Objective and factual data required as proof of the reality of services performed

On 15 October 2016, the Belgian Supreme Court rendered a decision on the principles guiding the deductibility of management fees (F.14.0161.n/1).

(a) Facts. The taxpayer, a company, operates a bakery via a so-called management company. The management company became the managing director of the bakery. The shareholder as well as the directors of the bakery are the same individuals.

Upon a tax audit, the tax authorities reject the deductibility of a substantial part of the fees paid to the management company. They regard the surplus as liberalities and find that the conditions for deductibility of these expenses are not met because the taxpayer was not able to demonstrate the reality of the underlying services.

This position was upheld by both the Court of First Instance and Appeal of Antwerp. Both courts consider that objective data should be made available to substantiate the reality of the management services performed. This is not proven by merely providing the invoices and agreement and pointing out that the bakery had a huge turnover.

(b) Legal background. Deductible expenses are those incurred or borne by the company during the financial year in order to obtain or safeguard taxable business income (article 49 of the Belgian Income Tax Code). To be deductible, documentary proof should be provided.

(c) Decision. Although the wording of the provision on the deductibility of expenses do not explicitly state that these expenses should be incurred for real services provided, it is clear and logic that only real services could result in the obtainment of taxable business income.

Therefore, it does not come without a surprise that the Supreme Court confirms that a taxpayer indeed should provide sufficient factual and objective proof that services – for which the expenses have been incurred – have actually been rendered.

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