Taxable ‘abnormal’ capital gains on shares are taxable on net basis, according to the Constitutional Court

In a recent judgement, the Constitutional Court ruled that there is discrimination between the way ‘abnormal’ capital gains on shares and ‘abnormal’ occasional profits or gains (other than those obtained from financial products) are taxed. The former are taxed on a gross basis while the latter are taxed on a net basis. The Constitutional Court held that this difference between the two categories of taxpayers is not reasonably justified. Therefore, this case law carries important practical implications.

Introduction

Capital gains on shares realised outside the exercise of a professional activity are in principle exempt from taxation if they are realised within the normal management of private assets.  If they fall within the abnormal management of private assets (art. 90, paragraph 1, 9°, first indent of the Income Tax Code (hereinafter: ITC)), they are taxed as miscellaneous income, i.e. at the rate of 33%.  Taxpayers realising such capital gains were until recently taxed on a gross basis, i.e. without deduction of expenses or losses.

Occasional profits or gains (which are not obtained from financial products) realised outside the exercise of a professional activity are also taxed as miscellaneous income if there is an abnormal management of private assets (art. 90, paragraph 1, 1° ITC) (taxable at 33%).  However, taxpayers who realise such occasional profits or gains may deduct the expenses incurred for this operation from the aforementioned profits or gains (art. 97 ITC).  In addition to the cost deduction, losses incurred in the five years preceding the realisation of such occasional profits or gains may also be deducted from such income. As a result, taxpayers who realise occasional gains or benefits are taxed on a net basis.

Constitutional Court judgment dated 21 September 2023

In a judgment dated 21 September 2023, the Constitutional Court ruled on the aforementioned distinct valuation methods of the two categories.  The facts underlying the judgment were as follows.  Two natural persons were shareholders of a company.  They decided to sell their shares and had a law firm assist them in doing so.  Subsequently, both realised a substantial capital gain on the sale of their shares.  The taxpayers took the view that the realised capital gain fell within the scope of the normal management of private assets and they therefore did not owe any tax on it.  However, the Administration did not share this view and decided that there was an abnormal management of private assets (Article 90, paragraph 1, 9°, first indent ITC).  The capital gains should then have been included in the tax return and qualified as miscellaneous income (taxable at 33%).  The Court of First Instance decided that there was effectively a transaction that did not belong to the normal management of private assets.

The Court of First Instance then proceeded to refer a preliminary question to the Constitutional Court.  According to the taxpayers in the proceedings, there is a difference in treatment, which is not reasonably justified, between two similar categories of taxpayers, namely (i) taxpayers who obtain gains or income from the abnormal management of private assets (art. 90, paragraph 1, 1° ITC) and (ii) taxpayers who obtain capital gains on shares from the abnormal management of private assets (art. 90, paragraph 1, 9°, first indent ITC).  Indeed, the first category is taxed on the net amount remaining after deducting the costs and losses from the abnormal operations of the management of private assets while the second category is taxed on the gross amount without the possibility of deducting the costs or losses from the income.

The Administration argued that the difference in treatment between the two categories was reasonably justified.  After all, holding shares is a purely passive activity that does not require specific costs while this is not the case for taxpayers who realise occasional gains and profits from abnormal management of private assets. 

However, the Constitutional Court ruled that there is no reasonable justification for the difference in treatment.  It follows that the cost deduction can be applied not only to ‘abnormal’ occasional gains or profits (Art. 90, paragraph 1, 1° ITC), but also to ‘abnormal’ capital gains on shares (Art. 90, paragraph 1, 9°, first indent ITC).  However, no ruling was given on the loss account as it was not applicable in the present case. Indeed, the facts of the judgment showed that only lawyers’ fees were incurred in the share transaction, which, according to the Constitutional Court, cannot be considered as a loss, but merely as an expense.

Consequences

Taxpayers who realise capital gains on shares from the abnormal operations of the management of private assets (Article 90, paragraph 1, 9°, first indent ITC) will now be able to deduct the costs they have borne or incurred for these share transactions from the capital gains.  Consequently, they will no longer be taxed on a gross basis, but on a net basis. 

The legal doctrine states that also losses that taxpayers may have incurred, in the five years preceding the realisation of those capital gains, could also be deducted from those capital gains.  The Constitutional Court did not rule on this, but it can nevertheless be inferred from the judgment.

Besides having implications for the future, the judgement also has an effect for the past.  After all, judgements of the Constitutional Court are regarded as a “new fact”.  A taxpayer who was faced with an overcharge, resulting from such a “new fact”, can file a request for an ex-officio tax relief in order to obtain a refund of this overcharge.  Taxpayers who were subjected to taxation on a gross basis of their ‘abnormal’ capital gains on shares since 1 January 2019 can use the Constitutional Court’s judgement to recover any over-taxation.

Eline Depaepe and Evert Moonen
De Langhe Attorneys