A taxpayer may wish to obtain legal certainty as to the tax treatment of a particular transaction or situation. A request for an advance ruling from the Belgian Tax Rulings Service ("TRS") may be useful for this purpose. However, under certain conditions, this legal certainty can be called into question, as has been clearly shown in a recent litigation case. Here we review the advance ruling mechanism and discuss how the legal certainty attached to it can be questioned – and what the taxpayer can do about this.
The idea of an advance ruling which is binding vis-à-vis the State is not new. Indeed, since 1992–93, a formal procedure for prior (but limited) tax agreements was created before a special committee within the tax administration in order to allow the taxpayer to request prior agreement concerning the concept of "legitimate financial or economic needs", a concept which makes it possible to determine the application of tax exemptions or deductions as well as the application of the general anti-abuse provision. Indeed, in the absence of a legal definition of this particularly vague concept, it was necessary to find a balance by providing legal certainty for the taxpayer.
The mechanism for general and extended advance tax rulings within an autonomous service of Federal Public Service ("FPS") Finance (as it is today) was introduced by the Act of 24 December 2002, which defined an advance tax ruling as "the legal act by which the Federal Public Service Finance determines in accordance with the provisions in force how the law will apply to a particular situation or transaction which has not yet produced any tax effects".
A request for an advance ruling must be made under conditions specified by law (in writing, with a full description of the situation or transaction and the legal and regulatory provisions concerned, etc.) and may be declared inadmissible in certain cases provided for by law. These grounds for inadmissibility include, for instance, the fact that the situation has already generated tax consequences at the time of the advance tax ruling or where the request relates to provisions which the TRS cannot rule upon (e.g. requests concerning the tax rate, tax return or sanctions).
Once the TRS has issued its decision, it is, in principle, binding vis-à-vis FPS Finance (but also vis-à-vis the taxpayer) for a maximum period of five years, unless the subject matter of the request requires a longer period (such as, for example, the depreciation period of an asset exceeding five years). During this period, only the grounds for nullity or lapse provided for by law allow FPS Finance to be released from its obligations under the ruling. It was by invoking some of these grounds that the Special Tax Inspectorate ("BBI"/"ISI") tried to circumvent a ruling that had been granted, in a case in which the Dutch-speaking Court of First Instance of Brussels handed down its judgment on 21 June 2019 (docket numbers 2017/2452/A and 2017/3788/A).
Grounds for nullity or lapse of rulings and our recommendations
First, we will explain the three possible grounds for the nullity of a ruling. These have retroactive effect.
In a second step, we will discuss the two grounds for lapse, which only have an impact for the future.
Grounds for nullity
The first ground for nullity arises when the conditions to which the ruling is subject are not fulfilled. In the case at hand (concerning the "excess profits" regime), the TRS had mentioned in the ruling that an annex (the calculation of excess profits) should be attached to the tax return each year, which would allow verification of the correct execution of the ruling. The Special Tax Inspectorate found that such an annex was not attached to the tax return for one of the tax years and (surprisingly) alleged that it was a condition for the validity of the ruling. In addition to the fact that (at the administrative stage of the litigation) the TRS itself acknowledged that this was not a condition, the court rightfully pointed out that this reporting obligation was described too vaguely to be considered a formal condition. Moreover, if it were to be accepted that this annex to the tax return was a formal condition of the decision, that condition would violate the law, since the TRS cannot decide on the method of declaration (the latter being a ground for inadmissibility). In our view, if a ruling were to contain such a "condition", it would not be void, but such an illegal condition could not then be applied against the taxpayer.
Our recommendation: This case illustrates that the concept of "condition" in the Act is relatively vague. In this respect, the fact that the TRS' role is to determine how the law will apply to a given situation does not give it the power to enact legislation by adding conditions to the law. In order to grant a ruling and to ensure that the taxpayer executes the transaction as described to the TRS without any subsequent amendments which, if the TRS had been aware of them before, would have resulted in a different assessment of tax consequences, the TRS has imposed conditions in the past, but now requests commitments from the taxpayer. Thus, to avoid any discussion, we would advise taxpayers to ensure that they respect their commitments when executing their transactions, and, in the event of a discussion with the administration, to contact a professional.
The second ground for nullity occurs (i) when the description of the situation or transaction was incomplete or inaccurate or (ii) when the essential elements of the transaction were not carried out in accordance with that description.
It is sometimes very difficult to distinguish between, on the one hand, inaccurate descriptions and/or changes that do not concern the very essence of the transaction and, on the other hand, undisclosed items or changes that may impact TRS' assessment. In the present case, the Special Tax Inspectorate also tried to argue that the transaction was not described completely or accurately. The court rejected this allegation, finding that the essential elements of the transaction (such as the structure, purpose and manner of collaboration between group entities within a Belgian silent partnership) had been correctly described.
Our recommendation: It is clear that the taxpayer must provide as much information as possible to the TRS to ensure that the request is complete and accurate (and hence, to ensure that it remains so, should supplement this afterwards if need be), and then execute the essential parts of the transaction as presented. However, it is also clear that, after the ruling has been issued, changes in circumstances may occur. These changes must be carefully analysed on a case-by-case basis to determine whether they concern the essential elements of the transaction and whether it is necessary to confer with the TRS about them in order to possibly obtain an amending addendum to the ruling. Indeed, a simple renegotiation of a share sale agreement by an individual, whereby the latter suddenly takes disproportionate risks in the context of the representations & warranties and/or accepts other commitments relating to the sale can sometimes influence the question of whether this person is acting as a "prudent man" and whether this transaction does not go beyond normal management of one's private estate. However, the replacement of the buyer or the addition of another buyer to the sale of the same shares need not, in itself, automatically constitute a change in an essential element of the transaction for the purposes of the TRS' analysis.
The third ground for nullity is when the ruling is unlawful, i.e. it contradicts the provisions of the treaties, European law or national law. Some common examples can be given: A ruling granting an illegal advantage (and state aid) or applying an act constituting state aid offers no protection. The same may be true when an administrative interpretation (on which the ruling is based) is uniformly and consistently sanctioned by case law (especially by the highest courts). It should be noted, however, that discordant case law cannot, in our opinion, be sufficient to challenge the legal certainty attached to a tax ruling. The tax authorities should only be able to challenge a ruling in exceptional circumstances, and not as soon as they discover a judgment by a court of first instance or even a court of appeal that goes against the interpretation given by the TRS. In any event, the court called upon to verify the alleged illegality must ensure that its assessment remains marginal. Indeed, since the TRS is supposed to have already correctly applied the law to the facts presented, the judge should therefore reject only manifestly illegal tax rulings.
In this context, the "advance" nature of the decision is a specific matter for discussion. It is a decision rendered in respect of "a particular situation or transaction which has not yet produced any tax effects". This characteristic is, above all, a condition for the admissibility of a request to the TRS. In the case at hand, the Special Tax Inspectorate asserted that the decision had not been given in advance and was therefore in breach of the Act establishing the TRS. However, the judge referred to the explanatory memorandum for the Act – which states that, in order for the decision to be an advance decision, the ruling must precede the tax assessment phase – and concluded that the ruling must therefore precede the tax return, which was the case. This is a consistent practice and interpretation of the TRS, but it was the first time a judge had to rule on the subject.
Our recommendation: Except in very rare cases where the ruling would be manifestly illegal, this is, in our opinion, the most alarming – and the most criticised – ground for nullity, because it is the one that is most subject to various interpretations of the law which would make it possible to allege that the ruling is illegal. In this respect, it is therefore necessary to follow the case law of the courts which have the power to modify the legal order. As for the specific discussion on the "advance" nature of the ruling, attention should be drawn to other taxes whose assessment and reporting procedures are governed by specific rules as a result of which tax effects can occur earlier (e.g. registration duties, tax on stock exchange transactions, VAT or withholding tax on investment income or wage withholding taxes), which can either limit the protection of the ruling or prevent it from being obtained.
Grounds for lapse
The first ground for lapse is where the legal provisions applicable to the situation (treaty, EU or national law) are modified. This lapse takes effect as from the entry into force of the new provisions unless the new act is retroactive. The new act could also provide that it only applies to transactions that take place after a specified date, thus leaving the transaction covered by the ruling outside its scope. It should be noted that some courts (the European Court of Justice or the Constitutional Court) have the power to change the legal order. A case-by-case analysis of the case law of these courts should be made when it deals with one or more provisions on which the ruling is based, in order to assess whether or not there is an impact on the ruling and its scope (lapse or even nullity). Another example would be changes in the OECD's commentary on transfer pricing and accepted approaches, which may prompt the administration to challenge a ruling for the future, although we would consider this questionable if the underlying legislation applied in the ruling has not also been amended.
Our recommendation: In order to be able to anticipate a possible challenge to a ruling for the future, it is therefore necessary to monitor (or to be assisted for the purpose of monitoring) the legislative amendments in connection with the subject of the ruling, the details of the provisions for their entry into force, and the case law of the courts which have the power to modify the legal order.
The second ground for lapse arises when the essential effects of the transaction are modified as a result of related or subsequent events attributable directly or indirectly to the applicant. On the basis of this ground, the administration can withdraw a ruling where it had not noticed, at the time of granting, that the situation concerning which the ruling was granted was actually aimed at tax avoidance or was fraudulent.
In short, the legal certainty of an advance tax ruling is important but not absolute: it is conditional on the good faith and rigour of the applicant at the time of the request and when executing the ruling as well as on the principle of legality. It will therefore sometimes be important to request an amending addendum to a ruling in order to ensure its protection. In addition, even when a ruling is granted, it is important to monitor both case law and legislative developments to ensure its continued protection.
Finally, even though the administration obviously has the right to verify the validity of a ruling, the ways in which the Special Tax Inspectorate sometimes challenges rulings are counterproductive. It should be stressed that, in the light of the spirit of the Act (providing greater legal certainty, improving the administration–taxpayer relationship, attracting and reassuring investors), such a challenge must remain an exception limited to cases of manifest nullity, lapse or fraud.
We are ready to assist you in assessing the legal value of your ruling or in the event that it is challenged by the tax authorities.