Tax retroactivity of a restructuring transaction
Tax retroactivity of a restructuring transaction
July 2022 – In the case of a contribution, a merger or a demerger, it is not unusual for the parties to set a specific date for the valuation of the transaction, to agree on various arrangements afterward, and for the contract to be signed several months later. How does the tax department deal with this retroactivity?
The accessory follows the principal
Taxation is not an accessory but is based on legal reality, as found in various codes. If an investment is an asset from an accounting perspective, it will also be an asset from a tax perspective. If an association has a legal personality under corporate law, the tax authorities will accept that legal personality. Only if the tax law expressly derogates from this principle will the tax authorities be able to disregard the normal legal framework or even, in case of abuse, impose another legal framework with appropriate tax consequences.
Company law and accounting law
A contract organising a restructuring has no retroactive effect per se.
The merger, demerger or contribution only takes place at the time the contract is concluded and, from a legal point of view, this occurs at the earliest when the general meeting decides on the restructuring. It can also occur at a later date if the parties so agree.
But of course, the parties can also set a date in the past for the evaluation of the transaction.
Prior to the Companies and Associations Code (CSA), the retroactive effect of a restructuring was not regulated. Under the impetus of the Accounting Standards Committee, retroactivity started to be allowed as long as the balance sheet date was not exceeded.
The CSA now contains a legal provision that limits retroactive accounting in the case of mergers, demergers and contributions of a branch of activity or a universality to the first day following the end of the financial year for which the annual accounts have already been approved.
Tax
Under the old Companies Code (at a time when there was actually no provision on this point), the tax authorities accepted retroactivity under 3 conditions:
Retroactivity cannot be an obstacle to the fair application of the tax law.
It corresponds to reality.
And it relates to a short period.
By "short period", the tax authorities meant a maximum period of 7 months. This was stated as such in the administrative instructions (COM.I.R.), but many rulings also explicitly confirmed that a period of more than 7 months could not be considered a short period.
It should be noted, however, that there have also been a few rulings that have allowed a period of more than 7 months due to exceptional circumstances.
What about the provision in the new CSA that allows retroactivity to the first day after the end of the fiscal year?
Let's say that in 2023, you want to split a company that has a December 31 year-end.
From an accounting point of view, you can carry out this demerger until the end of December 2023 with the demerger date being January 1, 2023.
However, the tax authorities will deny you the (preferential) tax regime applicable to restructurings if you take the decision after August 1.
(In)accuracy of the Minister
It should be emphasised that the 7-month rule that the tax authorities applied was not a legal rule, but "only" an administrative rule. The tax authorities assume that a retroactive period of more than 7 months is not "normal".
The law now allows for a longer retroactive period.
In response to a parliamentary question, the Minister seems to indirectly admit that the 7-month tax period is no longer tenable. He points out that the tax authorities still adhere to the 3 conditions for accepting retroactivity of a corporate act, including the "short period". But he also says that the provisions of the CSA only deal with accounting retroactivity in the event of a merger or demerger and that these provisions do not involve any change in tax law. The tax authorities will only accept retroactivity of corporate actions if it "corresponds to reality" and is "not an obstacle to the application of tax law".
The Minister therefore no longer mentions the 7-month period, but the question is whether he extends this period to the maximum accounting period. This is not apparent from his answer.
The administration will therefore probably continue to adhere to its rule that if the retroactivity exceeds 7 months, it does not by definition correspond to reality.
It is then up to the taxpayer to prove that this is the case.
In the case of a restructuring that would be a little more complex and that could drag on for a long time, it would therefore seem advisable to turn to the Ruling Commission, which today agrees - albeit rather exceptionally - to a longer retroactive period.