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Capital gains taxation: Constitutional Court to rule

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Under Belgian tax law, capital gains on shares realized by individuals are only taxable if they are realized in the course of a professional activity or if they can be considered as “miscellaneous income”. One of the categories of taxable miscellaneous income is capital gains on shares considered to represent “speculative” income (article 90, section one, 1° of the Belgian Income Tax Code (“BITC”)). Such speculative income is taxed at a separate tax rate of 33% (article 171, section one, 1°, a) BITC).

At the same time, speculative income is not deemed to be present, and the capital gains on shares will be tax exempt, if the shares are transferred or sold in the context of the “normal management of a private portfolio”. It should be noted that the latter exception is not further specified, for example by means of more detailed criteria.

Case law has defined the normal management of a private portfolio as any act usually performed by a “prudent man” with a view to increasing or preserving his assets. According to case law, “normal management” is the management that a reasonably prudent person would perform in a similar context. 

Since there still is a large scope for interpreting what exactly constitutes the “normal management of a private portfolio”, many litigations have emerged and have reached the Belgian tax courts in recent decades. The judgments of the courts have not always been consistent, overall, which has created uncertainty. 

Also, the interpretation of the concept of a “prudent man” has evolved over time, making it difficult, if not impossible, to assess the taxable or tax-exempt nature of various transactions. 

In a recent case brought before the Supreme Court, the Court has addressed a request for a preliminary ruling to the Constitutional Court. The question to be judged by the Constitutional Court is whether article 90, section one, 1° BITC is in violation of the constitutional principle of legality and/or the principle of equality contained in articles 170 and 172 of the Belgian Constitution. 

The constitutional articles referred to in fact concern the “predictability” of the tax law. The tax legality principle contained in article 170 of the Belgian Constitution means that no tax can be introduced, except by law, meaning a law in the formal sense; a law passed by parliament. All elements essential for the levying of the tax (tax liability, taxable event, taxable base, rate, exemptions) should be specified in and regulated by the text of the law. It also follows from the tax legality principle that the tax law is to be interpreted in a strict manner. And if the text of the law would prove to be unclear and there is no clear information available allowing an interpretation, the law must be interpreted to the advantage of the taxpayer. 

Article 172 of the Belgian Constitution regulates the tax exemptions or reductions: no tax exemption or reduction can be introduced except by law. Therefore, also with respect to tax exemptions and reductions, the tax legality principle is enshrined in the Belgian Constitution. 

As mentioned, article 90, section one, 1° BITC utilizes the vague concept of “normal management of a private portfolio” in order to determine whether or not income from certain transactions is taxable as miscellaneous income. This lack of a clear definition makes it difficult, if not impossible, to predict the tax consequences of specific transactions. 

The Supreme Court has therefore addressed the following question to the Constitutional Court:

“Does article 90, 1°, of the 1992 Income Tax Code, coordinated by the Royal Decree of 10 April 1992 and ratified by the Law of 12 June 1992, infringe the constitutional principle of legality and/or equality contained in articles 170 and 172 of the Constitution to the extent that it taxes profits or income obtained outside the exercise of a professional activity, unless the profits or income arise from normal operations of the management of private assets consisting of immovable property, portfolio securities and movable objects?”

Please note that the Supreme Court has addressed a request for a preliminary ruling and no annulment procedure has been initiated. Nevertheless, if the Constitutional Court’s decision would be that article 90, section one, 1° BITC indeed infringes the Constitution, the ruling of the Court may be invoked by other taxpayers involved in disputes on the application of article 90, section one, 1° BITC.

And if the latter were to happen, one cannot exclude a change of tax law. Although not necessarily in favor of the taxpayer. The above exemption on capital gains on shares has long been a target for those seeking to increase capital gains taxes.