Retroactivity for restructurings: tax retroactivity longer than seven months possible?

In a previous newsletter, we already mentioned that the effective date of a restructuring (e.g. demerger or merger) can be set before the date of the decision to restructure itself. Due to the introduction of the new company law, this retroactivity can be up to one year on the accounting level, if the annual accounts of the previous financial year have already been approved. If, on the other hand, the annual accounts for the previous financial year have not been approved yet, retroactive accounting is possible up to the first day of this previous financial year. An answer given by the Minister of Finance to a parliamentary question on this subject does not provide sufficient clarity.

1 Accounting retroactivity

Since the entry into force of the new company law, the limitation of the accounting retroactivity in the case of restructurings has been determined by law.  The Companies and Associations Code (hereinafter: CAC) stipulates that the date as of which the operations of the company to be taken over are deemed, for accounting purposes, to have been carried out on behalf of the acquiring company, may not be set earlier than on the first day after the closing of the financial year for which the annual accounts of the companies involved in the operation have already been approved.

If the annual accounts for the previous financial year have already been approved, an accounting retroactivity is only possible until the first day of the financial year in which the merger takes place.  The accounting retroactivity can in this case not exceed one year.  

If, on the other hand, the annual accounts of the previous financial year have not yet been approved, an accounting retroactivity up to the first day of the previous financial year (for which no annual accounts have yet been approved) is allowed.  

Suppose two companies decide to merge on 1 November 2022.  The annual accounts of both companies for financial year 2021 have already been approved.  The accounting retroactivity can already take effect on 1 January 2022, as a result of which all actions taken by the absorbed company as from that date for accounting purposes will be attributed to the acquiring company. 

As long as the annual accounts of both companies for the financial year 2021 have not yet been approved by the general meeting in 2022, the accounting retroactivity can take place until 1 January 2021.

2 Tax retroactivity

However, the Income Tax Code (hereinafter: ITC) does not provide a legally enshrined tax retroactivity clause in case of restructurings.  However, the tax authorities also accept retroactivity for tax purposes as far as the retroactivity corresponds to:

• the reality and relates to a short period of time;  and 
• it does not interfere with the correct application of the tax law. 

The ruling practice shows that a “short period” is in principle seven months.  In exceptional circumstances this period may be longer. 

3 Answer to a parliamentary question creates ‘clarity’

Although the legislator omitted to include a provision on retroactivity in the ITC, we already pointed out in our earlier newsletter the case law of the Belgian Supreme Court of Cassation which states that tax law follows accounting law, unless the tax law explicitly differs from it.  From this point of view, the provisions of the CAC on retroactivity can also be applied in tax cases. 

Following a parliamentary question, they wished to have this position confirmed by the Minister of Finance.  The question reads as follows: 

“Can you confirm that the provision in the CAC concerning the accounting retroactivity of up to one year in the event of a restructuring of the company can also be extended to the tax retroactivity?  If so, on what basis?  If not, why not?  Is a change in the law necessary here?”

The Minister of Finance replied as follows: 

“From now on, the Companies and Associations Code (CAC) stipulates that the date as of which the operations of the company or companies to be acquired are deemed, for accounting purposes, to have been carried out on behalf of the acquiring company, which must be mentioned in the merger or demerger proposal, may not be set earlier than on the first day following the closing of the financial year for which the annual accounts of the companies involved in the operation have already been approved. 

First of all, it should be noted that the retroactivity provided for in the relevant provisions of the CAC only concerns an accounting retroactivity, not a retroactivity under contract law. These provisions do not imply a change in tax legislation either.

The position of the tax authorities as regards the retroactivity of company deeds in general can be summarised as follows: the retroactivity of a company deed is not opposable to the tax authorities and a retroactivity clause in a company deed cannot have the effect of evading the provisions of the tax laws, which are of public order. It is only possible to derogate from that principle if the retroactivity clause specified in the deed corresponds to the reality, concerns a short period and does not prevent the correct application of tax laws. Specifically with regard to the retroactivity clause in a merger or demerger proposal, the administration has until now not considered a period of more than seven months in normal circumstances to be a short period.

The aforementioned provisions of the CAC only concern an accounting retroactivity in the case of a merger or demerger and define the maximum period over which the accounting retroactivity can extend.  The principle that the tax authorities only take account of retroactivity in company deeds on condition that it corresponds to the reality and that this accounting retroactivity does not affect the application of the tax law which is of public order remains unchanged.”

In his reply, the Minister first discusses the legal provision that stipulates the accounting retroactivity in the CAC.  He then goes on to explain the aforementioned position of the tax authorities.  Finally, the Minister mentions that the tax authorities can only take account of retroactivity for restructurings if it is in line with the reality and as far as the accounting retroactivity does not infringe the tax law in force.  It is striking that the Minister no longer mentions the seven-month period.  Amongst tax specialists, this fact is not interpreted uniformly.  One school of thought is of the opinion that a legal fiction in private law, in this case the reinstatement of taxable facts in the past, cannot have any effect in tax matters, with the exception of the explicit administrative tolerance of seven months.  Another purport believes that the Minister, by no longer mentioning the seven-month term, has implicitly distanced himself from it.

4 Analysis

The CAC clarifies the accounting retroactivity in restructurings.  However, this accounting retroactivity does not affect the application of the tax law which is of public order.  Despite the provisions of the CAC and the aforementioned answer of the Minister of Finance to the parliamentary question, it is still advisable to exercise some caution concerning fiscal retroactivity in the case of restructuring.

For years, the tax authorities have been opposed to tax retroactivity extending beyond the date of closure of the previous financial year, regardless of whether the annual accounts have been approved.  This is particularly the case for merging companies where one company has taxable profits and the other company has tax deductible losses (or other tax deductible components) in different financial years.  Obviously, no problem arises when both companies are profitable (in those respective financial years) / have no tax deductible components.  In the latter case, however, there is no need to extend the tax retroactivity beyond the date of closing the previous financial year. 

Consequently, in our opinion, in cases where the companies involved in the merger are not all profitable, it is still appropriate that the tax retroactivity does not extend beyond the date of closing the previous financial year.  If one nevertheless wishes to opt for a tax retroactivity extending beyond the closing date of the previous financial year, a ruling request can be submitted to the Tax Ruling Service in order to avoid a possible later dispute with the tax authorities.

5 Conclusion

We still believe that the maximum period of retroactivity for restructurings in the tax area can possibly be equated with the accounting retroactivity, which can at most go back to the first day of the financial year in which the merger takes place if the annual accounts of the previous financial year have already been approved.  

However, from the point of view of legal certainty in tax cases, it is, in our opinion, appropriate in certain cases to (e.g. a situation of profit and loss in different merging companies): 

• opt for a tax retroactivity that does not extend beyond the closing date of the previous financial year;  or 
• submit a ruling request to the Tax Ruling Service .

Evert Moonen – Eline Depaepe
De Langhe Attorneys