Ghent Court of Appeal

08.06.2021

2016/AR/455 - In the case of:

BELGIAN STATE/FEDERAL OVERHEIDSDIENST FINANCIEN, ON ..., Minister of Finance, with offices at 1000 BRUSSELS, rue de la Loi 12, BELGIUM, represented by the Regional Director AA BBI ANTWERPEN, with offices at 2060 ANTWERP, rue Elleman 21, BELGIUM,

appellant, represented by A.D. and P.C., adviser

against

U. B.V., ON ...,

having its registered office at ...,

the respondent,

D.B.L., lawyer in ....

the court gives the following judgment:

1. The procedure before the Court

By petition filed on 8 March 2016, the appellant appealed against the judgment pronounced by the Court of First Instance of West Flanders, Bruges Division, Fourth Chamber, on 27 January 2016, in the cases with reference numbers 13/3365/A and 13/3435/A.

By judgment of 1 October 2019, this Court declared the aforementioned appeal admissible but unfounded and confirmed the contested judgment.

Pursuant to Article 356 of the Income Tax Code92 , the Belgian State submitted a subsidiary assessment by way of a claim filed with the Court Registry on 12 March 2020.

The Court used the Dutch language in accordance with the Act of 15 June 1935 on the use of languages in judicial matters.

2. The relevant facts and the preceding procedure

2.1. The dispute between the parties concerns the assessment of royalties obtained from licences granted on the U. technology. U. technology allows laminate planks to be joined together without glue by means of a click profile milled into the planks. The U. technology is commercialised, among other things, through its integration into Quickstep laminate floors.

U. technology was invented in 1996 by Messrs. B.T. (director of U. bv), S.M. (former employee of U. bv) and M.C. (former employee of U. bv).

U. B. bv, a Dutch company established in 1976, applied for basic patents for this technology and obtained the first patents in Belgium and Europe from 1997-1998. The US patent was granted in 1999.

By a licence agreement of 8 January 1998 concluded between U. B. bv as licensor, on the one hand, and U. bv (then, U. D. nv), the respondent, as licensee, on the other hand, a licence was granted by U. B. bv granted U. bv a licence of its patent to exploit the Uniclic invention against payment of royalties.

A settlement agreement has also been reached between these parties regarding the intellectual property rights to the Uniclic invention: "The licensee declares and acknowledges that the licensor is the owner of the intellectual property rights to the Invention and that he does not and will not make any claim to these rights. In this regard, he waives all rights, claims and demands. He also declares that he will be adequately compensated for the contribution he has made to the development of the Invention by the favourable exploitation conditions agreed upon below."

Following negotiations with the Dutch tax authorities, U. B. bv transferred the beneficial ownership of the patents to F.I. Ltd. by means of an agreement dated 12 January 2001. (hereinafter, "F."), with effect from 1 April 2000. F. was incorporated for that purpose on 2 December 1999 as an Irish company under the name U. I. Ltd., changed its name in 2000 and, on 1 October 2007, transferred its registered office from B., Ireland, to Luxembourg. F. owed NLG 6,721,734 (EUR 3,050,189.31) to U. B. bv for this transfer.

Also on 12 January 2001, F., as licensor, entered into a 'license agreement' with the defendant, as licensee, under which the latter may use the Uniclic invention in the production of its floor products as from 1 January 2001. Under this agreement (also called 'swap agreement' by the defendant), the defendant does not have to pay royalties to F. but the latter may directly enforce all rights on possible improvements to the invention by U. BV.

F. also grants licences to third party licensees to use the Uniclic technology protected by the Belgian and various foreign patents.

2.2. In the context of an inspection started in 2009, on 10 July 2012 the Special Tax Inspectorate of Antwerp sent the respondent a notice of extension of the investigation period relating to the assessment years 2006 to 2009. Based on a number of findings, the administration stated that "the implicit transfer from U. BVBA to U.B. BV of the right to formalise and further exploit the invention, followed by the explicit transfer of the economic ownership of the patents by U. B. BV to F.I. Ltd. The parties did not accept all the consequences of the transfer." On this basis, the administration concluded that "substantial income was deliberately diverted to more tax-friendly related companies during the years in question. This diverted income belongs to U. BVBA. The intention to evade taxes is present."

On 23 October 2012, the administration sent notices of amendment to the tax return to the respondent for assessment years 2006 and 2010. The administration stated that the respondent, through its director B.T. and employees M.C. and S.M., invented and developed the Uniclic technology in 1996 and continued to exploit it, and that the subsequent transfer of rights to the Uniclic invention to U.B. BV was simulated. The administration applied Article 26 of the CIR92 in order to add the profits foregone annually by the respondent, i.e. the royalties received by F. from third party licensees less the costs borne by F., to the respondent's taxable base. A tax increase of 50% was announced.

On 4 December 2012, the respondent disagreed with this for both assessment years. She argued, among other things, that the administration had failed in its burden of proof to demonstrate feignedness, that the parties had accepted all the consequences of their actions, and that the transfer of the Uniclic invention and the right to patent it had been recognised by various third parties and was not fiscally motivated. The respondent further disputed the existence of tax evasion and raised a number of breaches of procedural rules, which would result in the nullity of the assessment.

However, the administration maintained its position and sent the notices of assessment for both assessment years on 18 December 2012. On 20 December 2012, the following supplementary assessments were filed:

- assessment year 2006, article number ..., for an amount of 46,134,910.68 euros (tax due of 30,922,734.45 euros and 50% tax increase),

- assessment year 2010, article number ..., for an amount of 35,566,971.10 euro (tax due of 23,711,494.17 euro and 50% tax increase).

The assessment notices were sent on 28 December 2012.

Objections to both assessments were filed, for assessment year 2006 on 4 March 2013 and for assessment year 2010 on 14 March 2013, subsequently supplemented. By decisions dated 30 August 2013 and 6 September 2013, respectively, the notices of objection for the assessment year 2006 and the assessment year 2010 were declared admissible but unfounded.

2.3. By means of a petition filed on 2 December 2013, the respondent brought her claim concerning assessment year 2006 before the Court of First Instance of West Flanders, Bruges Division. This case was known there under case number AR 13/3365/A. The claim relating to the 2010 assessment year was brought before the same court by means of a petition filed on 6 December 2013. This case was filed under reference number AR 13/3435/A.

In its judgment of 27 January 2016, the Fourth Chamber of the Court of First Instance of West Flanders, Bruges Division, ruled as follows:

Joins the cases known under AR 13/3435/A and under 13/3365/A together.

Declares the tax claims admissible and well-founded to the following extent.

Dismisses the contested assessment for corporation tax imposed on the plaintiff under assessment number ..., assessment year 2006, in the amount of EUR 46,134,910.68.

Dismisses the contested assessment of the corporate income tax payable by the plaintiff under assessment number ..., assessment year 2010, in the amount of 35,566,971.10 euros.

Orders the repayment of all disputed amounts which have been or will be collected or withheld, plus moratorium interest in accordance with Article 418 of the Income Tax Code 1992.

Orders the defendant to refrain from assessing the costs of the proceedings, as they will be borne by him, and to assess the indexed basic legal costs of EUR 16,500.00 on behalf of the claimant.

By judgment of 1 October 2019, the appeal against this judgment was declared unfounded.

2.4. By submission on 12 March 2020 to the registry of this court, the appellant filed a subsidiary assessment for the assessment year 2010.

3. The claims of the parties

3.1. The appellant's claim

The appellant asks the court of appeal to:

Confirm the subsidiary assessment established for the 2010 assessment year and declare it enforceable;

Order the costs to be borne by the respondent, both at first instance and on appeal, including the costs of the roll call of EUR 800.00;

rule that the respondent is liable to pay procedural costs, estimated at the minimum amount.

3.2. The respondent's claim

The respondent asks the court of appeal to:

In the main order

- Declare the request for the declaration of validity and collectability of the subsidiary assessment on behalf of the respondent for the assessment year 2010, as submitted by the appellant to Your Court in its opinion dated 12 March 2020, inadmissible, at least unfounded; consequently, rule that the tax situation for the assessment year 2010 on behalf of the respondent should remain unchanged, so that a transferable professional loss of EUR 14,964,582.66 should be established.

In subordinate order:

- At least declare the proposed subsidiary assessment as submitted by the appellant to Your Court by conclusion dated 12 March 2020 inadmissible, at least unfounded to the extent that it contains the rejection of the previous appeal losses originating from assessment year 2009, amounting to EUR 14,964,582.66.

In the most subordinate order:

- At least declare the proposed subsidiary assessment as submitted by the appellant to Your Court by conclusion dated 12 March 2020 inadmissible, at least unfounded to the extent tax increase of 10% is imposed; therefore, at least rule that this tax increase should be reduced to zero.

order the appellant to pay the costs of the proceedings at first instance and on appeal, including the costs of legal representation, which may be index-linked, in accordance with the Royal Decree of 26 October 2007 fixing the rate of the legal representation fee referred to in Article 1022 of the Statute of the Court of First Instance. 1022 of the Belgian Judicial Code on the recoverability of lawyers' fees and costs (8.5. 9 November 2007) (applicable increased maximum amount after indexation: € 33,000 at first instance (old indexation) and € 36,000 on appeal (new indexation)).

4. The disputes and their assessment

4.1. Basis for the subsidiary assessment summary

The subsidiary assessment for the assessment year 2010 (with a payable amount of €25,486,124.51) is again based on article 26 of the Income Tax Code 92, however without invoking simulation. The administration claims that U. bv has a certain functionality with regard to F.'s licensing activity and thus contributes to F.'s profit without being remunerated for it. On the basis of a functional transfer pricing analysis, the administration states that a large part of F.'s annual profit should be added to U.'s profit in application of Article 26 of the CIR92, because for the 2010 tax year, U. exercised all DEMPE (Development Enhancement Maintenance Protection Exploitation) functions with regard to the Uniclic patents as well as all B.de risks without being remunerated for them. In fact, during the period in question, F. would not have had the necessary substance that would have allowed it to represent added value in any way. According to the administration, the profit made by F. from the exploitation of the patents should therefore be allocated to U. BV and F. should only be remunerated on the basis of a +5% charge for the support functions she performed. By not being remunerated for the performance of these functions, the administration claims that U. bv granted an abnormal or gratuitous advantage of EUR 74,806,808.50 to F. for the assessment year 2010.

The subsidiary assessment also rejects the losses carried forward on the part of U. bv as these "can only be explained by the fact that (U. bv) was not remunerated in accordance with its functionality in the period 2000 to 2008 inclusive". A tax increase of 10% is applied.

4.2. Admissibility of the claim for a declaration of validity and recoverability of the subsidiary assessment

4.2.1. The respondent first of all argues that the claim for the declaration of validity and enforceability of the subsidiary assessment is inadmissible due to the lack of competence, at least lack of competence, of Messrs D. and C. to submit the subsidiary assessment to the court, which according to the respondent constitutes a new claim.

Article 356 ITC92 introduces a specific procedure to allow the tax administration to submit a subsidiary assessment, with a view to validating it, to the court by the mere submission of conclusions following the annulment of the original assessment by the same court. The case then remains on the roll for a period of six months starting from the judicial decision. Article 356 of the Income Tax Code92 is aimed at avoiding the conduct of an entirely new procedure and at obtaining a ruling on the chargeability of the tax by means of an accelerated procedure.

Whereas the claim for the validation and collection of a subsidiary assessment is a new claim within the meaning of article 807 of the Judicial Code, it has no direct or indirect impact on the amount of the tax due. W., this does not affect, either directly or indirectly, the admissibility of the claim for the declaration of validity and recoverability of the subsidiary assessment lodged by an administrative servant by means of a claim. It follows from Article 356 ITC92 that this new claim is made within the same judicial dispute. Article 356 of the CIR92 expressly stipulates that the administration can submit a subsidiary assessment to the judgement of the judge. Messrs D. and C., as officials of the administration of the Special Tax Inspectorate, were competent to submit a subsidiary assessment to the judgement of this court. It is not disputed that they are part of the tax administration being an organ of the Belgian State and were competent to represent the Belgian State in this dispute. Pursuant to article 379 CIR92, in disputes relating to the application of a tax law, an appearance in person may be made in the name of the Belgian State by any official of a tax authority. Neither article 356 ITC92 nor any other legal provision requires the officials concerned to have held a special appointment at the time of filing the subsidiary assessment.

This plea of the respondent is rejected.

4.2.2. Furthermore, the respondent argues, both in her second plea and in the third plea, second part, that the subsidiary assessment cannot be based on article 26 CIR92, in view of the following judgment of this court in the judgment of 1 October 2019

"4.2.5. In the absence of proof that the transfer of the rights to the Uniclic¬ invention to U.B. BV was feigned, the consequences of this transfer must be taken into account. Article 26 of the CIR92 cannot be invoked by the appellant to justify the disputed assessments on behalf of the respondent."

As well as:

"4.3.3. (...) The disputed assessments are based on an application of article 26 ITC92. By basing the application of Article 26 ITC92 additionally - in a subsidiary manner - on an infringement of the legal principle of speciality, the underlying assessments do not change to such an extent that it concerns a prohibited substitution of motives. This additional argumentation does not affect the legal basis of the disputed assessments and is only an additional argument for the appellant to reach the same conclusion, namely that an abnormal or gratuitous advantage must be taxed on the part of the respondent. (...)

4.3.4. (...)

In the absence of proof that the transfer qualifies as a speciality transaction, this subordinate ground for taxation also fails.

In its second plea, the respondent argues that the subsidiary assessment cannot be based on Article 26 CIR92 in view of the authority of res judicata of the judgment of 1 October 2019. The subsidiary assessment cannot be established contrary to an earlier decision between the same parties. In the third plea, second part, the respondent argues that in the judgment of 1 October 2019, the court denied the existence of taxable matter as a result of which article 356 WIB92 cannot be applied.

The violation of any possible legal rule, other than a rule of limitation, may give rise to the reassessment in application of article 356 CIR92 insofar as the court pronouncing the annulment does not rule on the extent of the taxable base and does not deny the existence of taxable matter (see also Cass. 5 May 2017, F.15.0146.N, consideration 4; Cass. 22 May 2015, F.13.0169.N, consideration 3; Cass. 26 May 2016, F.14.0154.N, consideration 1). Pursuant to Article 356 of the Income Tax Code92 , the administration can submit a subsidiary assessment to the judge by means of a claim, in the name of the same taxpayer and based on all or part of the same tax elements as the initial assessment. The tax elements referred to in article 356 ITC92 are the positive and negative material elements that contribute to the determination of the taxable base (see also Cass. 23 January 2020, F.18.0103.N; Cass. 26 November 2015, F.14.0181.N; Cass. 26 May 2016, F.14.0154.N; to be consulted on juportal.be).

In the judgment of 1 October 2019, the court did not rule on the extent of the taxable base nor did it deny the existence of taxable matter. The taxable matter is the element that gives rise to the tax, the situation or the fact that leads to the tax being due. The taxable matter is distinguished from the taxable base which is the basis on which the tax is calculated (see also GwH No. 34/2018, 22 March 2018, consideration 8.9). In terms of the application of Article 26 CIR92, the taxable matter is the granting of abnormal or benevolent benefits. The court did not express any opinion on this matter in the judgment of 1 October 2019. After all, the initial assessment by the administration under section 26 WIB92 was essentially based on the proposition that the transfer of the rights to the Uniclic invention, including the right to patent, to U.B. bv was simulated. The entire profit of F. was attributed to U. bv as an abnormal or gratuitous advantage granted. The court ruled that, in the absence of proof of a feigned transfer of the rights to the Uniclic invention to U.B. bv, article 26 WIB92 could not justify the initial valuation. The two sentences quoted above from peripheral paragraph 4.2.5 of the judgment of 1 October 2019 are related to each other and should therefore be read and understood together. The valuation ground elaborated in subordinate order, in particular the infringement of the legal principle of speciality, was also rejected due to lack of evidence. The existence of the taxable matter was not adjudicated in the judgment of 1 October 2019.

In the context of article 356 ITC92, the tax authorities are allowed to submit a subsidiary assessment to the court based on all or part of the same tax elements as the initial assessment and to invoke the same legal basis (article 26 ITC92), but using different means of proof. When establishing a subsidiary assessment, the administration can rely on the same or different means of proof as those used for the establishment of the annulled assessment. This does not mean that the subsidiary assessment has a different tax base, only that the tax base is proven in a different manner. In the subsidiary assessment, part of the profit of F. is still allocated to U. BV in application of article 26 ITC92 as an abnormal or gratuitous advantage granted. The subsidiary assessment is thus based on all or part of the same material elements that contribute to U. BV's taxable base as the initial assessment.

There is no breach of the authority of res judicata of the judgment of 1 October 2019. The authority of res judicata of decisions regarding direct taxes does not find its legal basis in articles 23 and 28 of the Judicial Code (see also Cass. 26 May 2016, F.14.0154.N, consideration 5). The judgment of the Court of Cassation of 27 April 1967, which the respondent cites several times, is obsolete in this sense. As already considered above, the administration is allowed, in the context of article 356 ITC92, to submit a subsidiary assessment to the opinion of the court based on all or part of the same tax elements as the initial assessment and invoking the same legal basis (article 26 ITC92), but using other means of proof. In its judgment of 1 October 2019, the Court of Appeal did not in any way rule that the tax authorities could not use article 26 ITC92 as a legal basis for their assessment, but only ruled that article 26 ITC92 could not justify the disputed (initial) assessment(s) due to a lack of proof of fraud. Once again, the two sentences quoted above from paragraph 4.2.5 of the judgment of 1 October 2019 are related to each other and must therefore be read and understood together. In that regard, the appellant correctly observes that the administration respects the res judicata of the judgment of 1 October 2019 in the sense that it recognises the transfer of the rights to the Uniclic invention.

Both these pleas of the respondent are rejected.

4.2.3. In her third plea, in the first part, the respondent argues that the subsidiary assessment should have been submitted to the West Flanders Court of First Instance since it was this court and not the court of appeal that annulled the initial assessment. The respondent points out that in the judgment of 1 October 2019, the court of appeal only confirmed the judgment of the first judge and that it was the first judge who annulled the assessment(s).

A subsidiary assessment must be submitted to the judgment of the judge who ruled on the nullity of the initial assessment, either at first instance or on appeal. By application filed on 8 March 2016, the court took note of the appellant's appeal against the decision of the first judge to fully exempt the initial assessment(s). The court of appeal dismissed this appeal and upheld the decision of the first court to declare the respondent's initial claim for integral relief from the initial assessment(s) well-founded, largely on the same grounds that had been assumed by the first court. By upholding the judgment of the first judge, the court ruled on the nullity of the initial assessment(s) within the meaning of Article 356 of the Income Tax Code92 (see also Cass. 29 June 2018, F.17.0147.F). The subsidiary assessment was rightly submitted to the court.

This objection by the respondent is rejected.

4.2.4. Finally, the respondent argues that the subsidiary assessment is also based on data collected in 2020 (especially documents SUB4, SUB9 and SUBl0) which, at least as far as document SUB4 is concerned, was obtained in an irregular manner, as a result of which there is a violation of articles 333 and 356 of the Income Tax Code92. She points out that in February 2020 the BBI consulted the database Dolsis (which is an application giving access to the data of the National Social Security Office) in order to obtain details about the evolution of the workforce of U.I. bvba (the current M.I.S. bv, the service centre of the Group). This document SUB4 would be used by the Special Tax Inspectorate to support its claim that during the period in question, all functions relating to the exploitation of the Uniclic patents would have been performed by U.I. bvba, and not by U.I. bvba as suggested by the respondent. According to the respondent, this consultation is an illegal act of investigation due to the violation of the investigation deadlines provided for in Article 333 ITC92, which leads to the nullity of the subsidiary assessment.

The investigations referred to in Article 333 of the CIR92 imply an obligation for the taxpayer, the third party or the public service, institution or establishment where they are carried out to communicate, at the request of the administration, books, documents or information in accordance with the provisions of Title VII, Chapter 111 of that Code (see also Cass. 12 February 2016, F.14.0216.F). The consultation of the government database Dolsis, being a B.d. database by the NSSO, does indeed constitute an investigation within the meaning of section 333 WIB92. In its application for access to the database in question, the ONSS expressly invoked article 327 WIB92. Pursuant to article 327 CIR92, the administrative services of the Belgian State are obliged, when requested by an official responsible for the establishment or collection of taxes, to allow him to inspect all deeds, documents, registers and any other records in their possession. The appellant wrongly limits the scope of article 327 CIR92 to investigations of the taxpayer and third parties. Also administrative services of the Belgian State, other than the tax administration itself, fall within the scope of article 327 CIR92. In view of the obligation set out in article 327 CIR92 and the legal basis invoked by the Special Tax Inspectorate to gain access to the Dolsis database, the consultation of this database by the Special Tax Inspectorate constitutes an act of investigation.

It is clear that this act of investigation carried out during the period for establishing a subsidiary assessment qualifies as an unlawful act of investigation. The period for making a subsidiary assessment cannot be used to carry out additional acts of investigation since all the investigation periods stipulated in Article 354 of the Income Tax Code92 have expired.

It is also not open to serious dispute that the information from the Dolsis database was obtained in violation of the access authorisation granted to the Special Inspection Service. The appellant does not dispute this. The authorisation to access the database Dolsis was granted to the FPS Finances 'with a view to carrying out its control tasks', following a request from the Special Tax Inspectorate to grant access 'to a number of staff members (inspection profile) who are specialised in the fight against fiscal fraud and in the analysis of data. These accesses would be for the purpose of combating tax fraud of the type "portage salaria", dumping, domiciliation fraud or false invoices in accordance with the security conditions and measures of privacy and under the supervision of the security adviser of the Federal Public Service Finance." The time limit for the establishment of a subsidiary assessment cannot be used for additional investigative acts. In the absence of further defence by the appellant, the court can therefore only conclude that the access to the Dolsis database was taken outside the execution of any audit assignment and does not fall within the context of fiscal fraud as outlined in the application for access.

However, this unlawful act of investigation does not result in the nullity of the subsidiary assessment. The nullity sanction provided for in article 333 ITC92 is not applicable since the investigation period referred to in article 333 ITC92 does not apply.

Since the period for filing a subsidiary assessment does not allow for any additional investigation, and also taking into account the explicit nullity sanction, if the additional investigation were to be carried out within the period mentioned in Article 354, second paragraph of the Income Tax Code92 as well as the fact that the information was obtained in violation of the access authorisation granted by the Sectoral Committee that guards secure access to this database and in view of the requirements imposed by privacy legislation, the court concludes that the results of this investigative act must be rejected, which is an appropriate sanction given the nature and seriousness of the infringement committed and the impact of the unlawful act on the legal position of the taxpayer. Thus, the Court does not take document SUB4 into account when assessing the merits of the alternative assessment.

As an aside, the court notes that the evolution of the workforce of U.I. bvba, for which reason the appellant is said to have consulted the Dolsis database, is also apparent to a certain extent from the social balance sheet that is attached to the publicly available annual accounts of U.I. bvba, which, incidentally, are also attached to the documents of the respondent for the years in question.

4.3. The merits of the claim for the declaration of validity and recoverability of the subsidiary assessment

4.3.1. The subsidiary assessment is based on the assertion of the administration that the transfer price policy of the U. group is not in accordance with the arm's length principle which requires that group companies in their mutual legal relationships agree on conditions (or transfer prices) which do not deviate from the conditions which would have been agreed upon by independent companies under comparable circumstances. The administration applies article 26 of the Income Tax Code92 on the basis of which abnormal or gratuitous benefits granted to foreign affiliated companies are added to the own profit, and also refers to article 9 of the double taxation treaty concluded between Belgium and Luxembourg as well as to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the OECD, hereafter abbreviated as "OECD TPG".

The administration states that there are two intra-group transactions for which a price adjustment is required:

- a price adjustment in the context of the transfer of the rights to the Uniclic¬ invention, on the one hand; and

- a price adjustment because the DEMPE functions relating to the "intangibles" (or intangible assets) are carried out by U. bv without the latter receiving any remuneration for this, on the other hand.

However, when the administration states that U. bv should have received an annual additional payment from F. because the agreement to transfer the Uniclic invention to U. bv does not contain a price adjustment clause (the first price adjustment), which independent companies would have stipulated, the court notes that the administration does not attach a concrete consequence to this position that is incorporated in the disputed subsidiary assessment for assessment year 2010. Therefore, the Court of Appeal will not discuss this matter any further. The assessment is limited to the second price correction mentioned above.

4.3.2. As the appellant rightly states, the transfer price between affiliated companies must be determined on the basis of a functional analysis. This functional analysis must take into account the functions performed by the affiliated companies (activities carried out and responsibilities) and their economic importance within the legal relationship, the assets used and their nature as well as the risks borne.

In view of the application of Article 26 of the Income Tax Code92 , it is up to the administration to provide proof of the existence of an abnormal or gratuitous advantage and the extent thereof. It is thus up to the administration to prove by means of a functional analysis that the applied transfer price in the legal relationship between U. bv and F. does not comply with the at arm's length principle.

The discussion between the parties regarding the applicability of the OECD TPG 2017 is legally relevant notwithstanding the question whether it is decisive in the factual assessment (see factual assessment in section 4.3.3 below). The OECD guidelines are intended to provide insight into how the at arm's length principle can be applied in practice and contain recommendations for determining transfer pricing policy. The OECD guidelines as such have no direct effect in Belgium but are used as a starting point in the area of transfer pricing. From the conclusion of the Belgian State supporting the filed subsidiary assessment, it is clear that the administration bases the valuation of the abnormal or gratuitous benefit at least partially on the 2017 version of the OECD TPG. However, the 1995, 2010 and 2017 versions of the OECD TPG differ in a number of respects and to varying degrees. These differences range from mere clarifications that do not impact on the content of previous versions to completely newly developed parts, namely recommendations that were not included, even implicitly, in previous versions. One of these completely newly developed parts that have only been included in the 2017 OECD TPG concerns the DEMPE functional analysis method as well as the method of ex post outcomes of hard-to-value intangibles, on which the Belgian State bases the subsidiary assessment at issue at least in part. The subsidiary assessment relates to the 2010 tax year/the 2009 income year in which the economic context and the regulatory framework applicable in 2009 had to be taken into account. The only OECD TPG available at the time were the 1995 OECD TPG.

In the light of this, the administration is permitted to base the valuation on the 1995 OECD TPG (which, moreover, as stated above, are merely a non-binding instrument). The administration is also permitted to base the valuation on later versions of the OECD TPG (such as those of 2010), but only to the extent that these contain useful clarifications, without further elaboration, of the 1995 OECD TPG. The 2017 OECD TPG were published after 2009 and to the extent that the recommendations contained therein have evolved significantly since the 1995 OECD TPG, they cannot be applied in the current dispute. In particular, the DEMPE functional analysis method and the method of a posteriori results of intangibles that are difficult to value cannot be usefully applied in the present dispute from a temporal point of view, as these are tools that are only set out in the 2017 OECD TPG. Moreover, this position is also confirmed in Circular 2020/C/35 of 25 February 2020, which summarises and further interprets the 2017 OECD TPG, in which the administration explicitly states in para. 284 that the provisions of the Circular are in principle only applicable to transactions between related companies taking place as of 1 January 2018 (see also EU General Court judgment, 12 May 2021, cases T-816/17 and T-318/18, Luxembourg-lreland-Amazon v. Commission, para. 146- 155).

4.3.3. The administration's argument boils down to the fact that during the years 2000-2009, U. bv, and not F., performed all the important functions relating to the intangible assets linked to the Uniclic invention, as well as all the risks B.de was taking, without being remunerated for this. According to the administration, the income obtained by F. in 2009 was partly realised by the functions exercised in the years 2000-2009, which must therefore be partly attributed to U., in whose name it withholds an abnormal or gratuitous advantage granted to F. for assessment year 2010.

First of all, the administration cannot be followed when it states that the services provided by U.I. bvba to F. as from November 2007 are to be attributed to U. bv, since U.I. bvba is integrated into the operations of U. bv. Without invoking simulation or article 344, §1 WIB92, such a statement amounts to a disregard of the separate legal personality of U.I. bvba. Subject to application of the anti-abuse provisions of the law, the existence of a company and the contracts concluded by it can only be disregarded if simulation is involved (see also Cass. 2 January 2020, AR F.18.0074.N, available on juportal.be). Such an approach also disregards the separate entity approach, which is at the heart of the at arm's length principle and the OECD TPG on which the administration relies. The separate legal personality of U. Industries bvba and its separate organisation and functioning cannot be ignored on the basis of the findings that the turnover of the latter comes largely from U. bv or that the company has its registered office at the same place of business as U. bv.

Next, the respondent rightly maintains that the administration does not prove that, irrespective of which functions would have been carried out by U. bv or not, the transfer price applied between U. bv and F. deviates from the transfer price that independent parties would have applied in similar transactions. The administration, on which the burden of proof rests, does not present the results of a comparability study.

Finally, the administration cannot be followed in its factual assessment either. It argues, first of all, wrongly that the transfer price determined in the legal relationship between U. bv and F. should take into account the development of the invention which would have been done by U. bv. In the legal relationship between F. and U. bv, the latter does not perform any development function of the intangible asset and does not bear any risk in this respect, at least the administration does not demonstrate this, as F. acquired the economic rights to the (by then already patented) patent from U. bv at the beginning of 2001. At that time, settlement between U. bv and F. took place over the value at that time, after consultation with the Dutch tax administration. The rights to the Uniclic invention were transferred to U.B. bv in 1996 and, as the court considered in the judgment of 1 October 2019, U. bv has "waived (...) any claim it had or would have to these rights in a license agreement dated 8 January 1998 for the benefit of U.B. BV and (...) acknowledged that U.B. BV is the owner of the intellectual property rights to the invention." The at arm's length nature of the legal relationship between U. bv and U.B bv is not the subject matter of this dispute. If the court were to take into account the development function that U. bv would have performed in 1996 prior to the transfer to U. B. bv for the determination of the transfer prices in the legal relationship between U. bv and F. for assessment year 2010 (note that the court did not rule on this in the judgment of 1 October 2019 nor in this judgment), it would make abstraction of any possible limitation period and the fact that F. settled in 2001 on the value of the assets taken over at that time. The same applies to the market introduction, protection and operation functions which U. bv would have performed in the late 1990s. F. paid to U. B. BV a remuneration in line with the market according to the Dutch tax administration. The appellant does not show that in 2009 a fee should have been paid to U. bv by F..

As the administration points out in conclusions, the strategic decisions to enforce the validity of the patent rights in court in the period 2000-2009 by conducting offensive and defensive proceedings have been crucial in the development of the successful licensing activity. However, the administration does not show that this function (which it refers to as 'protection') was performed by U. bv in 2009 and even in the years before. In his thesis, B.V.d.S. repeatedly refers to F.I. as F.. The fact that the contribution of U.I. bvba in that period was limited as it was only transformed into a shared service centre in November 2007 does not prove that this function was taken up by U. bv, the taxpayer. It is certain that, from November 2007 onwards, F. used the services of U.I. bvba for the performance of this function, and also paid the latter for this (see also documents SUB 1.15 and 1.43-1.47, respondent's file). When the administration states that there is a zero invoicing by U.I. bvba to F. and bases this on VAT listings, it does not take into account the (then) rules concerning the reverse charge of VAT. The flow of invoices between U.I. bvba and F. is sufficiently proven. U. I. bvba employed 120 employees at the time, several of whom were qualified to protect patents and intellectual rights. The administration does not demonstrate or make plausible that the services provided by U. I. bvba to F. were in fact provided by U. bv, that U. bv bore the costs for those services or that the employees who provided those services were in fact employed on behalf of U. bv. It is not sufficient to make such a claim; the administration must also prove its claim.

The value attributed to the intangible assets at the time of the transfer from the Netherlands to Ireland in 2001 (EUR 3,050,189.31) and the value at the time of the transfer from Ireland to Luxembourg in 2007 (EUR 731,523,000.00) show that the greatest value creation in this respect took place in the period 2001-2007.

Also for this period it does not appear from the official report drawn up by the Special Tax Inspectorate on 19 October 2012 and its annexes or from other documents that this function was exercised by U. bv or that U. bv would have borne any risk in this respect. The respondent makes it plausible that F. was just set up to bear the risks intrinsically associated with these activities. From the reports of the board of directors of F. from that period it appears that the board closely followed the negotiations with possible licensees, called in subcontractors (a.o. T.T.S. Ltd.) to identify and contact possible licensees, and called in external advisors for conducting proceedings (both offensive and defensive) and tracing and following up patent infringements. T.T.S. was a 100% subsidiary of F. set up in February 2002 for which Mr G.V.H. (patent agent), Mr T.M. (market research) and Mr F.T. (legal) were (partly) employed as consultants. Neither the fact that these persons also worked for U. bv nor the fact that they sometimes worked from Belgium show that the activities they carried out in this area ('protection') should be attributed to U. bv. It appears from the reports of F.'s Board of Directors that Mr B.T. (the documents of which show that he remained personally involved in developments in this area for a long time), F.D.C. and M.H. were closely involved in the development of these activities. However, these persons were also either members of the Board of Directors of F. (B.T. and F.D.C.), which had exclusive competence for determining the strategy relating to the B. and the marketing of the intellectual property, or employees of F. (M.H. from 2003 and from 2007 via secondment and T.M. from 2005/2006). Also B.V.d.S., who from 2006 onwards managed the portfolio on a daily basis B.de, was seconded from U. Industries bvba to F. or employee of F. The domicile of B.V.d.S. gives no indication of the functionality that U. bv performed. This shows that as from 2003, F. performed the functions related to maintenance, protection and commercialisation of the intellectual property through the members of its Board of Directors and through its own personnel or consultants, as well as subcontracting to third parties. All IP proceedings were conducted by F. and the costs thereof were borne by F. (as is also confirmed by Exhibit 46, annexes 197-198, appellant's brief, and by the statement of M.H., exhibit 13, appellant's brief). The proceedings initiated by U.B. bv were continued by F. at its own expense. The monthly newsletter (Exhibit 46, Appendices 38-41) does not show that U. B. bv performed any functionality for which she was to be reimbursed in 2009. In view of F.'s functionality, which is also apparent from the file included as document 46, annexes 205-207 (appellant's bundle), it cannot be assumed that U. bv performed all functions in the area of 'protection' in the relevant period. The records do not show that U. bv carried out any activities or bore any risks in this area and that it should have been granted any remuneration for this by F. in 2009. Nor - and more importantly - does the administration show that independent parties in similar circumstances would have granted each other a remuneration for this.

As regards the recurring functions, i.e. the B., market research, sales and the provision of services which go in the direction of what the administration calls maintenance and exploitation, the respondent should be agreed that the appellant does not demonstrate that these were carried out in 2009 by U. bv. With regard to the recurring functions, the transformation of U.I. bvba in November 2007 into the shared service centre of the Group should be taken into account, as it provided certain of these functions to F. on a contractual basis and was also remunerated for them (see also documents SUB 1.15 and 1.43-1.47, respondent's file). There is no evidence that U. bv exercised any of these recurring functions in 2009 or that these recurring functions were exercised under the control of U. bv. Moreover, U. bv did not have the necessary assets to exercise these functions, at least no evidence of this is available. The staff responsible for carrying out these functions was employed by F. (R.H., M.H., B.V.d.S. who was also responsible for the Chinese market, P.S) or by U. Industries bvba (a.o. F.T., G.V.H., B.S, M.H., B.V.d.S., S.L.), or whether certain assignments were subcontracted by F. to third parties (e.g. Bureau M.F.J. B. nv). Mr S. was the only person on the payroll of (the Chinese representation office of) U. bv, the taxpayer. Mr. S. was responsible for the commercial expansion in China and was supervised by Bart Van der Steekt (F.) (see among others documents 1.12.b, p. 9, and 1.19, appendices 256-257 bundle of the respondent). The respondent claims that the costs for his salary were invoiced on and ultimately borne by F.. Whatever the case may be, there is nothing to indicate that U. bv, through the formal employment of Mr S., had any control over how he carried out his activities or bore any responsibility or risk in this respect. The documents show that Mr. S. was managed by B.V.d.S. from F. Nor do the records show that U. bv, the taxpayer, bore any risk in 2009 with regard to these recurring functions. Also for the period prior to 2009, to the extent this would be relevant for the determination of the transfer price with regard to recurring functions, this evidence is not provided (see considerations made in previous paragraph, which apply mutatis mutandis). Again, in view of the functionality of F., which is also apparent from the file included as Document 46, Appendices 205-207 (appellant's summary), it cannot be assumed that U. bv performed all the functions in the area of 'maintenance' and 'exploitation' in the relevant period. The administration neither proves nor makes it plausible that U. bv exercised any real activity in this field or bore any risk and that it should have been compensated for this by F. in 2009. Nor - and more importantly - does the administration show that independent parties in similar circumstances would have granted each other a remuneration for this. The circumstance that employees of U. bv, in particular salespeople of Quick-Steplaminate, also observed infringements of the patents, is not of a nature to change this opinion. After all, to the extent that any functionality can be attributed to this, the records do not show that independent parties would have awarded each other compensation for this in similar circumstances. As the respondent rightly points out, these determinations were in the economic interest of U. bv itself and were part of the execution in good faith of the licence agreement.

Finally, the administration points out that under the licence agreement of 12 January 2001 between F. and U. bv, the latter undertook to continue investing in technical improvements to the products using the Uniclic technology in exchange for a free licence to the Uniclic technology. On the basis of this license agreement, F. can directly enforce all rights on possible improvements to the invention by U. bv. The fact that a licensee performs a function of improvement to the intangible asset can be considered market conform (as, moreover, explicitly stated in the 2017 OECD TPG at para. 6.90), in particular if this licensee is a production company that incorporates the technology into its products. The remuneration granted to U. bv in return consists of the royalty-free licence agreement. The respondent points out that this has enabled U. bv to save a considerable amount in royalties. It cannot be denied either that a royalty-free licence results in a competitive advantage. The administration does not show that this fee was not in line with the market in 2009, nor does it show that the transfer price applied between independent parties in similar circumstances would have been different. On this point, the appellant also fails in its burden of proof.

4.3.4. The Court of Appeal concludes that the administration has failed in its burden of proof that the transfer prices applied between F. and U. bv for assessment year 2010 are not in accordance with the arm's length principle. The administration does not show that U. bv granted an abnormal or gratuitous advantage to F. in income year 2009, which should be added to its own profit by virtue of Article 26 WIB92. Since the existence of the abnormal or gratuitous advantage is not proven, it is not necessary to further discuss (the administration's possibility to submit to the court) the claim of the administration, put forward in secondary order, to determine what a market remuneration would be in respect of U. bv.

4.3.5. As regards the deduction of losses that can be carried forward (especially the losses from previous taxable periods) rejected by the administration, the court can be brief. This rejection of the deduction is unjustified.

The losses carried forward that existed in the 2009 financial year amounted to EUR 14,964,582.66. The respondent shows that these were exclusively from the 2008 financial year. This contradicts the administration's assertion that these losses are due to the fact that U. bv was not remunerated in accordance with its functionality during the period 2000-2008. In addition, the respondent rightly states (peripheral No 319 of the last submitted conclusion) that the "justification for rejecting the amount of losses carried forward necessarily implies that, in the opinion of the Special Tax Inspectorate, 'additional income' should have been generated by U. BV, had it been properly remunerated, for its functionality. The Special Tax Inspectorate herewith necessarily recognises that it does not reject the previous professional losses on the part of U. BV because of an assessment of the income or costs entered in the accounts, i.e. the normal elements of the taxable result of a company, but because of "additional income" that U. BV should have realised in previous financial years. It is clear that the rejection of the deduction of losses in a subsidiary assessment established for assessment year 2010 cannot be based on the reasoning that income has been foregone in previous financial years. This lost income must, if necessary, be taxed in the relevant financial year and cannot be 'recovered' by means of a general rejection of the deduction of professional losses within the framework of article 356 ITC92. In this respect, the subsidiary assessment is affected by arbitrariness.

4.3.6. The court of appeal rejects the appellant's claim based on article 356 of the Income Tax Code.

In view of the above judgment, the other pleas in law should not be met.

5. The legal costs

5.1. Party ruled against

The appellant has been unsuccessful and must therefore bear the legal costs of the appeal.

5.2. The legal costs at first instance

The respondent's claim to be awarded the maximum amount of the court fee for the proceedings at first instance has already been finally decided in the judgment of 1 October 2019. The court has exhausted its jurisdiction in this respect.

5.3. The legal costs in appeal

The respondent requests that it be awarded the maximum amount of the court fee for the appeal proceedings, in view of the manifestly unreasonable nature of the situation, which is evidenced by the establishment of the unfounded subsidiary claim. By judgment of the court of appeal of 1 October 2019, the respondent had already been awarded a procedural indemnity of EUR 18,000.00.

The court of appeal acceded to the respondent's request to increase this amount on the grounds of the manifestly unreasonable nature of the situation. The court of appeal cannot ignore the fact that the appellant, after its claim was rejected by judgment of 1 October 2019, filed a subsidiary assessment based on a completely different argumentation than the initial assessment that was in dispute in the dispute that led to the judgment of 1 October 2019. This forced the taxpayer to reorganise her defence from scratch as from March 2020, after a procedure concerning assessment year 2010 that had already been ongoing for almost ten years. In the end, the subsidiary assessment concerning assessment year 2010 was also rejected. This method of litigation has placed an above-average strain on the respondent's resources. In these circumstances, the award of the basic amount of the procedural indemnity is insufficient to reasonably cover the costs and fees of the successful party's lawyer. In view of the aforementioned elements, the costs and fees referred to in article 1022 of the Judicial Code can be adequately compensated in this case by the allocation of an additional amount of EUR 21,000.00, so that the total litigation compensation for the appeal proceedings reaches the (indexed) maximum amount of the litigation compensation of EUR 39,000.00.

DECISION OF THE COURT OF APPEAL

The court of appeal renders judgment in rebuttal;

The court decides as follows

- rejects as unfounded the Belgian State's claim for the declaration of recoverability of the subsidiary assessment submitted.

The court orders the appellant to pay the legal costs of the appeal, determined as follows:

- on the part of the appellant: nil

- for the respondent:

- legal costs of appeal, additional: EUR 21,000.00

Thus rendered by the FIFTH CHAMBER of the Court of Appeal of Ghent, sitting in fiscal matters, consisting of:

D.V., chairman of the chamber

S.R., counsel,

F.C., counsel

and pronounced by the President of the Chamber in open court on 8 June 2021, assisted by J.D., Registrar.

Note to the administration

Relationship to previous judgment/judgment

Remarks or comments

Reference WF

501-04-13/016956