New seat of effective management judgement confirms formalist interpretation
In a judgment of 23 November 2017 (2014/AF/217) the Brussels court of appeals gave a verdict on the tax residence in a Belgian-Luxembourg context. The judgement is interesting not only because of the parties in the dispute, or the nature of the tax claimed, but mostly because the court decided on a formalistic approach to the effective management, in a group context.
The dispute concerned Belgacom Invest SA (later renamed Tango SA), a public limited company registered in Luxembourg wholly owned by Belgacom NV, a public limited company registered in Belgium. Belgacom (currently named Proximus) is the largest telecommunications company in Belgium, and interestingly, was wholly state-owned at the time of the dispute (currently the Belgian state is still the majority owner at 53.5%). Belgacom NV had contributed i.a. a 75% participation in Belgacom Mobile NV, another public limited company registered in Belgium, into Belgacom Invest SA.
Why had Belgacom chosen this setup? The choice to incorporate a holding company was motivated by economic considerations. However, the choice to incorporate a Luxembourg holding was motivated wholly by tax considerations. Indeed, the dividends distributed by Belgacom Mobile NV exceeded the taxable base, which would result in an ‘excess participation exemption’, which would have meant an irrecoverable tax loss at the time of the dispute. This would later be determined to be contrary to European law (ECJ C-138/07) and is now changed in Belgian law (allowing for the carry forward of excess participation exemption), but obviously this is to no avail for the time in which the dispute arose. Hence, Belgacom decided to incorporate Belgacom Invest SA in Luxembourg instead.
We mention this tax motivation specifically because the sole shareholder of Belgacom at the time of the dispute was indeed the Belgian state! In a reply to a parliamentary question the minister of state companies stated on this topic that Belgacom has simply exercised its right to choose the least taxed option as confirmed by the court of cassation and ECJ. Indeed, in Belgium even the government has the right to avoid taxes!
The Belgian government, this time in its capacity of tax administration, was not equally enthusiastic with the used structure, and attempted to tax the dividends as if Belgacom Invest SA was a Belgian tax resident. They invoked firstly that Belgacom Invest SA was a fictitious company, but this argument is quickly dismissed. Hence the tax administration argued that the seat of effective management of Belgacom Invest SA was situated in Belgium which led to the main discussion at hand.
After listening to the parties’ arguments, the court rules in favour of Belgacom and determines Luxembourg tax residence based on following elements:
- Belgacom Invest SA is incorporated in Luxembourg and has its registered office there
- Belgacom Invest SA files annual tax declarations in Luxembourg and received a certificate of residence in Luxembourg
- The accounts and corporate documents are kept in Luxembourg
- Belgacom Invest SA has a bank account in Luxembourg
- The general assembly is formally held in Luxembourg
- The board of directors meets formally in Luxembourg.
One may note that none of these elements are new, so what’s the deal? Well, maybe more important than the elements the court takes into account to determine the place of effective management, are the elements that the court explicitly does not take into account. They give us both an insight in the (formalistic) limits the Brussels court of appeal will put forward in this discussion, as well as in the (factual) arguments the tax administration will put forward.
The tax administration first invokes the lack of staff of Belgacom Invest SA. Indeed, a company without employees must be a letter box!? This argument is quickly dismissed on the one hand by the specific activity (passive holding company which does not require staff) and on the other hand by the contracts with third party providers (such as the domiciliation agreement with a corporate service provider which includes secretary accounting, office maintenance, etc.).
More interestingly, the tax administration then puts the three directors of the company under scrutiny:
- A majority (two against one) of the directors are Belgian residents who hold functions in other (Belgian) group companies;
- The Luxembourg director is a lawyer who invoices fees rather than receiving a remuneration;
- The decisions of the board are bound by instructions of group companies (and specifically the coordination centre in Belgium).
Regarding the residence of the directors, it is noted that in most of the Belgian advance rulings at least 50% of the directors should be residing in the state of the place of effective management. The court, however, notes that the ‘Belgian’ directors cannot bind Belgacom Invest SA without their Luxembourg colleague, and all meetings take place in Luxembourg (albeit sometimes by phone). Also a lack of desk in Luxembourg and business cards mentioning the Luxembourg contact details is disregarded by the court.
Also the fact that the Luxembourg director was a lawyer whose firm invoiced legal fees rather than him receiving a remuneration as director was not taken into account as none of the documents gave an indication that he was working in his capacity of lawyer (of the parent company) rather than director of Belgacom Invest SA.
The final additional consideration of the tax administration was the strong influence the (Belgian) parent company had on the effective management, thus placing the effective decision making in Belgium. Indeed, the Belgian directors hold functions in other (Belgian) group companies, and their decisions during the board meetings are mere confirmations of decisions instructed by the group, and specifically its coordination centre.
However, the court notes that it is precisely the function of a coordination centre to align group decisions. This does not detract from the directors’ competences, but simply fits in a hierarchical group structure and the relation between a parent company and a subsidiary. As long as the directors can hold their meetings in Luxembourg in accordance with Luxembourg corporate law and the bylaws, it should not be relevant that they consider the group’s approach (set out in Belgium) in their deliberation.
It is noted that the court uses a very formalistic approach to determine the place of effective management of Belgacom Invest SA in Luxembourg rather than Belgium. Unlike the ruling commission (e.g. in decision 800.430 of 20 January 2009, which is quoted in the judgment), no majority of local directors is required and the other functions in group companies do not pose an obstacle. This obviously does not safeguard companies in every situation (the tax administration still disagrees), but it does offer some leeway in the decision for a holding jurisdiction if necessary.
For daily practice is is also noted that the court interprets the substance requirements in light of the activity of the company, thus accepting for example that a holding company would not require staff to be operational. Moreover, great importance is placed on the domiciliation agreement with a corporate service provider. Given the formalistic approach of the court, it is of great importance that these formalistic elements are correctly present. The judgment is therefore a lesson for those considering a virtual office rather than paying for actual services, to realise a (small) cost saving. We highly doubt the court would have come to the same conclusion in case of a letterbox company, thus offsetting the small cost saving with a potentially massive tax cost!
Lastly, the court accepts that the board of directors meets formally in Luxembourg even if they follow an orientation given by a group entity, albeit the parent company or a coordination centre. This should in itself not surprise, as the directors are appointed by the shareholders to manage the company to their benefit. However, in light of the place of effective management, and the risk entailed by instructions given abroad, the judgement offers guidance on how to balance on this fine line.
All in all, the judgment offers clarity for Belgian taxpayers with international corporate/holding structures. And in the end, while the Belgian government lost this case in its capacity of tax administration, it also won in its capacity of majority shareholder. So only winners this time!