On 30 October 2012, the Court of Appeal of Gent ruled that a change of control is not justified by legitimate financial and economic needs if the target company is in a financially sound position. This judgement implies a narrow interpretation of the concept of legitimate financial or economic needs in the framework of article 207, al.3 BITC 92 and thus limits the possibility of keeping the carried forward tax losses in case of a change of control.
Background: Financial or economic needs
In case of a direct or indirect change of control, the deduction of tax attributes carried-forward (such as tax losses carried forward, notional interest deduction carried forward) is disallowed, unless this change of control can be justified by legitimate financial or economic needs (cfr. article 207, al. 3 BITC92).
The content of the condition of financial or economic needs is not defined by the law. However, in a report to the King it was stated that the condition of having legitimate financial or economic needs is met (i) in case the change of control occurs within a group of companies that are part of an accounting consolidation, or (ii) when the target company, who has financial difficulties, is able to continue, even partially, its economic activities and its employment level. These situations were however in practice considered as examples and not as being a limitative list. Furthermore, in legal doctrine it was defended that the condition of needing to have legitimate financial or economic needs was fulfilled if the transaction did not have tax avoidance as its main purpose.
Judgment of the Court of Appeal of Gent
In a recent court case the situation of a take over by a third party was discussed (so that the above exception of a transfer within a group of companies could not be invoked).
In this case the Court of Appeal of Gent followed the reasoning of the tax authorities and the Court of First Instance that there were no legitimate financial or economic needs that supported the transaction simply because of the fact that the target company was not in financial difficulties (given a.o. its solvability and liquidation ratio).
As this judgement clearly narrows the scope of the definition of legitimate financial or economic needs as stated in art. 207, al.3 BITC 92, we would like to stress that this judgement should be borne in mind when dealing with acquisitions of loss making companies.
Lead Transactions Partner
+32 2 710 74 23