Abuse of rights due to lack of economic content and management package on the program of the Wendel-Editis case

Article from the editors of January 30, 2022

Photo credit: MQ-Illustrations – stock.adobe.com

In the Wendel-Editis case, the Council of State confirms the existence of abuse of rights resulting from the creation of an artificial cross-border arrangement and the new tax analysis grid for management packages resulting from the judgments of July 13, 2021.

It follows from the provisions of Article L64 of the LPF that the administration is entitled to reject certain acts of the taxpayer as not binding on it, since these acts are fictitious, orthat, in order to benefit from a literal application of the texts against the objectives pursued by their authors, they cannot have been inspired by any motive other than evasion or alleviation of the tax burden that person, had he not performed these acts, would have behaved normally, having regard to his situation or his actual activities.

For example, the abuse of rights falls into two branches:

  • abuse of rights through simulation, including fictitious acts and disguised acts (which carry a misleading legal label, such as a donation disguised as a sale), as well as human intervention (for example, by calling on a nominee). This branch is well identified and looks like fraud because there are appearances and maneuvers ([113]†

  • abuse of rights by defrauding the law which, contrary to its name, is not tax evasion stricto sensu ([114]†

This second branch of abuse of rights presupposes the fulfillment of two conditions:

  • a subjective statebased on the purely tax motivation of the operation;

  • an objective conditionalleging that the literal application of the text by the taxpayer is contrary to the intention of the drafters.

Abuse of rights by defrauding the law therefore not only has the appearance of legality, but is theoretically legal as the letter of the standard is perfectly respected. On the other hand, the spirit of this standard is misunderstood, purely for tax purposes. It is for this reason that he is sanctioned.

Reminder of facts:

In 2004, the company WI founded a mechanism aimed at involving some of its senior executives in the acquisition of the E . publishing group as well as senior executives of the E-Group.

Thus, on 20 October 2004, MH acquired 37,500 shares in the company OM, for a total amount of € 75,000, a company indirectly owned by the company WI and in which the executives of group E who are involved in this operation come together.

He sold these shares at their purchase price on 19 December 2005 to the Belgian company P, which he founded with his wife and their three children. When Group E was resold by Group W, SPRL sold all its shares in OM to OF, a subsidiary of the Wendel Group, for EUR 1,212,746.

The capital gain of €1,137,746 thus realized benefited from the total tax exemption established by Article 192 of the Income Tax Code, in favor of capital gains from the sale of participations held by Belgian holding companies.

But after an inspection, the tax authorities, considering that company P, devoid of economic substance, had intervened for an exclusive tax purpose, started a repression procedure for abuse of tax laws (Art. L64 of the LPF) against Mr. and Mrs. h.

Rejecting the intervention of the Belgian company, the administration imposed on Mr H the profit resulting from the transfer of the shares of the company OM, up to 60% in the wage category and 40% according to the capital gain scheme on the sale of securities as referred to in Article 150-0 A of the CGI.

Spouses H appealed against the judgment of 27 June 2019 in which the Paris CAA returned them to the role of income tax for the year 2008 by maintaining the existence of abuse of rights and ruling that the entire disputed profit was taxable in the salary and wages category.

1. The Council of State confirms the existence of an abuse of rights through the creation of an artificial cross-border construction

The Council of State recalls that, before the Paris CAA, the Belgian company P had no economic content:

  • It had no buildings, resources or personnel,

  • The securities of the company OM were its only assets between its incorporation and its sale in 2008,

  • company P had no management autonomy over these shares.

The Council of State confirms that an abuse of tax law was not the creation of a company in Belgiumin particular with a view to transferring assets to children but the sole purpose of setting up a company in Belgium was to allow Mr H, a French tax resident, to exempt the capital gain from the transfer from his tax in France.

2. Management package: the Council of State confirms the new reading schedule

For memorythe Council of State has determined in three historic judgments of 13 July 2021 that the profits resulting from the acquisition, exercise and sale of BSA/COA are taxable in the wages category (and therefore not in capital gains) when a link with the functions of manager or employee of the beneficiary can be sufficiently characterized.

The Council of State applies this new tax reading schedule in the present case.

Leave a Comment