Following the adoption of the new Code on Companies and Associations in 2019, the Belgian tax legislator has included in the Income Tax Code autonomous, definitions for the merger, the de-merger and the contribution of a business line. The draft tax law currently under discussion before Belgian Parliament (Project of law of 19 October 2023 containing miscellaneous tax provisions, DOC 55 3607/001) aims at extending these tax definitions to cover the new forms of mergers and de-mergers introduced by the EU Mobility Directive.
On 16 June 2023, the law transposing the modifications required by the “EU mobility Directive” (Directive (EU) 2019/2121) into the Belgian Code on Companies and Associations (“Belgian Mobility Law”) entered into force.
One of these modifications consists of offering groups of companies the possibility to carry out their restructuring operations under three new forms:
The above-mentioned new forms of restructuring operations are currently not in the scope of the tax definitions of the merger and de-merger as set out at Article 2 of the Belgian Income Tax Code (“BITC”). The draft law of 19 October 2023, containing miscellaneous tax provisions (DOC 55 3607/001), intends to remedy this by amending the tax definitions accordingly.
Provided this (draft) law is approved by the Belgian parliament and published in the Belgian Gazette still by the end of the current year, the expected date of entry into force is 16 June 2023, to align with the application of the Belgian Mobility Law provisions.
The tax-neutral regime only applies when the restructuring operation meets the tax definition of merger, de-merger, or contribution of a business line. Hence, as it is, neither the sister-sister merger, the new forms of partial de-merger, nor the cross-border de-merger by separation is eligible to the tax-neutral regime, as they have features that exclude them from the current tax definitions (respectively, the absence of issuance of new shares, the issuance of new shares by the de-merged company and the attribution of the new shares in the recipient company to the de-merged company itself).
When the tax-neutral regime does not apply, the restructuring operation is to be considered as a liquidation for corporate income tax purposes. Leading to, among others, the (Belgian resident) (de-)merged company being subject to Belgian corporate income tax (ordinary rate: 25%) on the latent capital gains and tax-exempt reserves related to the net-asset transferred.
Once the tax definition of the de-merger is amended accordingly, the main advantage of the cross-border de-merger by separation is the possibility for the companies involved to enjoy the Belgian tax-neutral regime irrespective of whether the assets and liabilities contributed qualify a “business line” in accordance with the definition set out in the BITC.
Since the de-merger by separation is only possible in an EU cross-border context, the question arises whether this new form of tax-neutral demerger would trigger (reverse) discrimination, as in some cases a cross-border restructuring will be treated more favourably tax wise than the same restructuring but in a solely domestic context.
For example, let us assume that a Belgian resident company contemplates contributing part of its real estate assets located in Belgium and the liabilities related thereto to another company, in exchange for shares in the latter company. The assets and liabilities that will be transferred do not form a “business line” from a tax standpoint.
If the recipient company is an EU-resident company, the operation can be carried out through a de-merger by separation. The Belgian resident company will then benefit from the tax-neutral regime and will not be subject to corporate income tax on the latent capital gains pertaining to the real estate transferred (provided the assets will be maintained by the recipient company in a Belgian permanent establishment, which is obviously expected in this example since they consist of real estate assets located in Belgium).
On the contrary, should the recipient company be a Belgian resident, the envisaged operation could only be carried out through a traditional contribution of assets. Since the assets and liabilities being transferred do not meet the tax definition of a “business line”, it will prevent the Belgian resident company from enjoying the tax-neutral regime and the latter will thus be subject to corporate income tax on the latent capital gains.
This potential issue must be further analysed to determine, among others, whether the two situations have sufficient similarities to be considered comparable enough for a non-discrimination test (as a de-merger also implies the transfer of a portion of the paid-up capital and reserves of the de-merged company, which is not (by principle) the case upon a traditional contribution of assets), whether there could have an objective and reasonable justification to this difference in treatment, and what would be the appropriate legal remedy (for instance: extending the de-merger by separation to purely domestic operations).
By contrast, it is worth pointing out that the “business line” requirement seems to remain relevant for the de-merger by separation as far as Belgian registration duties are concerned.
For instance, in the example above, since the transfer of real estate assets goes along with a transfer of liabilities, a portion of the fair-market value of these properties transferred will be subject to the Belgian registration duties (standard rate: 12.5% in Wallonia and Brussels and 12% in Flanders) in application of the rules applicable to “mixed” contributions.
It is difficult for a tax practitioner not to see the potential tax issues that a remuneration of a partial demerger by the issuance of new shares by the de-merged company itself could trigger in some cases.
Under arm’s length conditions, it seems indeed not economically grounded that the company transferring the assets is also the one who takes care of providing the remuneration related thereto (i.e., the issuance of new shares).
While at a first sight this should not be an issue with respect to the companies involved in the de-merger operation itself, it could be another story at shareholder’s level. In some cases, the question could arise as to whether the shareholders of the de-merged company granted an abnormal or benevolent advantage to the shareholders of the recipient company by accepting to be remunerated with shares issued by the de-merged company, the value of which has been decreased upon the operation. In that scenario, the shareholders of the recipient company would benefit from an increase of the value of their respective shareholding without providing any compensation, along with the expectation to receive more dividends going forward (in case where the net assets contributed generate additional profits).
The draft tax law currently under discussion is certainly welcome as it will give full effect tax wise to the new restructuring forms introduced by the Belgian Mobility Law. That being said, the legislator has done the bare minimum here by simply broadening the scope of the current tax definitions, which will most likely not be enough to cover all the tax implications that such new forms of restructuring will trigger in practice.
Finally, it is worth pointing out that the draft tax law does not tackle the other aspects introduced by the Belgian Mobility Law, as for instance, the new cash-out right given to shareholders who are against a cross-border restructuring operation. In the absence of an ad-hoc tax regime, the amount received by the dissenting shareholders in exchange for the cancellation of their shares could potentially be considered in their hands as a taxable deemed dividend (acquisition bonus) for the portion exceeding the paid-up capital, which would obviously go against the tax-neutral regime’s rationale. Thus, it remains to be seen whether the Belgian tax legislator will address these other aspects in the future.