Since the famous Artwork Systems case at the end of the last century, the question of how to value an asset acquired by a company free of charge or at a reduced price has given rise to much discussion between taxpayers and the tax authorities. It appears, however, that the European Court of Justice has finally settled this issue in decisions rendered on 3 October 2013 and 6 March 2014, respectively. These two decisions deal with the interface between accounting law and tax law.
As a general rule, the starting point to determine a company's tax base is its balance sheet, provided this document has been correctly prepared in accordance with the rules on the establishment of annual accounts (formerly Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies, the content of which is, for the most part, reflected in Directive 2013/34/EU of 26 June 2013). If application of the directive is not sufficient to give a fair view of the company's assets, additional information must be provided.
The profit must be adjusted only if Belgian tax law expressly provides for an exception to this rule. The example with which the general public is most familiar is that of disallowed business expenses: even if the company undoubtedly incurred certain expenses, they will not be tax deductible (e.g. a portion of entertainment and car costs, clothing, corporate tax, etc.). Consequently, if the annual accounts provide a true and fair view of the company's financial situation and if no specific tax rules exist, the tax authorities have no choice but to tax the profit indicated in the accounts. Based on the directive of 26 June 2013, an asset must (as before) be valued at the price which the company paid for it.
In its judgment of 3 October 2013, the Court of Justice clearly ruled on the question of the value at which an asset acquired at a reduced price should be booked. The facts that gave rise to this case are relatively technical but can be briefly summarised as follows. A Belgian company sold, for a price of SEK 340,000 per share, a certain number of share in a Swedish company acquired 38 days earlier for only SEK 100 per share. The Belgian tax authorities wished to tax the difference between these two amounts. Citing a number of arguments, the Court of Justice replied that the fair view principle did not allow derogations from the general rule that assets should be valued at their acquisition price, as opposed to their real (market) value. This is also the case when the acquisition price is clearly less than the fair (market) value. The Court rejected the two main counterarguments: (i) the possibility that certain assets are undervalued in the annual accounts, assuming their acquisition value is less than their market value, is merely the necessary corollary to the choice made by the European legislature in favour of a valuation method based not on the fair (market) value of assets but rather on their acquisition value and (ii) the underestimation of certain assets, such as shares, in a company's books, due to the fact that they are valued based on their purchase price, complies with the precautionary principle.
In its judgment of 6 March 2014, a similar question was answered, the only difference being that the Belgian company had acquired the asset free of charge. In this case as well, the facts can be briefly summarised. A Belgian company had gifted another Belgian company 151 shares in a third company. The receiving company did not book the shares in its annual accounts. The tax authorities believed that the recipient should have booked the shares at their fair value and that this amount should consequently be added to the recipient's taxable income. The Court of Justice reiterated that even in this case, the directive does not require the company to record the asset at fair value in its annual accounts.
In conclusion, two important lessons can be drawn from these decisions: first, the tax authorities systematically raise, in almost all disputes, Opinion No. 126/17 on determination of the acquisition value of assets obtained for valuable consideration or free of charge, issued by the Commission des Normes Comptables/Commissie voor Boekhoudkundige Normen (recently taken down from its website, with a reference to the Court of Justice's decision of 3 October 2013) and, second, deprived of this weapon and after numerous victories by taxpayers, the tax authorities may have to change their tactics and try to apply other principles of tax law, such as Article 24(1)(4) of the Income Tax Code (ITC) or even the anti-abuse provision provided for by Article 344 ITC. It goes without saying, however, that the application of these articles to concrete cases is debatable and that numerous counterarguments can be raised. It is thus extremely likely that we have yet to hear the last word on this subject.