Copyright and Tax Abuse: The Court of Cassation Gets Its Wires Crossed!

The Facts and the Judgment of the Liège Court of Appeal of 8 March 2023

An architect carries out his professional activities through a single-member company. In 2016, he assigned his economic rights under copyright to that company. In return, the company paid him an annual amount equal to the ceiling laid down in Article 37 of the Belgian Income Tax Code 1992 (BITC 92), namely EUR 37,500 (indexed). The tax authorities decided to reclassify this income as professional income.

The Liège Court of Appeal rejected the tax authorities’ position. Following a detailed analysis of Article 17, § 1, 5° of the BITC 92, it found that the conditions for classification as income from movable property were met and noted that the company was indeed exploiting the rights. However, the Court agreed with the tax authorities on the question of tax abuse (Article 344, § 1 of the BITC 92), an argument they had raised in the alternative. According to the Court, a tax advantage had been obtained in a manner contrary to the legislature’s objectives, and the taxpayer had failed to demonstrate the existence of motives other than tax considerations.

The fact that the parties had set the remuneration for the rights at the ceiling provided for in Article 37 of the BITC 92 did not help their case. It is strongly recommended that the economic value of the rights be determined independently of any tax ceiling.

Following this judgment, the taxpayer lodged an appeal in cassation. Two grounds of appeal were raised. The first comprised three pillars: the identification of the legislature’s objectives, contradictory reasoning, and the consequences of the arrangement being unenforceable against the tax authorities. The second concerned the tax surcharge, on the basis that the tax return was not formally inaccurate.

The Court of Cassation’s Decision

The legislature’s objectives. The Court held that a breach of the objectives of a legislative provision can only be established where those objectives emerge sufficiently clearly from the wording of the provision and, where appropriate, its preparatory legislative materials. Account must also be taken of the general context, prevailing practices at the time and specific anti-abuse provisions.

The Court considered that the legislature had intended to introduce a tax regime better suited to the ability to pay of artists and creators, who face creative risks, irregular income and uncertainty as to their earnings. In this case, however, the taxpayer received substantial, fixed income without any uncertainty, a situation far removed from that objective. The Court therefore held that the appellate court had not infringed Article 344, § 1 of the BITC 92.

Contradictory reasoning. According to the Court of Cassation, it is not contradictory to find that the company exploits the rights while describing the legal certainty motive as “notional” on the ground that the company is entirely controlled by its sole shareholder.

Third pillar. In view of the Court’s position on the first two pillars, the third pillar became moot.

Tax surcharge. Where tax abuse is established, the legal provision concerned (in this case, Article 17, § 1, 5°) is deemed to have been infringed. Consequently, the tax return is inaccurate, and a tax surcharge may be imposed.

Criticism of the Court of Cassation’s Reasoning on the First Ground of Appeal

No tax advantage. The Court was not asked to rule on this concept, despite its central importance, and was therefore unable to take a position on it.

In our view, Article 17, § 1, 5° is not a derogating provision that reduces the tax burden. Rather, it establishes the ordinary tax regime applicable to income derived from the assignment of copyright. The fact that such income is taxed at a lower rate than employment income is not sufficient to constitute a tax advantage within the meaning of Article 344. Copyright does not arise from a professional activity. A tax advantage exists where a specific legal provision reduces the tax that would ordinarily be payable, which is not the case here.

Methodology and the legislature’s objectives. Both the Constitutional Court and the Court of Cassation regularly reiterate that preparatory legislative materials should only be consulted to determine the legislature’s objectives “where appropriate”. In principle, those objectives should be apparent from the wording of the legislation itself.

In this case, the Court of Cassation turned immediately to the parliamentary preparatory materials without first examining whether the legislature’s objectives could be identified from the statutory wording. In our view, however, the objective is clear from the text itself: the provision covers all copyright and neighbouring rights, without exception.

The Court identifies the original objective of the bill but disregards how that objective evolved during the parliamentary process. The amendments, the explanatory statement in committee and the statements of the Minister of Finance show an intention to simplify matters and bring all such income together in a single category of income from movable property, regardless of the profession or the amount of income involved. Protecting modest incomes is merely a secondary objective, achieved through the introduction of degressive flat-rate expenses. The Court of Cassation therefore failed to correctly identify the legislature’s objective.

Contradictory reasoning. The Court of Appeal accepted that the company exploited the works, which necessarily presupposes the author’s authorisation (Article XI.165 of the Code of Economic Law). It could not then consider that authorisation to be “notional” in order to dismiss the legal certainty justification. The rejection of this pillar of the appeal as “lacking factual basis” is therefore a harsh conclusion.

Conclusion

This “unfortunate” judgment creates further legal uncertainty in an area already marked by extensive litigation. The tax authorities could hardly have hoped for more: they are already relying on the judgment in ongoing cases to argue that tax abuse has occurred. The courts should swiftly distance themselves from it.