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A new compensation obligation in the legal system

Friday 04/01/2019
A new compensation obligation

What if a spouse practices his profession in a company whose shares all form part of his separate property?

The Act of 22 July 2018 has introduced considerable changes to matrimonial property law. This article addresses a specific addition to that law, namely the possible disadvantage incurred by the matrimonial property when a spouse practices their profession through their own company [1].  

What is it about?

The new rule is in the interest only of people who are married under the community property regime, in which case the capital is divided into three parts: the ‘separate’ capital, i.e. that of each of the spouses, and the community property capital. In the event of a divorce, a financial settlement is required between those three capitals if either capital has been enriched at the expense of another. For instance, if the community capital has funded works on a spouse’s separate property, that spouse’s capital has increased, whereas the community capital has decreased. In a divorce, these gains and losses are settled through the so-called compensation accounts (in Dutch: ‘vergoedingsrekeningen’): the enriched capital will have to compensate the decreased capital, thus restoring the balance between the spouses’ capitals.

Now, if the shares in a company are the separate property of a spouse who practices his profession in that company, the income generated by the company will not be paid out. Although the shares increase in value, no compensation is required – after all: no other capital decreased to realise the share value increase. This means that if the marriage ends in divorce, the spouse is allowed to keep the value increase without compensating the other spouse.

Section 1405, par. 1(1) of the Belgian Civil Code provides that in the legal system, the professional income belongs to the matrimonial property. In our example, the spouse’s labour gives rise to income that does not become part of the matrimonial property, but instead remains part of the spouse’s own company. The matrimonial property thus incurs a disadvantage as a result of the spouse practicing his profession through a company. In that scenario, it is possible that the spouse who owns the shares does not contribute to the matrimonial property, as he hoards his professional income in his company. The new section 1432(2) of the Belgian Civil Code seeks to remedy such situation. 

How does the new mechanism work?

A distinction must be made between shares in a professional company acquired with matrimonial property funds and those purchased with separate funds.

Shares acquired with matrimonial property funds

Section 1401, par. 1 (5) of the Belgian Civil Code provides that if the acquisition of shares in a professional company was funded with matrimonial property funds, the membership rights associated with those shares form part of the spouse’s separate capital if the enterprise is the professional company of that spouse, or if the spouse is crucial to the company (which will be reflected in the restrictions as regards share transfer).

However, based on section 1405, par. 1(5), the asset value of the related shares forms part of the matrimonial property. The law thus makes a clear distinction between ‘title’ (membership rights) and ‘finance’ (asset value). If said spouse ‘parks’ his professional income in his company, the matrimonial property does not incur a disadvantage in the longer term, as the value of those shares forms part of that matrimonial property. Consequently, no settlement between accounts is required.

Shares acquired with separate funds

However, shares in the professional company will form part of the spouse’s separate capital if said spouse acquired them before the marriage, or if he purchased them during the marriage with his separate funds or obtained them during the marriage through inheritance or donation. Section 1432(2) of the Belgian Civil Code was created specifically in view of these shares that belong to a spouse’s separate capital. For if this spouse pays himself only a minor fee for his performance in his own company, the matrimonial property will indeed incur a disadvantage. After all, the matrimonial property does not receive the higher income it would reasonably have obtained had the spouse practiced his profession as a self-employed person or as an employee. Furthermore, the own company will be able to reserve or capitalise the remainder of the realised profit, as a result of which the value of the shares and hence the separate capital of this spouse practicing his profession in the company, will increase.

For this reason, section 1432(2) of the Belgian Civil Code provides that if the matrimonial property incurs a disadvantage as illustrated above, it should be compensated for the net professional income it missed out on and which ‘in fairness’ it could have obtained had the profession not been practiced through a spouse’s own company. The related claim for compensation may be brought by the other spouse at the time of the divorce. It will not constitute the total share value increase, but only compensate for the income missed out on by the matrimonial property. In his defence, the spouse practicing his profession in the company may plead against said claim by demonstrating that payment of a higher or normal fee was not appropriate for various reasons, e.g. the financial situation of the company due to heavy losses or investments, a slow market, economic circumstances or reasons of competition, etc. Such defence must be supported by the necessary documents. In a more complex situation where parties fail to reach an agreement, an expert will be appointed.

Please note: practicing a profession through one’s own company should not always be considered a negative factor in relation to the matrimonial property. A company often brings advantages to the matrimonial property. Examples include the (family) home purchased by the company, for which the family need not pay rent, and the purchase of a car via the company.  

Timetable of application

The above compensation rule applies to spouses married after September 1, 2018. Spouses married before this date can only claim compensation for any income ‘lost’ after September 1, 2018. Any income lost before that date cannot be recovered based on the new section 1432(2) of the Belgian Civil Code. 

[1] Section 1432(2) of the Belgian Civil Code

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