax basis rule.

• Failing to report in the corporate income tax return a received abnormal or benevolent advantage from a foreign associated enterprise exposes Belgian taxpayers to the application of the special statute of limitation provided by Art. 358 of the income tax code

The other question the Supreme Court had to tackle was whether Belgian tax authorities may use the special statute of limitation laid down by Art. 358 of the income tax code for taxpayers who have not separately reported the amount of their received abnormal or benevolent advantage in their tax return.

In a nutshell, the special statute of limitation set out in Art. 358 of the income tax code allows the Belgian tax authorities to establish an additional tax assessment, irrespective of whether or not the ordinary statute of limitations (until recently, respectively 3 and 7 years) have expired, following an audit or an investigation that reveals unreported taxable income by a Belgian taxpayer in the 5 years prior to the year in which the results of that audit or investigation were brought to the attention of the Belgian tax authorities. The tax authorities then have 24 months from the notification of the audit or investigation findings to formally establish an additional assessment.

As a received abnormal or benevolent advantage by a Belgian taxpayer is per se included in the amount of its corporate tax basis, one may support that the special statute of limitation set out in Art. 358 of the income tax code is not applicable since there is no question of a non-reported taxable income for that kind of income.

This is not the stance adopted by the Supreme Court in its judgment. According to the Court, the abnormal or benevolent advantage cannot be considered as a properly reported taxable income for special statute of limitation purposes when the amount of this advantage is not reported under the ad-hoc boxes of the annual corporate tax return which expressly relate to the received abnormal or benevolent advantages and to the application of the minimum corporate tax basis rule. Hence, having the amount of the advantage included in the corporate tax basis, without being mentioned separately in the corporate tax return under the ad-hoc boxes, is not enough to rule out the special statute of limitation set out in Art. 358 of the income tax code.

Therefore, it follows from this judgment that when taxpayers do not report their abnormal or benevolent advantages under the proper ad-hoc boxes of its annual tax return, they expose themselves to the risk of the application of the special statute of limitation organised by Art. 358 of the income tax code.