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Nov. 18 — A Belgian tax on dividend distributions affecting large companies will likely be abolished if the European Court of Justice follows a recent opinion by its highest adviser that it fails to comply with European law.
In a Nov. 17 opinion, Advocate General Juliane Kokott held that Belgium’s “fairness tax” on dividend distributions is incompatible with EU law because it double-taxes dividends distributed by a non-resident subsidiary to its resident parent company when those profits are subsequently redistributed to shareholders.
If the ECJ concurs with the opinion of the Advocate General, which it does in two of three cases, the Belgian government is likely to completely scrap the fairness tax rather than amend it to make it compatible with EU law, practitioners told Bloomberg BNA.
Mark Joris, tax adviser and partner at Antwerp-based Moore Stephens, said “the fairness tax cannot continue to exist in its current form” should the court concur with the Advocate General’s opinion.
Companies would moreover be able to recoup fairness tax sums they’ve paid, he told Bloomberg BNA in a Nov. 18 phone-interview.
The fairness tax was introduced in 2013 by the previous Belgian federal coalition of Socialists, Christian Democrats and Liberals, with the aim of combating situations in which companies paid hardly any taxes but still distributed profits by indefinitely carrying forward losses and claiming deductions for risk capital through application of the notional interest deduction.
However, its compatibility with the Belgian constitution, EU law and double taxation agreements has been questioned by business associations, lawmakers and Belgium’s Council of State from the outset.
It imposes a 5.15 percent tax on dividend distributions by Belgian companies and Belgian permanent establishments of foreign companies—levied on any dividend distributions or profits not effectively taxed due to a taxpayer’s use of Belgium’s notional interest deduction or carrying forward of tax losses.
A resident parent company can therefore also be taxed on profits realized by a subsidiary abroad, which isn’t allowed under EU law. Under the previous Parent-Subsidiary directive, EU 2003/123/EC, the authority to tax profits realized by a subsidiary lies exclusively with the member country in which the subsidiary is located.
The ECJ case was put in motion two years ago, when Fortum Project Finance, a Belgian finance subsidiary of the Finnish energy group, appealed against the fairness tax before the Belgium Constitutional Court, arguing that the levy discriminated against non-resident companies in certain situations. The Belgian Constitutional Court subsequently asked the European Court of Justice for a preliminary ruling in Jan. 2015.
Fortum Project Finance chose to remain anonymous in the proceedings before the ECJ, but its identity was clear from the court proceedings at the Belgian level.
Under Article 4 of the Parent-Subsidiary Directive, when a subsidiary distributes profits to its parent company in a different EU county, this EU country must exempt the profits distributed to the parent company from taxation. Under the Belgian regime, however, dividends received by a resident parent company from a subsidiary are included in the taxable basis to which the fairness tax is applied when they are redistributed by the resident parent company.
The Advocate General held that Belgium’s fairness tax therefore “circumvented” the tax exemption that an EU country must grant for profits received from a subsidiary, Tom Engelen, an associate at the tax controversy team of the HVG Advocaten law firm, told Bloomberg BNA.
With HVG Advocaten, Engelen pleaded before the ECJ and the Belgium Constitutional Court on behalf of Fortum, the party that anonymously appealed against the fairness tax.
When a parent company receives a dividend from its subsidiary, 95% of the received dividends can be deducted from that company’s profits under the Belgian regime and this in accordance with EU law, he pointed out in in a Nov. 17 phone-interview.
“However, when that same parent company redistributes to its shareholders those same profits it has received from its subsidiary, those dividends are again taxed, so they are not exempted” as they are included in the taxable basis of the fairness tax upon redistribution by the Belgian parent company, he said.
In the Advocate General’s view, this double taxation constitutes a violation of Article 4 of the Parent Subsidiary Directive.
Engelen said that taxpayers in the same situation as the one at stake in the ECJ case—parent companies that were made liable for fairness tax on profits distributed to shareholders that the parent company itself received from a subsidiary—can recoup the paid taxes from Belgian tax authorities if the ECJ concurs with the opinion of the Advocate General.
Such companies will have five years to recoup the paid taxes by filing a request for ex officio detaxation with the Belgian tax authorities on the basis of the ECJ ruling, counting from the day of the ruling, he said.
Taxpayers that were made liable for fairness tax but “are in a different situation” will have to wait until the Belgium Constitutional Court delivers its ruling since the ECJ cannot rescind the Belgian fairness tax; only the Belgian court can do this, Engelen explained.
Only after the Belgian Constitutional Court has annulled the Law of 30 July 2013, under which the fairness was introduced, every taxpayer who has paid fairness tax, no matter the particular circumstances, can recoup the levied sums, he said.
The Belgian court, Engelen added, is likely to strike the law down in its entirety because the fairness tax “does not contain any separate provisions that distinguish between profits that were subjected to definitely taxed income and profits that were not subjected to this,” he said.
The Belgium Constitutional Court is expected to rule on the case in 2017, while the ECJ should deliver its ruling in three to six months.
Engelen noted that many resident taxpayers have held off distributing dividends until the ECJ and the forthcoming Belgium Constitutional Court ruling offered more clarity on the matter.
“I think that all those companies that waited to distribute profits, will now do exactly that,” he said, if the court follows the opinion of the Advocate General.
Joris added that the ECJ opinion was a step in the right direction, noting that the fairness tax “was not at all that fair in practice” because it constituted a double taxation.
With KPMG clients, he said, “we experienced that large family companies that distributed dividends and profits that had already been taxed were also confronted with the fairness tax.”
Joris expects many companies to recoup the paid taxes, though he said it was impossible to give an estimate of the number of taxpayers affected by the measure in the first place.
“But speaking from my own practice, we saw quite a few,” he said.
To contact the reporter responsible for this story: Linda A. Thompson in Brussels at firstname.lastname@example.org
To contact the editor responsible for this story: Penny Sukhraj at email@example.com
The Advocate-General’s opinion is at: http://src.bna.com/kcn
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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