In a judgment dated 6 April 2022, the Court of First Instance of Antwerp reminded a company of doctors of the scope of the protection of an advance tax ruling (“decision anticipée”/“voorafgaande beslissing”). This judgment also underlines the importance of having a demonstrable remuneration policy in order to meet the deductibility requirements of Article 49 Income Tax Code 1992 (“ITC92”) when a company intends to remunerate its director via fringe benefits.
Context
Company P specialises in optimising the remuneration of company directors. In this respect, it offers a remuneration scheme with a grant of stock options relating to shares listed on a Belgian or foreign stock exchange (Act of 26 March 1999). Company P obtained rulings confirming various aspects of the tax treatment of the product that it offers. These rulings were only issued to company P and not expressly to its client companies setting up the stock option plans.
The rulings cover the following scenario: A client company X issues stock options and offers them to its director as remuneration for his activity in the company. If the director accepts the offer, he may exercise or transfer the options to any interested purchaser no earlier than one year after the offer. However, this transfer is only possible if the purchaser agrees to enter into an agreement with company X, allowing company X to repurchase the options from the purchaser. Once the options are repurchased, company X will immediately void the options (so that the repurchase price becomes a cost for company X).
In this context, the rulings confirm that the price paid by company X to the purchaser will be deductible under Article 49 ITC92, assuming that the options are offered to the director as remuneration for his activity within the company. Indeed, the so-called remuneration theory (“théorie de la remuneration”/“bezoldigingstheorie”, as confirmed by the Belgian Supreme Court (“Cour de cassation”/“Hof van Cassatie”)) requires that the costs are incurred with a view to remunerating the director’s services for the benefit of company X and that the company can prove this. If these conditions are not fulfilled, the costs are not deductible on the basis of Article 49 ICT92.
A structure protected by a ruling questioned?
In the case submitted to the Court of First Instance of Antwerp, the tax authorities denied the deduction of the costs incurred by a client company of P (more precisely, a company of doctors) after it had repurchased the options from the purchaser. On the basis of Article 49 ITC92, the tax authorities argued that it had not been demonstrated that these costs were incurred in order to remunerate the services actually provided by the director for the benefit of the company of doctors. The latter contested the rectification of its tax return and put forward various arguments.
Position of the Antwerp Court of First Instance
First, the judge rejects the argument that the tax authorities violated the rulings. On the one hand, the court notes that these rulings were issued to company P and not to the company of doctors. Therefore, they do not expressly concern the latter. On the other hand, the judge notes that these rulings confirm the deductibility under Article 49 ITC92 based on the principle that the stock options are granted as remuneration for services provided by the director. The deduction is therefore, in the view of the court, not secured in an absolute way, but will only apply when the conditions of Article 49 ITC92 are met in each concrete case.
With regard to the payments in the context of the attribution of fringe benefits, the court underlines that the conditions of deductibility under Article 49 ITC92 must be respected. In this regard, the court notes that the company of doctors does not submit any document showing that, in addition to the periodic remuneration (already attributed both in cash and in kind), the stock options were granted in accordance with a remuneration policy for the director of the company. According to the court, the issuance of salary slips and the fact that the director is taxed on such a fringe benefit do not as such constitute the necessary evidence. Since the purpose of granting (additional) remuneration for the services provided is not demonstrated, the price paid by the company for the repurchase of the options is not tax deductible.
Conclusion
This judgment reminds us of two important lessons for everyday practice:
- Except in certain cases, a ruling obtained by a third party cannot be invoked by another taxpayer. Furthermore, one must always verify what is actually covered by the ruling and – equally important – what is not. In this case, the fact that the options were granted as remuneration for services rendered by the director required a factual analysis of the specific case and could not merely be presumed. This is a reminder that one must be careful in not overestimating the protection granted by a ruling and must determine the scope to which this protection extends.
- The Supreme Court has stated that for each form of remuneration in kind (such as a company car, a house made available to the taxpayer, but also a grant of stock options), the taxpayer must be able to demonstrate that it is attributed in order to remunerate the actual services of the company director. This is especially true when further remuneration is suddenly granted in addition to the existing remuneration in cash and/or in kind. Such evidence requires consistent organisation as well as adequate documentation, drafted in tempore non suspecto. Without these elements, it cannot be excluded that the tax authorities will question the deductibility of these costs.
