Private capital gains on shares only taxable on net amount

Private capital gains on shares are taxable when realised outside the normal management of private assets. In this case, these capital gains are taxed at a rate of 33% (plus municipal taxes).

The Constitutional Court has put an end to the debate on whether these capital gains are taxable only on their net or gross amount.

Problem since unclear change in law

Before 2008, capital gains on shares and other profits or gains arising from abnormal management of private assets were defined as miscellaneous income taxable at their net amount, i.e. after deduction of expenses (and losses suffered in one of the five previous taxable periods).

In 2008, a new definition of capital gains on shares from abnormal management of private assets was  introduced, namely that they must be outside the scope of the professional activity.  However, that change in the law caused confusion as the new description no longer referred to a possibility  to deduct expenses and losses. Since then, the tax deduction of expenses and losses on realised private capital gains on shares has been denied with the result that they are taxed gross as opposed to profits and gains that are taxed net. This loophole created a difference in treatment between capital gains on shares from abnormal management and profits and gains from abnormal management.

Constitutional Court: violation of the principle of equality

The principle of equality in taxation means, in principle, that all taxpayers in the same situation should be taxed in the same way and that taxpayers who are not in the same situation should also not be taxed in the same way, subject to proper justification.

On 21 September 2023, the Constitutional Court ruled that there was indeed a difference in tax treatment between capital gains on shares and those of other profits and gains from abnormal management. Consequently, the law violated the principle of equality insofar as there was no possibility for cost deduction.

The Court argued that there could indeed be costs associated with realising capital gains on shares (e.g. costs of advisers and attorneys incurred in the context of selling the shares), despite the established unconstitutionality.

The Court confirmed that the legal provision providing for a cost deduction for profits and gains from abnormal management could also be applied to private capital gains on shares that are part of abnormal management.

Consequences of the judgment

This judgment has a clear impact in a recent judgment of the Court of First Instance Luxembourg, Marche-en-Famenne division where it was ruled that the waiver of a debt claim in the context of a share transaction constituted a deductible expense. 

In addition, the Court’s judgment also has tax implications. Indeed, it can be regarded as a new fact on the basis of which a cost deduction on historical capital gains can still be claimed in the context of an ex officio exemption. This is subject to a five-year time limit. This means that those who were taxed on their private capital gains on shares outside the normal management of private assets for income years 2021 and onwards can still obtain an exemption in the amount of the overpaid tax resulting from the non-deduction of costs or the non-deduction of losses.

Conclusion

The Constitutional Court’s decision creates clarity. Private capital gains on shares are taxable only on their net amount. This means that the deduction of expenses must be accepted for tax purposes. However, the Court did not rule on the deduction of previous losses. Nevertheless, it seems somewhat logical to interpret this ruling in the same way for losses from share transactions that frame from abnormal management of the previous five years based on a violation of the principle of equality.

Taxes on private capital gains can thus still be exempted from income year 2021.  For this earliest income year, the deadline expires on 31 December 2025.

Lan Yi Verbauwhede and Evert Moonen
De Langhe Attorneys