The new Law of 29 March 2012 has modified the general anti-avoidance test applicable for tax matters in Belgium. The new rules cover personal and company income tax, registration taxes and estate taxes.
Previously, in order to challenge and re-characterize any action or transaction the Tax Administration was obliged to adopt a re-characterization that was compatible with the legal non-tax effects of the original action or transaction. This required the re-characterization operated by the Tax Administration to include and reflect the essential elements of the original action or transaction, which proved to be a substantial obstacle for the Administration.
Under the new rule the Tax administration is no longer required to adopt or offer any new characterization of the original action or transaction. Provided that there is “tax abuse” the Administration may disregard and ignore the action or transaction.
Notion of tax abuse
The Tax Administration has to prove that a tax abuse has occurred. This is the case where the Administration can demonstrate that the taxpayer’s intention was to benefit from a favorable tax treatment or to avoid an unfavorable tax provision, this in violation of the underlying objectives of the tax provision which the taxpayer is attempting to benefit from or to avoid.
If the Administration alleges tax abuse, as indicated above, the taxpayer may however defend himself by proving the existence of legitimate economic or other reasons for the action or transaction, other than avoiding taxes.
At first sight the new rules appear to grant enormous discretionary power to the Tax Administration. However, as has been demonstrated by similar provisions in relation to VAT which have been in force since 2006, only the day to day practice of the Tax Administration will allow for a real appraisal of the precise extent and effect of the new powers.