As widely known by now, the budget note from De Wever I includes a capital gains tax on shares. Although not many details are known yet, the note stipulates that there will be a general solidarity contribution on the future realized capital gains of financial assets, accrued from the moment of the introduction of the contribution. Historical gains are thus exempted.
A first question here is whether an entrepreneur/shareholder should consider preparing a valuation of its company that can be used as a reference point and what this should look like to be defensible against the tax authorities.
Today, a company’s valuation is only fiscally accepted if it can be sufficiently documented that this value is defendable to be arm’s length. This means that a detailed valuation must be prepared to support the arm’s length character of the value unless the value was determined in a transaction between third parties (where it is assumed that this value equals the market price).
There are various valuation methods that can be used, and within each method, certain parameters and assumptions are also used, which can also be tested by the tax administration to see if they are reasonable and defensible.
Valuing a company is not an exact science. Therefore, selecting the appropriate method and substantiating the parameters and assumptions used is crucial. Additionally, when an entrepreneur/shareholder incurs additional costs to have a proper valuation performed by a valuation specialist, or prepares a detailed valuation themselves, it is essential for the legislator to create legal certainty to avoid disputes on the valuation methodology, assumptions, and parameters used, during a future tax audit.
A second important question arises at the time of exit: the sale of the company.
Even though a valuation exercise – prepared by the company or by a recognized third party – normally provides a good estimate of the market value, this value is unlikely to equal the price paid in a third party transaction. The latter will potentially capture other factors, some beyond economics, some specific to the buyer, such as the negotiation power/position of each party, the eagerness to buy, the pressure to sell, synergies for the buyer, etc. The value estimate on the other hand assumes that buyer and seller have the same knowledge concerning the company, are not under pressure to buy or sell and have equal negotiating power.
As a result, there will almost always be a difference between the (theoretical) valuation at the reference point and the actual price/value at exit. The question is therefore, whether it is logical that the capital gains tax on shares be calculated on the difference between the exit price and the (theoretical) value estimate that was established based on an internal valuation, without taking into account potential economic and non-economic factors which affected the price at exit. Shouldn’t there be a provision for “backtesting” that allows for an adjustment of the internal valuation at the reference point if the internal valuation – extrapolated to the moment of exit – deviates by x% from the exit value?
Nancy De Beule – Tax partner, PwC Belgium
Philippe Rasquin – Senior Director Deals Valuations, PwC Belgium
