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Tax on conversion of bearer shares is contrary to EU law
 
Background

By act of 14 December 2005, Parliament introduced legislation to gradually abolish bearer securities starting in 2008. The law obliged Belgian companies to issue registered shares or bonds (recorded in the company's share register) or into dematerialised shares or bonds (registered in a securities account with a financial institution).

The announcement that bearer securities would be banned combined with the tightening of the money laundering legislation and the EU Savings Tax Directive convinced many small investors to come clean and regularise their bearer bonds and cash certificates. 

Since 1 January 2008, Belgian companies can no longer issue bearer securities and shares or bonds cannot be delivered in a physical form anymore, even if they are foreign securities or bearer securities recorded on a securities account.

Over a transitional period of six years, between 2008 and 2013, issuers of bearer securities were able to convert their securities voluntarily. All securities that had not been converted by the end of December 2013 were automatically converted into dematerialised shares, if the company's articles of association allow this, if not they were converted into registered shares. After 1 January 2015, the issuer will sell any securities for which the owner is not known.  The proceeds from the sale of bearer securities will be deposited with the Caisse des Depôts et Consignations. The holders of bearer securities may recover the proceeds from the sale of their securities from the Caisse, but a penalty will be due, calculated at 10% of the proceeds for each year of delay.

The Act of 28 December 2011 introduced a tax on the conversion of bearer shares. This tax was initially 1 percent, calculated on the market value of the bearer securities. This tax was raised to 2 percent for all conversions in 2013 and thereafter.

From the beginning, the tax raised a number of questions as to how issuers and financial institutions were supposed to apply the tax. In the absence of a practice note from the tax administration, a working group with representatives from the major players in the business and financial world, the so-called DMAT Task Force, published a set of “Best Practices“ on 2 January 2013 (www.dmat.be). These address issues such as when the tax is due, who is liable for paying the tax and on what basis - and by whom - is the tax calculated. The Best Practices provided much-needed clarification to help implement the tax in practice.

The Court of Justice of the European Union

On 9 October 2014, the Court of Justice of the European Union handed down a decision on a request for a preliminary ruling from the Constitutional Court (C-299/13, Isabelle Gielen v Ministerraad).

Mrs Gielen and her children held bearer shares in Belgian companies; she filed an application with the Constitutional Court to invalidate the tax on the basis that the conversion tax provided for an unjustifiable difference in treatment between shareholders who had subscribed registered shares or dematerialised shares (for which no conversion tax is due) and shareholders who had subscribed bearer shares. She pointed out that bearer shares do not qualify for the prohibition on indirect taxation provided for by Article 5(2) of Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital.

The Court confirmed that this tax on the conversion of bearer securities is contrary to Directive 2008/7/EC. Indeed, Article 5(2)(a) of the Directive must be interpreted as meaning that the prohibition on the indirect taxation (in any form) of shares precludes a tax on the conversion of outstanding bearer shares into dematerialised or registered form.

As for whether such a tax can be justified by Article 6(1) of the Directive (which could have allowed the Member States to charge a tax on the transfer of securities), the Court reminds the reader that it has already had the occasion to rule that Article 12 of Directive 69/335, the wording of which was substantially the same as that of Article 6 of Directive 2008/7, is an exception to the prohibition in principle of taxes with the same characteristics as capital duty (decision in Grillo Star Fallimento, C 443/09, EU:C:2012:213, paragraph 28).  This provision is an exception to the non-taxation rule and must be strictly interpreted; it cannot apply to a tax on the conversion of bearer stocks such as that at issue in Mrs Gielen's case.

The conclusion of the Court of Justice of the European Union was, therefore, that Article 5(2) of the Directive precludes taxation upon the conversion of bearer securities into registered or dematerialised form, such as the tax at issue in the main proceedings. Such a tax cannot be justified with reference to Article 6 of the Directive.

Consequences

This decision does not mean that Belgium will automatically pay back all the tax collected at the time of the conversion of bearer shares. The ball is now in the court of the Constitutional Court, but it is more than likely that, after this decision of the Court of Justice of the European Union, the Constitutional Court will declare null and void the Articles 61 to 69 of the Act of 28 December 2011 that introduced the tax on the conversion of bearer shares ... with retroactive effect, so that the tax will be deemed never to have existed.

After the decision of the Constitutional Court has been published in the Belgian State Gazette, taxpayers will have a special period of six months to claim back the tax on the conversion of bearer securities, even if the normal period of appeal has passed due to the statute of limitations. Reimbursement will be made to the financial intermediary who has paid that tax; those are the financial institutions if the securities are recorded in a security account, or the company that had issued the securities.

It is possible - and even anticipated - that the Constitutional Court may limit the effects of its decision so that not all the conversion tax would be reimbursed on the basis of the annulment of the conversion tax.  However, intermediaries and issues who claim back the conversion tax during the normal period for claiming back undue taxes (that is two years after payment) could recover the conversion tax paid in 2013, or even in the latter months of 2012, in accordance with the normal procedure.

Marc Quaghebeur
Partner, De Broeck Van Laere & Partners
22 October 2014



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