The law of 15 April 2018 recently entered into force and dramatically amends certain concepts proper to economic law.
It seemed us opportune to share the questions raised after having analysed this reform from a tax law perspective. We will concentrate on a specific aspect of this reform (the others being less relevant): the abrogation of the notion of merchant and its replacement by the one of ‘enterprise’ and the correlative disappearance of the distinction between commercial and civil companies.
The law of April 2018 does not contain specific tax provisions but this does not mean that it has no effect on tax law: on the contrary, is seems that said legislation clarifies certain concepts used by tax law, or broaden the application scope of existing tax regimes, feeding by that some debates taking places during tax audits.
The Income Tax Code of 1992 (ITC) is not, as such, articulated around the notion of enterprise, but frequently refers to this concept.
It must be reminded that the law of 15 April 2018 replaces the merchant concept by enterprise but that it also modifies the definition of the notion which now encompasses (in essence) any legal person, any company (with or without legal personality) and any individual exercising professional activities as a self employed worker (article 35 of the law).
Being informed about this amendment and of the broadening of the categories concerned, it is interesting to take our Tax Code and have a look on the consequences of these parallel readings. Without being exhaustive, we tend to summarize the most important questions raised by this reform here below.
An income is qualified as such by the ITC provided it corresponds to one of the characterizations provided by the Code. The definitions and precisions of the law are therefore of importance when it comes to defining the taxable items, the taxpayer, the taxation basis, etc.
Professional income is, according to the ITC, composed out of (among others) ‘profits’ that are defined by reference to the notions of ‘profits realized by industrial, commercial or agricultural enterprises’ (article 24 ITC).
Bearing in mind the changes brought by the law of 2018, one could question the interpretation that should be given to the word ‘enterprise’ used by the definition of profits by the ITC (and also at articles 25 and 28 of the same Code). Now that commerciality has no meaning anymore under economic law, one should most probably consider that the reference to ‘commercial enterprises’ as used by the ITC covers, since the latest amendments, the ‘enterprises’ as defined by the law of April 2018, any reference to their commercial nature being useless.
It is indeed generally admitted that in the event a notion is used by tax law without being defined by the latter, it has to be construed in accordance with the definition provided by common law (Supreme Court, 9 July 1931, Pas., 1931, I, pp. 218 et seq.).
The link between the introduction of the new enterprise definition and tax law begins to appear more distinctively.
Would this mean that all categories of enterprises covered by the new definition should consider their income as professional income, taxable as profits? Is a civil partnership or a nonprofit organization, characterized as ‘enterprise’ since the entry into force of the law, from now on subject to the heavy taxation applicable to professional income?
These questions are relevant and deserve a case by case analysis based on each case’s characteristics. To that end, certain key elements should be kept in mind to better circumscribe the discussion.
Articles 1 and 2 of the ITC introduce a personal income tax regime that is applicable to individuals, a corporate income tax one that applies to resident companies (with legal personality) and the legal entity tax regime that applies to legal entities other than companies. These precisions are of importance since article 24 ITC (that contains the definition of profits referring to the notion of enterprise) is a personal income tax provision.
For example, a nonprofit organization, having legal personality can, therefore, only be subject to the legal entities tax or to corporate income taxation (and not to personal income tax, except in case of recharachterization). Hence, it is only to the extent that either the corporate income tax regime or the legal entities tax regime explicitly refers to the personal income tax notion of profits that said organization would be concerned by the topic (which will be the case if the nonprofit organization is subject to corporate income tax – article 183 and 185, §1 ITC, but not if subject to legal entities tax).
In respect of civil partnerships, the situation is different. Since they do not have legal personality, they could neither be subject to corporate income tax (only applicable to entities having legal personality) nor to legal entities tax (that also requires legal personality) and they cannot be considered as individuals. The notion of profits, used by provisions of the ITC which could not apply to such partnerships would then be without consequences.
However, should the question not be transposed to the level of the individuals, members or managers of the partnership? The reasoning is not meaningless.
Indeed, this issue brings us back to the numerous discussions arising in practice regarding the delineation between professional activities (triggering the taxation of the income as professional income) and fortuitous activities falling outside of this scope.
Given the lack of clear definition by the law, our Supreme Court explains that a professional activity requires a whole of operations, repeated and sufficiently linked between them such as to form a continuous and usual activity (Supreme Court, 27 October 1983, Bull. Contr., no. 637).
Both in respect of partnership and nonprofit organisations, for example, these criteria should be kept in mind since the new definition of enterprise, read in conjunction with it, allow to have a more incisive look at the question.
To the extent that individuals, through a silent partnership, repeatedly conduct activities sufficiently linked to each other so as to constitute a regular and usual activity, the circumstance that partnerships and individuals may both fall under the definition of ‘enterprise’ to which the tax concept of profits refers, will most probably allow the Belgian tax authorities to elaborate stronger and more consistent reasoning aiming at taxing the revenues as professional income. The nature of the activities conducted will be decisive and would, depending on the circumstance, allow the discussion to be placed within the scope professional income (if the above criteria are met) and from thereon, the new enterprise definition will authorize taxation as professional income easily.
Since the rationale of the amendments adopted in 2018 was to effectively submit these categories of enterprises to economic law, it would in addition be delicate to try developing arguments aiming at refuting a taxation which, per se, is supposed to apply to economic players (i.e., taxation as profession income).
Here is another question which could seem delicate at first sight but that the above limitations will allow us to place in its right context.
This anti-abuse measure (articles 26 and 79 ITC) aims at ensuring the taxation of advantages granted by enterprises, when said advantages are not subject to taxation (in the hands of their beneficiary) or granted to certain non-resident beneficiaries.
Based on the foregoing, the discussion must be limited to situations where professional incomes are at stake. Article 26 ITC being indeed a provision proper to profits (and article 79 to professional losses), the same qualifications as the ones analysed in the previous section do apply. This measure is therefore only applicable to the extent that an enterprise earns professional income but there will be no more doubts as to the application of this measure to persons or entities that would previously have had the opportunity to argue that they were not an enterprise, despite the characterization of their income as professional income.
In order to combat certain complex tax structure (known as hybrid constructions) new definitions were introduced in the ITC. This regime is also referring to the notion of (foreign) enterprises without providing any further definition or information about this notion (articles 2 and 185, §2 ITC).
In this case, the analysis should be less nuanced.
This notion of foreign enterprise should indeed be construed within the meaning of the new law of April 2018 and therefore, be analysed not from the beneficiary’s point of view anymore, but from the one of the debtor and it dramatically impacts the analysis since it will not require tying this debtor up with any concept of professional income, individual income tax or other. The only circumstance that said debtor would qualify as an enterprise under economic law should suffice for the regime to be applicable to the beneficiary (provided the other conditions are met).
Life annuities are defined by the ITC be reference to the notion of enterprise.
Indeed, in the event that a payment meets certain conditions including the fact that it is attributed by an ‘enterprise’, the income is taxable as life annuities. The notion of enterprise (article 17 ITC) concerns here the debtor of the income such that it is not required to establish a taxation as professional income, the application of personal income taxes or other conditions applicable to the beneficiaries to enlarge the notion to the new categories covered by the definition.
Among the means of proof available for the tax authorities, article 342 ITC allows them to define minimal taxable basis.
By virtue of these provisions, in the event that no income tax return was filed or if filed lately, the tax authorities will be authorized to define a minimal taxable basis in the hands of certain taxpayers, among which ‘enterprises’ are cited (article 342, §§2 and 3 ITC).
Foreign enterprises may also fall within the scope of application of this regime.
A prudent interpretation of these texts should lead to the conclusion that the scope of application of this regime has de facto been broadened by the introduction of the new enterprise definition.
Belgium also introduces certain taxes in the hands of non-residents taxpayers (except if a double tax treaty may be invoked) and organizes this taxation around specific concepts. Among other situations, income realized by a non-resident person through a Belgian ‘permanent establishment’ are deemed taxable in Belgium pursuant to the ITC that allows the taxation of the profits generated thanks to this Belgian presence.
The wording of the applicable provisions (article 227 ITC regarding the notion of non-resident taxpayer and 229 regarding the question of taxable items) leads also to the conclusion that their scope of application has de facto been broadened by the introduction of the new enterprise definition.
If a permanent establishment typically covers office spaces or other fixed places of business, it also refers to the new notion in its definition which explicitly cites any fixed place of business through which a foreign enterprise conducts all or part of its activities.
Even though a link has to be established with professional activities, as soon as it will be demonstrated, the enterprise concept will be available to tackle more categories than before taking the latest modifications into consideration.
We briefly list the other regimes contained by the ITC that most probably deserve to be looked at into detail in the light of the new definition provided by economic law:
As emphasized by the below sections, the above questions will most probably require a case by case analysis to determine whether they raise important issues to address, or not.
The VAT Code is not really using the notion of enterprise but the question is more insidious here.
One should indeed remind that the notion of VAT taxpayer (article 4, §1 VAT Code) covers any individual, legal entity or group without legal personality that delivers goods or provides services within the framework of an economic activity (as an independent and repeatedly).
Further to the law of 2018, new categories are falling into the scope of application of economic law, but with which consequences on this taxpayer definition? Should any activity conducted by an enterprise not be considered as an economic activity?
The administrative commentaries to the VAT Code specify, in respect of the nature of the activities, that a taxpayer should be understood as any person independently and regularly conducting economic activities as merchant (VAT Manual, no. 78), regardless of the question as to whether the activities may be considered as professional.
The notion of merchant being abolished and replaced by the enterprise concept, it could reasonably be supposed that the tax authorities could use these arguments to reinforce their position in cases where the discussion concerns the satisfaction of the conditions to be fulfilled in order to be considered as a VAT taxpayer.
However, the VAT provisions do not really need any reference to a broadened notion of enterprise to apply to categories that could not be considered as merchants or that were not subject to economic law before the amendment introduced by the law of April 2018. The VAT approach is different than the one followed for income tax purposes, considering the definitions and concepts used by the VAT legislation that have a broader scope of application (it is not new for a nonprofit organization or for a partnership to be considered as VAT taxpayer).
That being said, the 2018 amendments clarify certain notions.
As highlighted by the above comments, the 2018 amendments are not without consequences from a tax perspective.
If it makes sense, to a certain extent, that including new categories in the economic area implies to treat those categories consequently for the purpose of applying legislations closely linked to said economic area (including tax laws), it should not result in excessive interpretations imposing heavy taxation and administrative burdens to persons or entities that the legislator had no intention to reach.
To conclude, it is always interesting to take some distance in order to try delineating the concrete borders of a question.
These amendments should most probably be seen as an additional demonstration of a trend that tends to become stronger through the years under Belgian law: the substance over form approach. The application of laws shifts more and more to criteria based on the nature of the activities, on their effective substance with less importance given to the form of exercise.
Hence, the introduction of a very broad notion of enterprise that could be seen as a source of legal uncertainty seems however consistent (even though further guidance should be given) and confirms the general trend noticed in practice and in legal cases.
We hope that proportionality will be preserved when applying tax provisions in the light of the new enterprise definition, bearing in mind, however, that the general principles and other fundamental rules will help keeping the discussion at a reasonable level.