On 25 February 2025, the Antwerp Court of Appeal confirmed that capital gains on shares – issued by Co-Investment Vehicles (CIVs) – embedding a carried interest and acquired following the exercise of options that were taxable at grant are not taxable as miscellaneous income (art. 90 1° ITC 92 and 90 9° ITC 92) (2023/AR/1737).
Background and facts
In the case addressed by the Court, an employee (Mr. M) worked for the same Belgian company (G. NV) from 1981 to 2019. His employer implemented stock-options plans through the creation of several co-investment vehicles (CIV’s). In 2005 and 2007, Mr. M was granted stock options, giving him the right to acquire shares in the CIV’s. Basically, these CIVs allowed selected employees to co-invest alongside the company (G. NV) in various portfolio companies.
As the stock options fell in the scope of the stock option legislation (law of 26 March 1999), the options were taxed at grant as employment income. After the exercise of the options by Mr. M, his employer (G. NV) exercised its call option in 2015 and bought the shares then held by Mr. M who realized a significant capital gain.
Mr. M did not report this capital gain on shares in his tax return, considering that it was not taxable.The Belgian tax authorities challenged this position and first put forward that this capital gain was a taxable remuneration. In a second stage, the tax authorities claimed that the capital gain should have been reported in Mr. M’s tax return and taxed as miscellaneous income (based on art. 90, al. 1, 1°, or alternatively based on art. 90, al. 1, 9° ITC 1992). The tax authorities also alleged that the structure was artificial and primarily tax driven.
Decision of the Court
The Antwerp Court of Appeal rejected the arguments of the tax authorities and confirmed that the capital gain on shares was not taxable.
The Court put forward that:
- The mere fact that the CIV shares embedded carried interest does not, in itself, mean that capital gains on such shares fall outside the scope of the normal management of the private estate of the employee. In other words, capital gains on such shares should not automatically be taxed as miscellaneous income.
- The Court also noted that Mr. M’s participation in the CIV’s was voluntary, financed with his own private funds, and that the investment was held over a significant period (options granted in 2005 and 2007, shares sold in 2015). There was no evidence of artificiality, fraud, or speculative intent. The Court further noted that Mr. M did not play an active role in the management or the structuring of the CIV’s, beyond his participation as an investor. On that basis, the Court refuted the tax authorities’ argument that Mr. M received the income for his role in the CIV’s.
- The Court reiterated that, as Mr. M filed his tax return on time, it was up to the tax authorities to demonstrate that the capital gain fell outside the scope of the normal management of the private estate of Mr. M and was to be taxed as miscellaneous income. In the case at hand, the tax authorities failed to provide sufficient evidence to support their position.
Comments
Since 2020, the Belgian tax authorities have taken the view that capital gain realized on equity leveraged instruments (e.g. carried interests, ratchet shares, sweet equity, etc.) should be taxed at 33% + local taxes as miscellaneous income, arguing that the volatility of such instruments is incompatible with a normal management of the private estate.
In the case at hand, the structure put in place created a double leverage: the first one through the options mechanism, the second one through the CIV vehicles. This case law confirms that capital gains realized by employees following the sale of shares (embedding a carried interest) had not to be automatically considered as taxable miscellaneous income.
Even with the entry into force of the new carried interest regime (program law of 18 July 2025) which, subject to certain conditions, provides a taxation of carried interest income at 25%, this case law remains relevant. Indeed, the new carried interest regime specifically excludes the application of this specific regime where the shares are acquired through the exercise of stock options taxed at grant in compliance with the Stock Option Law of 26 March 1999.
