Companies and capital gains on shares: the participation condition
Companies and capital gains on shares: the participation condition
July 2022 – Capital gains on shares can be exempted from corporate income tax. One of the conditions for this exemption is the minimum participation requirement. If you sell the shares in bundles, there will be a point where you will no longer meet this condition. But this is not necessarily an obstacle to the exemption.
Exemption of capital gains on shares
The exemption of capital gains on shares from corporation tax is set out in article 192, § 1, paragraph 1 of CIR 92: capital gains on shares are fully exempt to the extent that any income from these shares can be deducted from profits under articles 202 and 203. The reference to Articles 202 and 203 is a reference to the "definitively taxed income" exemption: dividends received by a company from another company may be exempt under certain conditions.
What, then, are the conditions that apply for both the dividend exemption and the capital gains exemption?
1. On the date of allocation or payment of the income, the recipient company has a holding of at least 10% in the capital of the distributing company or has a holding with an acquisition value of at least EUR 2.500.000. This is the participation condition.
2. The income relates to shares that are or have been held in full ownership for an uninterrupted period of at least one year. This is the condition of permanence.
3. The distributing company is subject to a normal tax regime. This is the condition of taxation.
Sale by bundles
The individual packages of shares have an acquisition value of more than 2.500.000 euros. If all the shares are transferred in one and the same transaction, the capital gains are exempt. But in this case, each package of shares is offered separately on the stock exchange and the packages of shares are sold "in real life". This means that the shares are not sold to the same buyer and not on the same trading day.
The question arises as to how the participation condition should be applied in this case. Let us imagine that the company holds a package of shares with an acquisition value of 4.000.000 euros and sells half of them on day 1, in which case the acquisition value of the remaining shares is indeed only 2.000.000 euros. It seems therefore that the second package cannot be exempted.
Sales decision
However, the Ruling Commission considers that the exemption is still possible for the whole package on the basis of a number of considerations. The first important element, in this case, is that the transferring company placed only one sale order, without specific instructions. It was therefore a one-off sale decision. The Ruling Commission already deduces from this that the company intended to sell the entire package of shares.
A second finding is that the shares were not sold in one day because the bank that placed the sale order preferred to split the shares into several parts because there was no demand for a sale of the entire package.
And as a third element, the Ruling Commission takes into account the relatively limited period of time in which the whole package was sold. It appears from the data provided that the bank sold 75% of the total market value in one trading day. The bank justified the delay on the basis of its "best execution" obligations.
The Ruling Commission concludes that the capital gains exemption can be granted (provided that the other conditions are also met) because the share packages with an acquisition value of more than 2.500.000 euros were put up for sale by the company following a single sale decision, without specific instructions, and were then sold by the bank within a relatively limited period of time to different purchasers as part of the best execution policy, rather than on the same trading day.
The sale of the eligible holdings to different buyers and on different days cannot be considered a single sale for purposes of applying CIR 92, Section 192.
Not too flexible!
The Ruling Commission itself already states that its view should not be interpreted too flexibly. It points out that the exemption is not possible if the shares of the same issuer are sold at a different time as a result of different orders or different sales decisions, it being understood that in this case, the taxpayer does not intend from the outset to sell all the shares at that time. In this case, the exemption will no longer be possible if, as a result of an earlier sale of shares, the acquisition value of the remaining shares has fallen below 2.500.000 euros.