- Grey area of tax law
In Belgium, capital gains realized by a private individual are not taxable if they are realized within the ‘normal management of their privately held assets’ and are not part of a business activity (Article 90, 1° ITC 1992). The next logical question is what exactly does ‘normal’ management mean? This concept is not defined in the Belgian tax code.
What is ‘normal’ and what is ‘abnormal’ (or speculative) in this context, is not always clear and has led to many disputes with the tax authorities. It probably does not surprise that the opinion of the taxman generally differs from that of the taxpayer. The assessment often requires a balancing act and a detailed analysis of the facts and circumstances. Where the taxability of a transaction depends on a subjective appreciation by the tax authorities, this inevitably results in discussions.
It usually concerns the taxability (or exemption) of capital gains resulting from share deals, real estate transactions, and more recently also transactions involving cryptocurrencies and NFTs. In any case, private individuals should be aware that in some cases, capital gains tax (CGT) may apply in Belgium.
- Business income, speculation, or normal management?
The first question that needs answering is whether the profit results from a professional activity of the taxpayer (taxable at the progressive tax rates of 25% up to 50%, plus local taxes). The Belgium Supreme Court defined a ‘profitable activity’ already back in 1965 as “a frequently occurring and interconnected set of transactions that result in a continuous and ordinary business and which, outside the scope of a normal management of privately held assets, have a professional character”.
The Belgian authorities clarified that those transactions should not only be closely linked to the (main) professional activity of the taxpayer (or be an extension of it), but also occur sufficiently often. There is no business activity in case of a one-time or occasional transaction.
Once it is established that an income cannot be taxed as professional income, the question arises whether it could potentially be labeled as ‘miscellaneous income’. The general rule is that every profit or benefit, even generated occasionally or accidentally, arising from any type of activity, transaction or speculation, must normally be taxed as ‘miscellaneous income’ (taxed at a flat rate of 16.5% or 33%, plus local taxes).
These types of occasional transactions used to remain completely tax-free, which was considered unfair. For this reason, the Belgian legislator introduced the concept of ‘miscellaneous income’, but at the same time, made an exception for “normal management of privately held assets consisting of real estate property, financial investments and movable goods”. These were traditionally considered to be the standard components of private wealth, and the day-to-day management of these assets by a diligent taxpayer should therefore remain untaxed (‘Prudent Man’-principle).
In view of this, how the concept of ‘normal management’ and ‘speculation’ are defined makes all the difference between a potential taxation or full tax exemption. The taxman does not like taxpayers who try to make a profit on a speculative basis. For this reason, a significant profit will too often (and hastily) be labeled as speculation.
- Criteria for ‘speculation’
By way of summary, we can state that ‘speculation’ depends on the facts and circumstances, but mainly requires three conditions to be fulfilled:
- the taxpayer takes a significant risk at the moment of investment
- at that same moment there should already be a clear intention to realize a significant gain, and
- the abnormality of the transaction or the use of mechanisms that deviate from what is generally considered to be ‘normal’
Due to the lack of objective criteria to measure these conditions, it will often result in a subjective opinion by the tax authorities. For speculation to be correctly assessed, it is necessary to make the assessment at the moment of initial investment by the taxpayer, and not at the moment of resale.
Criteria that are in general considered relevant in this context are: origin of the invested resources (personal funds vs. loan), frequency of transactions, use of personal knowledge vs. getting professional advice, short vs. long-term return on investment, familiarity with the type of investment, etc.
Again, as indicated before, everything will depend on the specific circumstances of each situation.
- What qualifies as ‘normal’ in 2022?
The question therefore remains what exactly is ‘normal management’ of your private assets? Despite many attempts in case law and legal doctrine over the years to further clarify this concept, it is clear that it remains a vague notion that continues to run after the facts.
The main criterion is obviously that of a normal and careful person in respect to the management of their private property. In other words, it should fall within a set of actions that a prudent family man usually undertakes to grow, retain or protect his personal wealth.
In this context, Belgian legal doctrine has identified some guidelines:
- the assets used for investing have been acquired in a normal way, e.g. from an inheritance, a gift, own personal savings, etc.
- the profits are generated by privately held assets, i.e. resulting from a non-professional use of assets and remain completely separate from any business activity
- the source of income is limited to real estate property, financial investments, and movable goods
It should also be noted that a normal management as a prudent taxpayer is not a priori irreconcilable with a certain degree of speculation. After all, the objective of generating profit is one of the main characteristics of successful wealth management.
‘Normal management’ is also a dynamic concept. What was common practice for private investors in the 1960’s may no longer be actual in 2022. Today’s wealth management presupposes a far greater expertise, more professional advice, more significant risks, and always a certain level of speculation.
- Confirmed by the Constitutional Court
In a recent case brought before the Belgian Constitutional Court (Nr. 31/2022, 24 February 2022), an ambitious taxpayer tried to challenge the legality of Article 90, 1° ITC1992.
He argued that the concept of ‘normal management’ is formulated in such a general way that taxpayers can never tell in advance whether a certain transaction will be taxable or not. According to the taxpayer, also the principle of equality in tax matters is violated. The same transaction will remain tax-free in one situation and will be taxed in another one.
In the case at hand, the taxpayer acquired two residential units and the common parts of property adjacent to a castle. The purchase was financed by two mortgage loans. About two years later, the taxpayer sold the property for more than four times the initial purchase price to a company of which he himself was the sole director and shareholder. The tax authorities taxed the realized capital gain as miscellaneous income, which seems rather obvious to us in the given circumstances.
Even though the Belgian tax code does not contain any specific criteria, the Constitutional Court replied that the text of the law is precise enough to meet the requirement of predictability and therefore respects the principle of legality. The latter does not require only those criteria to be in place that exclude any form of discretionary power of the tax authorities. The latter is in any case supervised by the courts.
The term ‘normal management of private assets’ remains a broad criterion, but it nevertheless contains a minimum set of guidelines that further limit the scope of this provision. For the Constitutional Court, it stipulates “sufficiently clear, precise, and unambiguous which transactions are taxable and which are not”.
However, practice shows this is hardly ever the case.