New company manager with a single share. A change of control impacting the company’s losses.

In the event of a change of control over a company, tax losses carried forward and certain other tax attributes may be forfeited. The Court of Appeal of Ghent has recently decided that such change of control may occur when a new company manager is appointed, even though that manager receives only a single share. Consequently, in case of a change in management it is imperative to keep this in mind and sufficiently motivate the non-tax reasons behind the change.

Loss forfeiture in case of change of control

In case of an “acquisition or change during the taxable period of the control over a company”, certain tax attributes (including, inter alia, tax losses carried forward) can no longer be used to reduce the taxable profit of that taxable period or any future taxable period. The tax deductions remain available, however, when the change of control is underpinned by so-called “legitimate financial and economic motives” (art. 207, par. 3 BITC92).

To define the concept of “control over a company”, tax legislation refers to the Company Code (that also includes accounting legislation). The concept of “control” is defined as “the de jure or de facto power to have a decisive influence over the appointment of the majority of the company manager(s) or on the company’s policies”.

Furthermore, the Company Code includes certain (rebuttable and irrebuttable) presumptions of de jure and de facto control. For example, an irrebuttable presumption of de jure control exists when a certain shareholder holds the majority of the voting shares of a company (art. 5, par. 2 Company Code). There is also a rebuttable presumption of de facto control when a certain shareholder, during the last and second to last shareholders’ meeting, has exercised the majority of voting rights during each of those meetings (art. 5, par. 3 in fine Company Code). As a result, one that does not hold the majority of voting stock can still avail of a de facto control, namely when the other shareholders are neither present or represented during the shareholders’ meetings.

Company manager with a single share

Based on the abovementioned definition of control, it is clear that the emphasis is on who has an actual say in the company rather than who legally owns the shares, a result of which a factual assessment is required to determine which person(s) has (have) control over a company. One the one hand, this offers some flexibility, yet on the other hand this may give rise to legal uncertainty. This was also the case before the Court of Appeal of Ghent in a recent decision (Gent 3 January 2017, unpublished).

The case before the court concerned a BVBA that was incorporated in 2001 and having as a company purpose the sale of books, newspapers and magazines. The bookshop was closed down in 2010. Later that year, the general shareholders’ meeting accepts the resignation of the company manager and appointment of a new company manager. At the same time, one single share out of 750 shares is sold to the new manager. The company purpose is changed to performing aviation consultancy services.

According to the tax administration, such course of action entails a change of control, notwithstanding the fact that the new manager only received a single share. In his defense, the taxpayer invokes the abovementioned irrebuttable presumption of de jure control in case one holds the majority of voting stock pursuant to art. 5, par. 2 of the Company Code. Since not the new manager, but the initial manager holds 749 out of the 750 shares, the latter has – irrebuttable – de jure control over the company. Hence, the new manager does not have control.

The Ghent appellate court does not agree with the taxpayer’s line of reasoning, since it ignores the fact that art. 5, par. 2 of the Company Code only relates to a de jure control and the Code also defines de facto control. This means that, implicitly, the Court lets de facto control prevail over de jure control when both types of control do not coincide. According to the Court, the following facts and circumstances demonstrates that the new manager, despite of holding only one share, is in control:

  • The company only performs services of which the new manager has any knowledge, and for a totally different clientele than the clientele of the initial bookshop;
  • Former staff was laid off;
  • The lease for the bookshop was ended;
  • During the administrative complaint phase, the tax administration was asked to send all correspondence to the new manager.

The Court ends with the observation that the de facto control of the new manager is also stable, since the new consultancy services have continued to be performed to date. Moreover, the new manager continued to manage the company and, in the end, also became the sole shareholder.

Sufficient non-tax motives as a prerequisite

The change of control most often occurring in practice remains, evidently, the (full or partial) transfer of the shares of a company. However, this court case demonstrates that a change of control may also occur in other, perhaps less apparent circumstances.

Amongst these less obvious circumstances, one can note change of control clauses in commercial agreements (such as financing agreements and joint ventures, long-term commercial lease agreements or agency and distributor agreements), shareholders’ agreements and amendments to the articles of association (for example when new classes of shares are created). To that list we may now add the appointment of a new company manager, if in-the-facts that new manager (and not the majority shareholder) runs the show.

Once again this demonstrates the need to adequately substantiate a change of control with financial and economic motives in cases of, for example, a change in management or drafting of commercial agreements. Indeed, if there are sufficient non-tax motives that underpin these corporate events, the tax attributes remain available to the taxpayer. Taxpayers therefore have an interest in anticipatively demonstrate the presence of financial and economic motives, by either properly recording these motives in company documentation or through a ruling with the tax administration.