Constitutional Court rules: different tax treatment of capital reduction is not discriminatory


On 19 February 2015, the Belgian Constitutional Court ruled that the tax treatment of income from a capital reduction in the hands of a Belgian company is not discriminatory, compared to the tax rules applicable to such income in the hands of a Belgian private individual.

In the case at hand, a Belgian company had acquired shares of an ailing company for free as part of a reorganisation. The selling price of EUR 0 was at arm’s length, taking into account the very bad financial situation of the company acquired. After restructuring the ailing company, a capital reduction to the shareholders was made.

Referral by the  Court of First Instance to the Constitutional Court

The corporate shareholder, beneficiary of the capital reduction, claimed a tax exemption for the part of the capital reduction in excess of the tax value of shares. According to the taxpayer, such excess qualifies as a (tax-exempt) realised capital gain on shares (under article 192 of the Belgian Income Tax Code (“BITC”)), although no transfer of shares had taken place. The tax exemption claimed was denied by the Belgian tax authorities. The case was brought before the Court of First Instance of Bruges. Before making a judgement, the Court raised two questions to the Belgian Constitutional Court.

First question: no answer required, due to incorrect starting point

The first question is to know whether or not it is forbidden discrimination that share buy-back income (charged on capital) would be considered as a tax-exempt capital gain on shares in the hands of the recipient company (to the extent the income exceeds the tax value of the shares), whilst in the case of a capital reduction, income would be fully taxable (to the extent the income exceeds the tax value of the shares).

The Court ruled that the starting point of the first question is incorrect: a share buy-back capital gain does not fall within the scope of the rules on capital gains on shares (article 192 BITC), but falls within the scope of the dividends received deduction regime (article 202, §1, 2° BITC). Hence, as the starting point of the first question is incorrect, this question does not require answering.

Second question: capital reduction not considered as realised capital gain

As a second question, the Court asked if the difference in treatment of a capital reduction for companies compared to private individuals does constitute forbidden discrimination. More in particular, the question was raised whether income as a result of a capital reduction in the hands of a private individual is fully tax-exempt, whilst for companies the income is only exempt to the extent that the repayment of capital does not exceed the tax value of the shares. The Constitutional Court ruled that there is no discrimination: the tax exemption applicable for corporate tax purposes extensively differs from the personal income tax regime, and therefore tax treatments cannot be compared in the case at hand. The Court decided that no discrimination exists in this respect.


Taking into account the above judgement, it could be expected that the Court of First Instance of Bruges will rule that the capital reduction will be subject to 33.99% corporate income tax in the hands of the Belgian corporate shareholder, to the extent that the income exceeds the tax value of the shares.