On June 25, 2014, the Brussels Court of Appeal confirmed an earlier ruling (dating from 2010) from the Tribunal of First Instance. The tribunal had found that costs and expenses in connection with an international stock option plan recharged by a South African parent company to its Belgian subsidiary are not tax deductible by the latter to the extent a capital loss has been suffered on the shares that had to be acquired in order to be delivered to Belgian optionees following the exercise of their stock options.
Under Belgian corporate income tax rules (Article 198, §1, 7º, Income Tax Code 1992), capital losses incurred on the sale of shares are, in principle, not tax deductible for corporations by virtue of the participation exemption regime. Although this has been disputed for some time, the Belgian tax authorities and the majority of court decisions take the position that this rule also applies when a Belgian corporate taxpayer acquires shares at a high price in order to deliver them to an optionee exercising his or her stock options at a discounted price (normally the fair market value of the shares at the time of grant or vesting).
Until recently, it was less clear what the tax treatment should be for costs and expenses incurred by a non-Belgian group company, e.g., a foreign parent company, when recharged to the Belgian subsidiary in connection with stock options granted to and exercised by employees or other optionees of that Belgian subsidiary. Under this scheme, the costs and expenses booked by the Belgian subsidiary are not (entirely or partially) earmarked as a capital loss on shares in the commercial books of the Belgian subsidiary, and there are good arguments to treat them as personnel (labor) costs for accounting purposes. Except if the tax law explicitly provides differently, the tax treatment of costs and expenses follows the accounting treatment. As a result, many practitioners in Belgium have taken the position that the total amount of recharged costs and expenses should in fact be tax deductible for the Belgian subsidiary.
In the case at hand, the taxpayer adhered to that position and contended that the costs and expenses that were recharged to it by its South African parent company did not (partially) constitute capital losses on shares and, therefore, should be tax deductible subject to the normal conditions, i.e., that the costs and expenses are properly documented and meet the arm's-length standard. However, both the Tribunal of First Instance and now also the Court of Appeals ruled that to the extent the recharged costs embody or include the amount of any capital loss on the shares that were sold to the Belgian employees and other optionees at a discount, they should then not be tax deductible for the Belgian subsidiary, as if the latter would have otherwise incurred the capital loss directly.
The first commentaries to the Court of Appeals ruling indicate that there is no unanimity among commentators and that there is a good chance that the taxpayer will take the case to the Court of Cassation for a definitive decision.