When private capital gains on shares are taxed as miscellaneous income because they were realised outside of the normal management of one’s private estate, since the Act of 11 December 2008, this is done on a gross basis.
In a milestone judgment of 21 September 2023, the Constitutional Court ruled that this constitutes prohibited discrimination compared with taxpayers who obtain benefits or profits from abnormal management of private estate and are taxed on a net basis. Henceforth, therefore, capital gains on shares obtained from abnormal management of private estate are also taxable only on a net basis (and thus after cost deduction).
Although the Constitutional Court did not deal with loss compensation, in our view it appears obvious that losses from abnormal share transactions realised in the five previous income years should also be allowed to be offset against taxable private capital gains on shares.
Anyone who, since 1 January 2019, has been taxed without cost deduction and/or loss compensation on capital gains on shares arising from abnormal management of private estate (i.e. at a rate of 33%), while costs were incurred or borne to realise those capital gains and/or losses from such transactions were incurred in the five years preceding the realisation of the said capital gains, is advised to take action quickly.
The issues in (more) detail
Until the Act of 11 December 2008, capital gains on shares, realised outside of the normal management of one’s private estate, were taxed under article 90, first paragraph, 1° ITC92 just like other benefits or profits obtained from such management. From the taxable capital gain, costs incurred or borne to obtain or maintain the income taxable as miscellaneous income could be deducted. Moreover, the losses incurred in the previous five years when performing transactions taxable under this article could also be compensated with the income from such transactions. Thus, there was taxation on a net basis.
Those who realised capital gains on shares from a so-called “substantial participation” (of 25%) when selling to non-residents outside the EEA, taxable under article 90, first paragraph, 9°, (now) second indent ITC92, were always subject to taxation on a gross basis (without any cost deduction or loss compensation).
However, in 2008 the legislator found it necessary – without amending article 90, first paragraph, 1° ITC92 (which thus theoretically continued to apply to such capital gains) – to treat capital gains on shares resulting from abnormal management of one’s private estate in a separate provision, i.e. in article 90, first paragraph, 9°, first indent ITC92 (which until then had only made capital gains from a “substantial participation” taxable when sold to non-residents outside the EEA). While the legislator did not want to create a new taxable subject matter, the consequence of this legislative amendment was that the provisions which until then had allowed for cost deduction and loss compensation for income falling under article 90, first paragraph, 1° suddenly no longer applied to capital gains on shares taxed under article 90, first paragraph, 9°, first indent ITC92. Since then, taxpayers in this situation were subject to taxation on a gross basis.
In a case handled by our tax team, the question arose whether the taxpayers could deduct the attorney’s fees related to the sale of shares (the capital gain of which was taxed as miscellaneous income) from the amount of the realised capital gain. The tax court decided to refer that question to the Constitutional Court.
Constitutional Court’s analysis
The Constitutional Court first notes that, although capital gains on shares from abnormal management of private estate have constituted a separate category of various income since the Act of 11 December 2008, they were previously taxable under article 90, first paragraph, 1°. Accordingly, the categories of income covered by article 90, first paragraph, 1° and 9° respectively are similar. However, the aforementioned Act did not amend the provision providing for the deduction of costs for income taxable under article 90, first paragraph, 1°; as a result, that provision does not apply to capital gains referred to in article 90, first paragraph, 9°, first indent. The fact that cost deduction was no longer possible for those capital gains was nowhere explained by the legislator. Nor was any explanation to be found in the provision which, in 1976, had provided for no cost deduction for the taxation of capital gains from a substantial participation.
The Belgian State argued that this difference in treatment was justified because the capital gains referred to in article 90, paragraph 1, 9°, first indent would result from a passive activity for which no specific costs would be necessary, while the benefits and profits referred to in article 90, paragraph 1° would result from an activity for which costs would be necessary. However, the Constitutional Court rightfully dismissed this line of argument and held that it could not be ruled out that achieving the capital gains referred to in article 90, first paragraph, 9°, first indent would also require incurring costs. According to the court, nothing can justify the fact that those costs cannot be deducted from this taxable income.
The Constitutional Court therefore concludes that there is no reasonable justification for the established difference in treatment. However, pending legislative action, the Court (somewhat surprisingly) formulates a solution for the tax courts to put an end to the established unconstitutionality, i.e. by allowing cost deduction also for the capital gains mentioned in article 90, first paragraph, 9°, first indent.
Conclusion and implications of the judgment
First of all, it is now no longer possible for the tax authorities to tax taxable private capital gains on shares without deduction of costs and thus on the gross amount.
Secondly, in the case at hand, the Constitutional Court did not deem it useful to address the difference in treatment regarding the possibility of loss compensation, because in this case there were no such losses at all. However, we believe that the Court’s opinion on cost deduction can be applied mutatis mutandis to loss compensation, to the extent that there are losses from share transactions from five years prior to the realisation of the taxable capital gain, which can be considered as abnormal management.
Thirdly, in view of the reasoning of the Constitutional Court, taxpayers who were taxed under article 90, first paragraph, 9°, second indent of ITC92 on the sale of a substantial participation to certain non-residents could also argue for the deduction of costs and/or loss compensation.
Finally, this judgment has significance for all those who have been taxed on the gross amounts since 1 January 2019. Indeed, judgments of the Constitutional Court are considered a new fact on the basis of which “ex officio” relief from overtaxation can be requested. Taxpayers who have been taxed on the gross amount since 1 January 2019 could therefore rely on this judgment to obtain relief for the non-deduction of capital gains-related costs and/or the lack of loss compensation from relevant share transactions during the five years prior to realising the taxable capital gain.
If you are faced with these issues, we would be very happy to assist you.