Headline news of Wednesday 26 May 2010:

A South-African parent company has granted options to certain of its employees and those of its subsidiaries (including the Belgian subsidiary). A Special Purpose Vehicle had been set up for the purpose to acquire shares while the plan was administered by a trust.

When Belgian employees exercised the options, the South-African parent company recharged the negative difference between the exercise price of the option and the cost at which the SPV acquired the shares.

The Belgian tax authorities have argued that this negative difference was to be regarded as a capital loss on shares and was thus not deductible and this, despite the fact that the ownership of the shares has never been held by the Belgian subsidiary (Article 198 first indent 7° of the ITC). According to the tax authorities article 198 first indent 7° of the ITC does not require that the shares are held by the Belgian subsidiary in order for the costs to classify as a loss on shares. It is to be noted that the Belgian tax authorities also stressed that the invoices received by the Belgian subsidiary in respect of the SOP costs actually mentioned that they related to a loss on shares.

In its decision of April 16, 2010, the Court of first instance of Brussels surprisingly confirmed the viewpoint of the Belgian tax authorities.

Although there are arguments based on Belgian GAAP, to defend that no capital losses on shares have been realised by the Belgian subsidiary if the shares have never been booked in its financial statements, we may anticipate further investigations by the Belgian tax authorities following the above judgement. It can therefore be advisable to check the wording of the invoices and agreements in place for the re-charging of SOP and other equity incentives related costs.

The taxpayer made appeal against the decision.