We have recently noticed some trends in the inspection practices of the tax authorities. In August, we were already discussing the sharp increase in the number of copyright inspections. In this article, we explain two other elements that frequently trigger a targeted inspection operation.
Checks on entries of exceptional expenses
In addition to the operations with regard to copyright, the tax authorities have recently also carried out targeted checks on exceptional expenses, so-called entries on account 66.
If a company includes non-recurring expenses of a significant size or significant impact in financial statements, the risk of an inspection increases. Non-recurring expenses are those expenses which do not arise from the normal activities of the company. These include, for example, depreciation and write-downs on fixed assets, or impairments from the realisation of fixed assets. The questions that the tax authorities then ask are:
- Demonstrate the professional nature, authenticity and amount of the expenses;
- Demonstrate that the cost was incurred or borne during the taxable period; and
- Provide the necessary entries related to those costs.
The taxpayer must be able to substantiate the answers on the basis of the necessary documentation and supporting documents. In practice, it is particularly important to adequately substantiate the deductibility of expenses. In other words, verification takes place as to whether the conditions set out in Article 49 WIB 92 (the Belgian Income Tax Code of 1992) have been met.
Checks on the notion of ‘consortium’ in the application of the liquidation reserve
Finally, a company runs an increased risk of a tax inspection if it has not complied with the conditions for setting up a liquidation reserve. More specifically, there have been recent targeted checks on the notion of ‘consortium’.
Small companies may establish a liquidation reserve by transferring part or all of their accounting profits to a separate account of the liability. This liquidation reserve is subject to a separate, anticipatory assessment of 10%.
In order to be regarded as a small company, the criteria laid down in Article 1:24 (1)-(6) of the WVV (Companies and Associations Code) must be met. These criteria should, in principle, be tested on a consolidated basis, including in the case of a consortium. A consortium relates to the situation in which a company together with one or more other companies (under Belgian or foreign law), which are neither subsidiaries of each other nor subsidiaries of one and the same company, are under central management. In other words, it must be ensured that the company is not designated as‘ large ’because it belongs to a consortium as then there is no longer any right to the benefit of the liquidation reserve.
The tax authorities are sometimes very simplistic in their assessment of the concept of ‘central management’. In a recent practical case, the tax authorities assessed that there was a consortium between two entities because the majority of the administrative bodies consisted of the same persons.
In this case, the sole director of company A was natural person X, while the sole director in company B was company A. However, we conclude from legal practice and legal doctrine that, from a legal point of view, natural person X and company A are two separate persons. The permanent representatives may therefore not be taken into account if the director is a legal person.
The same situation occurred with company A, with the sole director being natural person X, who is also a director in company B and company C. Person X only represents the legal person, without there being any substitution.
It is always good to be sufficiently aware of the intentions of the tax authorities regarding inspection. However, the inspection practices cited here are just the tip of the iceberg. In addition to these specific considerations, the Belgian tax authorities also carry out other, less foreseeable checks on the fiscal position of individuals and companies.
Our Bofidi experts will be happy to help you
Do you have any specific questions about inspection practices? Then please do not hesitate to contact us. Bofidi’s team of experts will be happy to help you.