The last dance for tax-free capital gains

Ask a business consultant how he would describe the last quarter of a calendar year. Bet he’ll answer something like “hectic”. Every year, whether the exemption from capital gains on shares will be maintained is a main cause of concern for entrepreneurs and business leaders.

Five years ago, it was clear to the government led by PM Charles Michel that there should not be any capital gains tax during this term of office. A few other taxes were introduced as a sop. For example, there was the speculation tax, which made a quick capital gain on shares subject to personal income tax. The tax was withdrawn almost immediately. The securities tax, version 1.0, was also introduced. It was quashed by the Constitutional Court. Version 2.0 is being reviewed since. The fact that the legislator has little control over these taxes fuels the idea that a much broader capital gains tax is in line with expectations.

The state treasury is a bottomless pit of debt as a result of the pandemic. Now that the economic crisis seems more or less under control, we need to worry about the financial consequences. Sooner or later, a new source of revenue will have to be harnessed. In almost every discussion, this includes a capital gains tax on shares. It is seen as a solid source of revenue, without pushing other sky-high taxes to unacceptable levels.

But that’s not all. For years, there has been an informal consensus on the idea that personal income taxes are in need of a thorough reform. In this respect, the fiscal government think tank of the High Council of Finance and the Minister of Finance are not afraid to consider taxing capital gains on shares.

And there is another problem: the exemption from capital gains on shares falls under the doctrine of “normal private asset management operations”. The international human rights doctrine considers the levying of taxes as a form of expropriation. Expropriation is only allowed if the rules are very clear. The problem is that the concept of ‘normal management’ can be interpreted in very different ways. As a result, the taxpayer cannot properly assess the consequences of his or her actions. The concept of ‘normal management’ may not stand up to human rights scrutiny. It has already been possible to convince a Tax Court judge to refer this matter to the Constitutional Court for a preliminary ruling. If the Court rules that the concept is not precise enough, a new tax system must be created.

There are other kinds of phenomena that are gathering like dark clouds over the tax exemption. What about cryptocurrencies? In fact, there is no reason to treat them differently from any other private asset. In principle, the capital gain should therefore be tax-free. Yet, the government and the tax authorities do not see it that way. The value increase of art and seemingly trivial things such as Panini collections should also be mentioned. It is not inconceivable that the creation of a clearer legal framework for cryptocurrencies will also bring down the exemption from capital gains on shares and other private assets.

It doesn’t look like the aforementioned business consultant is going to have a quiet year. He can expect even more questions about protection against a possible capital gains tax. While there are new opportunities in the area of capital gains, caution must be preached.  The tax authorities have developed various doctrines in order to be able to proceed with an appraisal in certain cases. Evidently, the tax authorities can’t help making appraisals. It’s in their DNA.