Application of the notorious tax deduction and compensation ban: can courts temper the consequences?
Since the implementation of the former article 207, paragraph 7 ITC, taxpayers are systematically confronted with a deduction and compensation ban when the Administration issues an ex officio assessment or sends a notice of amendment imposing a tax increase of at least 10%. However, its strict application often leads to disproportionate results. With the first judicial decisions appearing, it is becoming clear that the Administration is sometimes using a sledgehammer to crack a nut.
The deduction and compensation ban
In order to encourage companies to fulfil their obligations to declare correctly and to achieve greater tax uniformity, a deduction and compensation ban was created in (old) article 207, paragraph 7 ITC (now article 206/3 ITC).
This prohibition implies that no tax deduction (i.e. patent income deduction, (transferred) innovation income deduction, (transferred) investment deduction, group contribution deduction, (transferred) risk capital deduction, (transferred) dividend received deduction (DRD), gift deduction and (transferred) losses) may be made on the part of the result that is the subject of an ex officio assessment or a notice of amendment. Only the DRD from the taxable period is not targeted by this measure and as such it can still be deducted from the increased taxable base. The only condition for applying the deduction and compensation ban is an effective tax increase of at least 10%.
It is clear from the parliamentary preparations and two administrative circulars that the measure is not enforced when a 10% tax increase is in force but (i) without effective application and (ii) when, moreover, it is a first infringement.
The application of a tax increase as an administrative sanction is regulated by article 444 ITC. As set out below, the third paragraph of this legal provision causes a considerable amount of discussions in practice. More specifically, the Administration may indeed waive the 10% minimum in the absence of bad faith. The decision to waive this tax increase results in a non-application of the deduction and compensation ban.
The introduction of the deduction and compensation ban could since the entry into force count on few support from the legal doctrine. Now that the first judicial decisions are also appearing, it makes sense to determine the position of taxpayers with a critical look when confronted with an application of (old) article 207, paragraph 7 of the ITC.
Principles of legality and equality
Linking the deduction and compensation ban to an effective tax increase of at least 10% spontaneously raises a number of comments. Since this 10% minimum increase can be waived for lack of bad faith, the Administration has a far-reaching discretionary power, moreover since no legal limitation is provided in this respect and only summary (non-binding) criteria are included in the administrative comments. Consequently, the taxpayer is completely dependent on the goodwill of the official in charge. Namely, the official can decide completely autonomously to impose a tax increase or he can decide to impose an administrative fine instead, as a result of which (old) article 207, paragraph 7 of the ITC cannot apply.
This discretionary power makes it plausible that two constitutional principles are violated. First, there is a tension with the principle of legality, as contained in article 170, §1 Constitution. This principle implies that every taxpayer must be able to determine, with a minimum level of foreseeability, the tax system that will be applied. In this regard, the Constitutional Court has already aforementioned that the principle of legality requires that a tax law must contain precise, unambiguous and clear criteria for determining who is liable to pay tax and for what amount. Since the application of the deduction and compensation ban can be regarded to a completely autonomous decision by the Administration, (old) article 207, paragraph 7 ITC does not meet the scope covered by the principle of legality.
In addition, (old) article 207, paragraph 7 ITC arguably constitutes a violation of the principle of equality, as contained in articles 10, 11 and 172 Constitution. The principle of equality guarantees that equal situations are treated equally where different situations require different treatment. Unsurprisingly, the aforementioned discretionary power could also lead to a possible violation here. For example, in case two identical taxpayers in the same situation receive a notice of amendment, it cannot be excluded that only one of them will be confronted with a 10% tax increase and the corresponding application of (old) article 207, paragraph 7 ITC. Again, the dependence on the territorially competent taxing authority or even the competent taxing official creates a possible inequality between equal taxpayers.
Positive turn in jurisprudence
Meanwhile, there are known judicial decisions where the taxpayer succeeded in avoiding the application of the deduction and compensation ban.
For example, on 13 September 2022, the court of first instance East Flanders, Ghent division judged in favour of the taxpayer by reducing the tax increase from 10% to 9.9%. In this regard, the court stated that the application of the tax increase and (old) article 207, paragraph 7 ITC cannot be considered completely seperate. Although a 10% tax increase may thus be proportionate to the infringement committed, the “far-reaching financial side effects” for the taxpayer must be taken into account.
On 14 March 2023, the court of first instance Liège, Liège division also judged favourably. The court qualified the measure from (old) article 207, paragraph 7 ITC as being a sanction of a criminal nature. After all, a repressive and preventive objective is clearly pursued. The aim is to discourage the relevant behaviour of taxpayers and to make it forcefully clear that it is absolutely necessary to fulfil the obligations to declare correctly. Consequently, the court may subject an administrative sanction of a criminal nature within the meaning of article 6 ECHR with full jurisdiction to a proportionality test. Considering that the tax assessed in the submitted dispute exceeded the damage suffered by the Administration, the court decided that the sanction imposed was completely disproportionate to the infringement committed. Thus, it was decided not to proceed with the application of the deduction and compensation ban.
Conclusion
We note that there are already a number of positive precedents in jurisprudence, where the courts reduce the 10% tax increase because of its disproportionality to the infringement committed. From this perspective, an attempt can be made to avert the application of article 207, paragraph 7 ITC and thus avoid a taxpayer facing a financial drain. Without application of (old) article 207, paragraph 7 ITC, all tax deductions, as well as compensation with the loss of the taxable period, can namely be made on the increased tax base.
For the taxpayer, it may pay to go to court. Given the already existing favourable jurisprudence, the chances of a positive decision are plausible. Unlike the discretionary power of the Administration to impose or not impose a 10% tax increase, the court with full jurisdiction can proceed to mitigate the financial side effects associated with the application of deduction and compensation ban.
Evert Moonen and Mathias De Schrijver
De Langhe Attorneys
