Some recent case law gives cause for concern regarding the tax deductibility in Belgium of expenses relating to put or call options on shares. This article will first briefly discuss the applicable principles and provisions as well as the case law. Subsequently, it will establish that the legal grounds of this case law are contestable and that it appears possible to circumvent this case law easily, so that expenses' relation to options on shares should still be tax deductible in Belgium. This article will not discuss the particular cases in which there can arise, in Belgium, such expenses with respect to options on shares.
According to the Belgian Income Tax Code, arm's-length professional expenses are tax deductible if they are borne by the taxpayer in the relevant tax year to acquire or maintain taxable income and if their genuineness is established by means of pieces of evidence. The terms "made or incurred with the view to acquire or preserve taxable income" mean that there should be a genuine and necessary link between the expenditures made or incurred and the business activity carried out. Stated otherwise, there must be a causal relationship. The latter is, in principle, always present in the case of corporate taxpayers, as all profits and costs have for a company necessarily a professional character. Consequently, if the options were acquired with a view to acquiring or preserving profit, the relating expenses should be tax deductible.
However, in a ruling dated April 28 1999, the Liège Court of Appeal denied the tax deductibility of expenses relating to put and call options on the basis that the company concerned could not establish that these transactions were necessary to accomplish its object as defined in its articles of association. This ruling was confirmed by the Court de Cassation on January 18 2001. The same Court of Appeal rendered a ruling on September 22 1999, in which it denied the tax deductibility of such expenses on the basis of a statutory provision stipulating that costs cannot be deducted to the extent that they exceed the needs in an unreasonable way.
Other Courts of Appeal have recently joined this case law. In a ruling dated May 17 2001, the Brussels Court of Appeal denied the tax deductibility of costs relating to put and calls on shares, stating that these transactions on the stock exchange had no link whatsoever with the object of the company as defined in its articles of association. The Mons Court of Appeal rendered a ruling on October 9 2001, that is consistent with this.
The legal grounds of this case law are highly disputable for several reasons. As mentioned above, expenses incurred by a company should be tax deductible if they are made with a view to preserving or acquiring taxable profits. Irrespective of the object of the company (that is, operating company or holding company), costs relating to put and calls should therefore be tax deductible if the company can establish that the costs were acquired with a view to acquiring income.
Furthermore, this case law grants the Tax Administration the right to assess the opportunity of an expense in the light of the articles of association. However, it is generally accepted that the Tax Administration cannot assess the opportunity of a cost made by a company.
Taking this into consideration, it is clear that there exist good arguments to defend the position that such costs should, notwithstanding this case law, still be tax deductible. However, in order to avoid discussions with the Tax Administration and lengthy proceedings, it is highly recommended to check the articles of association before entering into put and call transactions (or similar transactions). Indeed, the articles of association should explicitly mention that such transactions are part of the object of the company.
It must be noted that the case law indicates that general clauses, such as: "The company may in general carry out all commercial, industrial, financial, movable and immovable transactions which directly or indirectly relate to its purpose or which could partially or entirely facilitate the achievement thereof," are not sufficient in this respect. More specific clauses must be inserted. Finally, it can be noted that the articles of association of a Belgian company can only be amended by an extraordinary shareholders' meeting held before a notary public.
Enrico Schoonvliet and Marc Dhaene
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