Tax avoidance is permissible
Belgium has always been a jurisdiction that cherishes the rule of law. This principle is clearly laid down in the Constitution (article 170). It implies very concretely that no taxation can be imposed other than when clearly provided for by statute. If there is doubt as to whether a tax charge can be levied, the principle of “in dubio contra fiscum” means that the statute is interpreted against the tax administration. This principle is derived from the so-called ‘legality principle’.
This legality principle leads to a very important distinction between tax evasion, on the one hand, and tax avoidance, on the other. The former is an intentional breach of the law, which is prohibited and entails (punishable) tax fraud, whereas the latter is permissible: it is also intentional, but does not entail breach of the law. This distinction is often encapsulated as the free choice of the least taxed route. If a taxpayer does not break any law and respects all the consequences of his (legal) acts, he is entitled to choose the least taxed route. This principle was first accepted by the Belgian Supreme Court in its famous, landmark “Brepols” decision in 1961.
It goes without saying that this has not been to the liking of many a tax inspector. They have had to prove actual tax evasion (and, hence, breach of the law) to successfully challenge taxpayers who have been too “creative” in their eyes. As this has often been very hard to do, parliament has come to their aid by introducing general and specific anti-abuse provisions over the years.
General anti-abuse of law provision: the old school
In the field of estate and inheritance planning as in other areas, there is a general anti-abuse provision. It was introduced by section 51 of the Act of March 30th, 1994 (Official Gazette, March 31st, 1994). This section in fact inserted the anti-abuse provision into section 106 of the Inheritance Tax Code. For gift taxes (amongst others), the same act introduced an anti-abuse provision into the Stamp Duty Code (section 18, §2, Stamp Duty Code).
However, as the anti-abuse provision expressly pointed to “legitimate financial or economic needs” it quickly became clear that it could not be applied in the field of estate and inheritance planning. Estate and inheritance planning is never inspired by “legitimate financial or economic needs”. It is always inspired by private goals and motives and never by economic ones. This view was confirmed by the Minister of Finance in parliament (Vr. & Antw, Kamer, 1995-1996, 6018) and accepted by the majority of legal scholars. In the field, tax inspectors themselves also did not apply the provision, either.
Hence, it was generally accepted that the general anti-abuse provision remained idle in the field of estate planning. However, this did not mean that the tax administration was impotent to act against excessively creative planners. Via the doctrine of simulation (sham doctrine) and numerous fictitious legacies, many tax avoidance schemes have been challenged.
General anti-abuse of law provision: the new school
Since June 1st, 2012, much has changed in this respect. By the Act of March 29th, 2012, (Official Gazette April 6th, 2012) a brand-new anti-abuse provision has been introduced into Belgian tax law. This provision is explicitly declared to be applicable in the field of estate planning, too. Meanwhile, two administrative circulars have been published. The first circular did not have the effect that scholars had expected (Circular no. 2/2012 of May 4th, 2012). It was too general and even further increased confusion amongst scholars, the press and taxpayers. Especially because no anti-abuse provision had ever applied in the field of estate planning, the confusion soared to unseen heights. The responsible minister and secretary of state therefore decided that the tax administration should issue a circular clarifying which estate-planning techniques fall under the anti-abuse provision and which do not. This exercise led to the Circular of July 19th, 2012 (Circular no. 8/2012).
Estate-planning techniques that in principle remain in the safe zone
This second circular lists a number of techniques that should remain outside the scope of the anti-abuse provision. However, it does not say that these techniques are always in the safe zone. From a “stand alone” perspective and in “theory”, the following techniques do not in and of themselves constitute an “abuse of law”. If they are combined with other legal acts or applied in the wrong circumstances, a tax inspector could still try to apply the provision. The techniques in question are especially the following:
Manual gift (from hand to hand), bank gift, donations before a foreign (e.g. Dutch, Swiss, Italian) notary public.
A gift of movable goods (portfolio investment, intangible assets, money, gold, antiques, art, etc.) is not always subject to gift tax in Belgium. This is only the case if the gift is “registered”. Upon the donation being formally registered, gift tax is levied. If you avoid registration, however, no gift tax is due on the donation. If a gift is made before a Belgian notary public, it is always registered. Belgian notarial deeds must be registered. This is not the case for foreign notarial deeds. Nor is registration compulsory for manual gifts etc. That way, gift tax is avoided legally. Furthermore, inheritance tax is avoided if the donor survives his gift by three years. Should the donor pass away within the three-year period without the gift being registered, the gift is regarded as a fictitious legacy, and is therefore taxable.
A phased donation of Belgian immovable property.
A gift of Belgian immovable property must always be registered. Hence, gift taxes always apply. Contrary to the low fixed rates for gifts of movable property, the gift taxes for immovable property are double progressive. This means that the applicable rates (and therefore the tax due) depend on the degree of kinship and the value of the property gifted. Making several subsequent gifts can break this progressivity and thus lower the overall tax burden. To counter this planning idea, the law provides that, to determine the tax rates applicable to a donation, gifts made during a three-year period should be aggregated. Hence, in practice, gifts of Belgian real estate are often made every three years. The administration has confirmed that this does not constitute abuse.
Making a gift under certain terms and conditions.
To avoid inheritance taxes, you should make lifetime gifts. It goes without saying that, whenever property is gifted, ownership passes to the donee. This is sometimes not in the interests of the donor, or indeed the donee. Hence terms and conditions are agreed between the parties (e.g. gift with reservation of usufruct, gift subject to certain burdens, gift with conditions subsequent). The circular confirms that this does not constitute abuse.
Wills that are optimized from a tax perspective.
E.g. a will in which the testator leaves more to a legatee that is entitled to a lower tax rate (e.g. the inheritance tax exemption for the family home inherited by the spouse in Flanders), a generation-skipping will or a dual legacy will.
Estate-planning techniques that are black-listed
The above estate-planning schemes should remain outside the scope of the new provision; however, this is not the case for the following schemes. It should be stressed that this is only the opinion of the tax administration. According to many scholars, this view is highly debatable. The schemes that are under attack are:
- Split-purchase scheme: immovable property is bought from a third party by the parents and children. The children buy the bare ownership and the parents buy the usufruct. The children purchase the bare ownership with funds that the parents donated previously. Upon the death of the parents, the usufruct accrues tax free to the children’s bare ownership.
- Long-lease schemes to lower the stamp duties due on the purchase of Belgian real estate.
- Certain tax planning schemes within the framework of a matrimonial property contract (e.g. death-bed provision, contribution of assets into the community of assets followed by donation of that property, taking assets out of the community property and subsequently gifting it between the spouses).
- A will whereby the testator requires his heirs to acknowledge being liable in terms of a claim of which the heirs children are the creditors.
Circular fails in its aim to clarify the scope
The circular itself says that the fact that a technique is listed is not decisive as to whether or not it constitutes tax abuse. This should be evaluated case by case as the answer to the question depends on the specific facts and circumstances. Furthermore, the circular says that, even if a transaction is or seems to be an abusive tax-avoidance scheme, the taxpayer may still justify it with other, non-tax motives.
Hence the question arises as to what the added value of the circular is. It was intended to clarify things for taxpayers. This objective is clearly not reached. On the contrary, legal insecurity has even increased with the circular.
To actually clarify the scope of the new anti-abuse provision, the tax administration should have confirmed that, in each specific case, the following decision tree should be followed. This decision tree is based on the clear wording of the legal provision introducing the anti-abuse provision. Furthermore, the administration should have unambiguously confirmed who bears what burden of proof.
- Does the situation concern a legal act?Only if the situation concerns a legal act can the anti-abuse provision apply. The administration bears the burden of proving this.
- Subsequently, the administration should prove that the taxpayer has placed himself outside the scope of a taxable situation or within the scope of an exemption/relief provision.This question has an objective and a subjective element. The objective element is self-evident. The subjective element is more difficult, however. The administration should prove (not only say) that the conduct of the taxpayer (circumvention of a provision/claim of a tax advantage) can essentially be explained by the aim of attaining a tax advantage. Factors that can be relevant in this perspective include the speed of the transactions or artificial transactions.
- To keep the anti-abuse provision in check with the legality principle, the administration should prove that the taxpayer’s conduct runs counter to the clear objective of the tax provision that is thereby circumvented. The anti-abuse provision only tackles abusive conduct, meaning conduct whereby the letter of the law is adhered to but its objective frustrated.Before being able to prove that the taxpayer has acted contrary to the law’s objective, the administration must prove that objective. This is not a simple task, as only a few tax law provisions have a “clear” objective. This objective should be deduced from the law itself and the broader legal context (legislative history). If the objective of the law is unclear, ambiguous or simply cannot be found, the anti-abuse provision cannot be applied.
- Once this proof is adduced by the administration, tax abuse is established. The taxpayer can nonetheless produce counter-evidence. This will relate to motives other than mere tax avoidance. They must be real and will be business, non-business, non-financial or even purely private motives.
- If the taxpayer fails in this counterproof, the tax administration may recharacterise the legal act. The taxpayer will be brought into a position that is in accordance with the objective of the tax provision that he is deemed to have abused (through circumvention or improperly claiming a tax exemption/benefit).
Read this way, the scope of the new anti-abuse provision should be very limited. However, in the next few years, the tax administration can be expected to try to apply it to many (if not all) estate and inheritance planning schemes. Taxpayers and practitioners should not panic, however. The scope of the new provision is very clear, namely to tackle wholly artificial arrangements with the sole motive of tax avoidance and lacking any other justification. In other words “a deal done by very smart people that, absent tax considerations, would be very stupid”.
Anton van Zantbeek and Ann Maelfait
Attorneys at Rivus