Share options granted to management company directors – A decision by Belgian Tax Authorities

The Tax Authorities have recently clarified the tax regime applicable to share options which are granted to the director of a management company by a company to which the management company renders services (Circular Letter of April 13, 2017).

At the end of 2016, the Minister of Finance created some doubt on this issue by questioning whether the favourable tax regime on share options could be applied in cases where the manager personally did not render the services, but instead supplied the services through a management company. In the latter case, it has not complied with the legal condidtion that the options must refer to the "shares of the company to which the professional activity is performed" (art. 43, Law of March 26, 1999). Indeed, it is not the beneficiary / director who supplies services to the company granting the share options, but instead the management company.

The Circular Letter clarifies the administrative position in this respect, and confirms that the favourable tax regime also applies in cases where the share options are directly granted to the director of the management company. In such a case, the fiscal value of the advantage in kind which is granted to the director of the management company is deemed to be equal to 18% of the value of the underlying shares and to that extent constitutes a taxable income to the director.

Tracking stocks for tailor-made securities for investors

Do you want to issue securities with a dividend whose entitlement would be differentiated according to the sectors or branches of your company? A solution would be 'tracking stocks'.

These securities allow their holders to be remunerated not on the basis of the results of the company as a whole but on the basis of the results of a part of the company (production line, division, branch of activity, subsidiary, ...). The results of another division will not have the slightest influence on this remuneration.

The advantages that arise from such a construction are various. Tracking stocks are, amongst other things, a way of individualizing the value of a component of the company, facilitating access to credit while maintaining the investor’s confidence. They can also be used as a motivational tool for the management. Moreover, in the event of an acquisition, the exchange of tracking stocks from the acquiring company may prevent the dilution of the shares of the shareholders of the absorbed company.

Even if these securities do not have any specific treatment in Belgian legislation and are still rarely used, they have been created by business practitioners and present concrete investment opportunities, with a tailor-made remuneration for investors or management members.

New tax rules on contributed capital gains: also applicable in case of a sale of shares?

Since January 1, 2017, new tax rules apply to "contributed capital gains". These rules apply to capital gains on shares realized by an individual upon contribution of these shares into a Belgian or a foreign company, and which capital gains remain tax–free, since they are deemed to be realized within the scope of the normal management of private assets (article 90, §1, 9°, sect. 1 of the Belgian Income Tax Code 1992, "ITC").

As a result of the new tax rules, the acquiring company will only enjoy an increase of its fiscal capital in an amount equal to the acquisition value the shares had in the hands of the individual (instead of the value of the shares at the moment of contribution).

But what happens in the case of a sale of shares instead of a contribution? Do the new rules also apply to such a transaction?

In principle "no". The text of the law clearly and exclusively refers to "a contribution of shares" (art. 184, sect. 3 ITC) and therefore does not apply to sales or types of transfer other than contributions.

The Conseil d’Etat already indicated at the moment of implementation of the new tax rules that taxpayers might be tempted to avoid the application of the new legislation by not contributing the shares, but instead by selling the shares to a company in which they have a stake, perhaps without immediate payment of the sale price. Later on, the claim resulting from the unpaid sale price can be converted into fiscal capital by contributing the claim into share capital. The Minister of Finance considered, however, that such a "tax scheme" does not fall within the scope of the normal management of private assets, and could also be challenged on the basis of the general anti-abuse clause (art. 344 ITC - Explanatory memorandum n° 54-2208/001, 16-48).

But what if no specific "tax scheme" is developed or organized and the sale price for the shares – for example - is simply paid by the acquiring company to the individual seller? We believe that in such a case the previous and present tax rules on sales of shares simply continue to apply, as a result of which such a sale remains tax-exempt provided the transaction is carried out within the scope of the normal management of private assets.

Advantage in kind: no tax deduction in case of lack of effective activities or services?

The Court of First Instance of Antwerp has recently ruled in a number of cases on the tax deductibility by a company of a so-called "advantage in kind" attributed to the company’s director (Court of First Instance of Antwerp, January 27, 2017).

A first case brought before the Court concerned a company director who, for private purposes, occupied part of a building which was owned by the company. The company considered the private use of that part of the building to be a taxable advantage in kind, and filed a tax form confirming the taxable status of this advantage towards the company director.

The tax inspector refused the deduction of the relevant building costs by the company, and considered that the company had failed to prove that "effective activities" had been performed by the director in order to justify the granting of such advantage in kind. As a result, the Court ruled in favour of the Tax Authorities and explicitly considered the filing of a tax form as an insufficient legal basis for allowing the company the tax deduction.

In another case brought to the Court on the same day, the judge did allow the tax deduction by the company of an advantage in kind granted to its director. The case concerned a director who was able to prove that he had effectively rendered services to the company, and whose normal remuneration had been decreased by an amount which was approximately equal to the value of the advantage in kind. The Court ruled that it was safe to conclude that the advantage granted indeed concerned a justified remuneration which was tax deductible by the company.

It clearly follows from the above jurisprudence, that the tax deductibility by a company of an advantage in kind to its director can not only be justified by the fact that such an advantage is definable as a taxable income for the beneficiary / director, even if a specific tax form is filed. The Antwerp Court clearly states that the proof of effectively rendered activities or services is required in order to justify the tax deductibility by the company of the relevant costs.