The Brussels Court of Appeal has upheld a controversial decision to deny a Belgian subsidiary a deduction for stock option costs recharged by its South African parent, to the extent those costs related to a "capital loss realized on shares".
A Belgian subsidiary had reimbursed its South-African parent company for the costs related to the stock options granted (directly) by the parent to the Belgian employees of the group. The reimbursement related both to administrative costs and to costs relating to the acquisition and subsequent sale of the shares (i.e., the difference between the stock exchange price of the shares upon exercise of the option and the exercise price of the option). The tax authorities denied the tax deductibility of the reimbursement to the extent it did not relate to the administrative costs.
Under Belgian tax law, capital losses on shares are (as a general rule) not tax deductible. Therefore, the main question raised before the Court of First Instance in 2010 and the Court of Appeals recently was whether or not the reimbursement of costs relating to the acquisition of shares should be characterised as a "capital loss on shares", even though the Belgian subsidiary never held the shares itself. Both courts ruled (unfortunately) that a company can realise a "capital loss on shares" even though it never held the shares and that treatment of the costs as a capital loss on shares in the hands of the foreign parent company also applies to the local Belgian subsidiary if those costs are recharged to the subsidiary (which had actually booked the cost in its accounts as "loss on share incentive scheme").
The judgment of the Court of Appeal remains in our opinion very questionable and debatable. A Court of Appeal decision has however an important precedent value. It is to be expected that the Belgian tax administration will invoke these court decisions in other cases and will more frequently and more strongly question the tax deductibility of certain costs related to stock-based incentive plans in the future. Although this case only related to stock options, the specific reasoning of the courts may be very well applied to other types of stock-based incentives such as an ESPP or RSUs.
Multinationals and Belgian subsidiaries should take this case law into account when determining their policy with respect to recharging costs related to stock-based incentive plans, when documenting a recharge policy and when booking such costs in their accounts.