Tax abuse: one for all, all for one!

Tax abuse often results from a chain of legal acts. Recently, the Court of Cassation was asked whether it is a requirement that the taxpayer formally participates in each part of this chain.

Principle

A tax abuse occurs when a taxpayer, by committing a legal act or a set of legal acts (creating the same transaction) contrary to the objective of a tax provision, either (i) places himself outside the scope of that tax provision or (ii) places himself within the scope of that tax provision, thereby claiming a tax advantage. 

New ruling by the Court of Cassation

The Court of Cassation addressed the question of whether it is required that the taxpayer personally performed all the legal acts, which are part of the ‘set of legal acts’, in order to conclude on the presence of tax abuse. In the legal doctrine, until the cassation judgment, several interpretations were available. This was due to the different wording used in the French- and Dutch-language versions of the anti-abuse provision. 

The Court of Cassation recently put an end to this ambiguity by ruling that it is not required that the taxpayer formally participates in all legal transactions. It is sufficient that there is a unity of intention/purpose between the different legal acts, where the ‘set of legal acts’ was already aligned in advance as belonging to an indivisible chain.    

The taxpayer argued that there could only be tax abuse if all the legal acts were performed by him personally. The Court of Cassation rejected this view.

In line with this, the Court of Cassation also ruled that in order to prove tax abuse, it is not intended that  the judge should separately assess the different legal acts belonging to the ‘set of legal acts’. It is sufficient that there is a unity of intention/purpose between the different legal acts.

Finally, the Court of Cassation also confirmed in its judgment that the requalification of the transaction(s), as a result of the tax abuse, only acquires effects at the tax level, in particular for the tax calculation. The existence and effects of the transactions are not affected. 

Impact

Although this case was set out with income taxes in mind, it should be noted that its value also extends to other taxes with a similar anti-abuse provision, such as inheritance and registration tax. In this sense, this judgement carries an important message to every master of puppets who has not – for the design – shown up in one legal act out of a whole set of legal acts.

On the other hand, in our view, this value should not be exaggerated either. For example, does this judgement mean that for every set of legal acts in which the taxpayer failed to perform one legal act, tax abuse is still always present?  Obviously not.

Let us look at a well-known example related to registration taxes: the situation where a person contributes immovable property to a company, immediately followed by the donation of its shares to one of the children. In such a situation, the tax advantage consists of the lower tax applicable to the shares, compared to the immovable property. The cassation judgement teaches us that the children did not necessarily have to be involved in that first step (the contribution) to speak of tax abuse. However, in this case, we believe that there may be other elements that lead to the conclusion that there is no tax abuse, such as, for example, the professionalization of the management of such immovable property through a company.

Nuance and substantiation still remain the key words in assessing a potential case of tax abuse.   

Eline Depaepe and Evert Moonen De Langhe Attorneys