Constitutional Court rules on the deduction limitation
20 Jun 2025
On 19 June 2025, the Belgian Constitutional Court ruled on the compatibility of the deduction limitation (Article 206/3 ITC 92) with the principles of legality, equality, proportionality, and the right to a fair trial (Const. Court, 19 June 2025, 90/2025). The Court held that the deduction limitation does not violate the Constitution but emphasised that the tax administration must respect the principles of good administration.
Background
When, following a tax audit, a tax supplement is imposed or an ex officio assessment is issued, tax deductions such as carried-forward losses or investment deductions can no longer be offset if a tax increase of at least 10% is applied. This leads to a minimum taxable base, resulting in an effective cash-out.
This measure has been subject to significant criticism, as it often results in disproportionate consequences in practice. A key concern is the automatic link between the deduction limitation and a 10% tax increase, which is subject to the discretionary power of the tax authorities. This may result in unequal treatment of taxpayers.
In an earlier decision of 21 November 2024, the Constitutional Court had already ruled that the measure does not infringe the principle of equality (Const. Court, 21 November 2024).
Preliminary questions from the Antwerp Court of Appeal
In the present case referred by the Antwerp Court of Appeal (Court of Appeal Antwerp, 18 June 2024, 2023/AR/308), the focus was on the discretionary power of the tax authorities to waive or not the application of a 10% tax increase. The Court of Appeal submitted three preliminary questions to the Constitutional Court, which can be summarised as follows:
- Does the deduction limitation violate the principle of legality because its application depends on the discretionary decision of the tax authorities to impose a 10% tax increase?
- Is the principle of equality violated due to a potential difference in the treatment of taxpayers acting in good faith, depending on whether or not the tax increase is applied at the discretion of the tax authorities?
- Does the automatic application of the deduction limitation, without the judge being able to moderate its application based on the taxpayer’s individual circumstances and proportionality, constitute a violation of the principle of equality in conjunction with the right to a fair trial under the European Convention on Human Rights (ECHR)?
No violation of the Constitution
The Constitutional Court ruled that there is no constitutional violation. According to the Court, the principle of legality does not preclude granting discretionary power to the tax authorities, as this allows them to consider the facts of each case. The Court emphasised, however, that the principles of good administration must be respected, which would prevent arbitrariness.
Regarding the principle of equality, the Court noted that the deduction limitation aims to increase tax uniformity, as companies with carried-forward losses could previously neutralise the effect of a tax increase. The Court found that the equality principle was not breached, since any difference in treatment stems not from the deduction limitation itself, but from the factual circumstances of the infringement and the discretionary assessment of the tax authorities. Once again, the Court underscored that the tax authorities must act in accordance with the principles of good administration, which are subject to judicial oversight.
As for the judge’s inability to mitigate the automatic application of the deduction limitation, the Court first acknowledged that the deduction limitation may be considered a sanction within the meaning of Article 6 ECHR. However, it ruled that this does not lead to a violation, as courts can assess, within the framework of proportionality, whether the tax increase and the related deduction limitation should be applied.
What’s next?
This ruling is disappointing, as it legitimises the broad discretionary power of the tax authorities to impose a 10% tax increase and the automatic application of the deduction limitation. That said, the Court strongly emphasised the need for the tax authorities to respect the principles of good administration when applying this sanction. This means they will need to properly motivate their decisions, taking into account the principles of due care, legal certainty, equality, and proportionality.
Several other preliminary questions regarding this issue are still pending before the Constitutional Court. Taxpayers are therefore advised to continue safeguarding their rights in this matter.
Taxpayers who commit a second or third infringement in good faith – which is not unlikely given the complexity of tax legislation – and who face disproportionate consequences due to the deduction limitation, may need to turn to the courts to seek moderation of the sanction.
Finally, it is worth noting that the draft Programme Act proposes amendments to Article 444 ITC 92 concerning the possibility of waiving a tax increase. The proposal introduces a presumption of good faith in the case of a first infringement, unless an ex officio assessment is involved. The tax authorities will then be required to waive the tax increase unless they can rebut the presumption of good faith.
Please do not hesitate to contact us for further advice on this matter.
Véronique De Brabanter & Agata Schroyen
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