Expatriate executives in Belgium who decide to buy their lease car from the company should be prepared to pay tax on the difference between the car's market value and the low take-over price. Carlos Gouwy of PricewaterhouseCoopers explains.

A recent issue frequently covered as a tax topic is the sale of a lease car at the end of the lease contract at a price below the market value.

In most cases, the Court – in line with the tax authorities – ruled that there is a taxable benefit because there is a link with the business activity. In another case, the Court ruled that the lessee granted a an abnormal and gratuitous benefit that must be added to the lessee’s tax base, and also upheld a tax increase of 50 percent due to the lessee’s failure to report the benefit with the intention to evade taxes.

Lease contract

A company car continues to be an attractive benefit. Usually the employer leases the car from a leasing company for a determined time period. At the end of the lease, usually a purchase option has been provided for, giving the lessee (usually the employer) the option to buy the leased car at a price that is significantly lower than the market price.

Issue

In practice, it is found that the lessee does not always exercise the purchase option at the end of the lease. Instead, the leasing company sells the leased car to a manager or an employee of the lessee or to another beneficiary at the take-over price stated in the lease contract or at a similar price.

In the view of the tax authorities, the difference between the market value of the leased car and the low take-over price has to be taxed as a benefit in kind. In this respect, the tax authorities determine the market value of the car on the basis of the estimated catalogue price of a similar car as published in car magazines.

Taxable benefit principle 

According to the Income Tax Code, benefits in kind received as a result of or in connection with the business activity have to be regarded as taxable earned income. This applies to employees, the self-employed, liberal professions, company managers, etc.

Link with business activity

A number of taxpayers used two arguments to claim that there is no benefit in kind. First, they said that the benefit had been granted by a lessor with whom there was no business relationship. Second, the company (ie, the employer) had not impoverished itself since there was no obligation to purchase the car.

However, the Court ruled that the employee, company manager, etc. would never have had the opportunity to buy the car at a low price had he not had the capacity of an employee, director, active partner, business manager, etc. with respect to the lessee.

The Court's reasoning

Below we will go into a number of elements and arguments cited in the judgements that made the tax authorities and the Court decide that there is a causal relationship between the business activity and the purchase of the lease car, and that there is a taxable benefit:

• The transfer of the purchase option by the public limited liability company or NV/SA (ie, the lessee or the employer), which the Court infers from the following cases:
  • The lessee sent the leasing company a letter proposing to sell the car to the employee.
  • From correspondence between the company and the lessor, it appears that the company has requested to charge the price of the purchase option to the director. Or there is a “tripartite agreement” to have the purchase option granted to the director (Antwerp Court, 22 February 2002).
• The price paid by the employee is significantly lower than the usual market price for a similar car. In practice, such cars are never sold at such low prices on the free market (Bruges Court, 4 December 2001).
• The employee buys the leased car on the very day that the lease contract between the employer and the leasing company terminates.
• Only if requested by the lessee can the leasing company be forced to sell the car at such a low price. No third party is in a position to claim such favourable conditions.
• Since the leasing company is a trading company whose exclusive object is to make profits it is not normal that it sells the car to a third party at so low a price.
• Since the lessee is a trading company whose exclusive object is to make profits, it is not normal that it does not exercise the purchase option, because the company could realise a significant capital gain if the leased car were sold at a later time.

Banking secret applicable?

According to the Belgian income tax code, the Belgian tax authorities are not entitled to gather information in the accounts, books and documents of financial, exchange, credit and savings institutions in order to tax their clients (this is the so-called banking secret). Whether the banking secret applies in the situation described above is, however, quite unclear. Case law is not unanimous in this respect. A few examples can illustrate this.

A number of taxpayers previously claimed that the tax authorities levied an assessment on the basis of information that they had gathered from the lessor in violation of the banking secret. The Brussels Court of first appeal (actually its French-speaking chamber) had already ruled that gathering information from lease companies for the purpose of taxing their clients was in conflict with the banking secret (Brussels Court, 23 February 2000 – however, this was a default judgement that the tax authorities were trying to have set aside).

On the other hand, several Courts have ruled that the banking secret does not apply to lease companies (for instance the Brussels Court on 4 January 2002, the Bergen/Mons Court on 16 January 2002, and the Liège Court on 18 March 2002). Consequently, the tax authorities were allowed to use the information they obtained from the leasing company in connection with the sale.

Finally, the Brussels Court of First Appeal has decided on 3 May 2002 that the banking secret is applicable on leasing companies (because leasing companies have to be considered as credit institutions). As a consequence, an additional income tax assessment may not be based on information gathered in conflict with the banking secret.

Spouse of a self-employed consultant

There is also a taxable benefit if the lessor sells the car to the spouse of a self-employed consultant at the price agreed (in the purchase option). This case involved a consultant who himself worked for the company and who was also the son of a director of the company.

By waiving the purchase option, it is the lessee who grants the benefit to the third party, rather than the leasing company.

In the Court’s view, it is not relevant that the ultimate beneficiary is not the consultant but his wife (Bergen/Mons Court, 16 January 2002).

De facto separated spouse of active partner in a private limited liability company

A certain BVBA/SPRL does not exercise the purchase option. Afterwards, the lessor sells the car to the de facto separated spouse of an active partner of the company at the take-over price that was agreed in the lease contract.

Here, too, the Court ruled that there was a taxable benefit in the hands of the active partner.

Since there is a causal relationship between the benefit and the business activity, the Court deemed it irrelevant that the car was sold to the de facto separated spouse (Antwerp Court, 27 May 2002).

Majority shareholder – director of a private limited liability company

Another BVBA/SPRL decides to terminate the lease contract early. Two months later, the lessor sells the car to the managing director (or business manager) of the company – who is also the majority shareholder – at the take-over price that was agreed in the lease contract.

In the view of the Court, the decision to terminate the lease contract is part of the – normal or abnormal – management of the company, and, from a corporate law viewpoint, this action could not be taken by any other person than the taxpayer in his capacity as a managing corporate body. Consequently, the taxpayer could realise the benefit only by performing his duties as a managing body, which suffices to establish the link between his business activity and the benefit. The Court found that the majority shareholding had at the most facilitated realising the benefit.

Amount of the taxable benefit refuted?

In some cases, the Court doubts whether the value assumed by the tax authorities (on the basis of trade magazines) corresponds to the real value.

That is why the debates are sometimes re-opened to allow the taxpayer to submit elements (including mileage and claims in case of accidents) evidencing that the real value is lower than the market value.

Abnormal and gratuitous benefit in the hands of the lessee

The lessee of a car can be taxed for an abnormal and gratuitous benefit when, after the lease term, the leasing company sells the car to a “third party” at the low take-over price agreed in the lease contract (Brussels Court, 4 January 2002).

Furthermore, the Court upheld a tax increase of 50 percent imposed for failure to report the benefit (rate applicable when a benefit is not reported deliberately in order to evade taxes – taking into account the significant difference between the normal value of the car and the take-over price).

In the case at hand, the car was transferred to a student, who himself had no link as an employee or partner with regard to the lessee.

The tax authorities tax the difference between the market value and the price paid by the student as an abnormal and gratuitous benefit in the hands of the company (an NV/SA), assuming that the company transferred its purchase option to the student at no charge. The tax authorities conclude there is an abnormal and gratuitous benefit on the following grounds:

• The company has not exercised the purchase option.
• A third party (the student) has purchased the car at the predetermined take-over price that is much lower than the real value.
• A company (ie, the leasing company) sells a commodity, for no obvious reasons, at a price that is significantly lower than the real price.
• Furthermore, when asked by the tax authorities, the leasing company confirms that it has traded with a third party at the request of the lessee.
• The sales invoice made out to the student mentions an expiry date that is the same as the date the lease term ended. Furthermore, the invoice also expressly refers to the lease contract.

August 2002

Carlos Gouwy is a senior tax consultant with PricewaterhouseCoopers in Belgium.