Belgian Fairness Tax partially violates EU law
On 17 May 2017, the Court of Justice of the EU (ECJ) has ruled that the Belgian fairness tax is not fully in accordance with EU law.
In particular the ECJ finds that the fairness tax partially violates Article 4 of the Parent-Subsidiary directive (PSD) and can violate the freedom of establishment. The ECJ hereby confirms the position that was taken by the Advocate-General (AG) in its opinion of 17 November 2017 and adds a potential additional violation. The judgement can be found here.
No prohibition as such by EU law
The fairness tax as such is not precluded by EU law since it does not constitute a withholding tax within the meaning of the PSD. According to the ECJ, one of the cumulative criteria required for the fairness tax to qualify as withholding tax is not fulfilled, namely that the taxable person must be the holder of the shares.
Partial violation of Article 4 PSD
Belgium implemented the PSD by providing that 95% of the qualifying received dividends can be deducted from the taxable profit of the parent company. Hence, the taxable amount may not exceed 5% of the dividends received. However, if a resident company redistributes dividends in a taxable period following the taxable period in which it received these dividends, the application of the fairness tax may lead to a higher tax burden than allowed under the PSD. This stems from the fact that the received dividends are included in the tax base of the fairness tax upon redistribution. As expected (after the conclusions of the AG), the ECJ now confirms that this effect of the Fairness tax is in breach with the PSD.
Potential violation of Article 49 TFEU (freedom of establishment)
The potential violation of the freedom of establishment is relevant only for Belgian establishments of foreign companies, for which fairness tax is calculated starting from the part of the gross dividends distributed by the foreign company that corresponds proportionally to the positive part of the accounting result of the Belgian establishment in the global accounting result of the foreign company. The ECJ refers to the situation whereby a non-resident company having a permanent establishment in Belgium distributes dividends from reserves that have a pure non-Belgian origin. In this case, the non-resident company will still be subject to the fairness tax even though the profits of its Belgian permanent establishment do not form part of the dividends distributed, which would not be the case if the non-resident company would conduct an economic activity in Belgium through a subsidiary. According to the ECJ, it is for the referring court (the Belgian Constitutional Court) to ascertain whether this situation could lead to a less advantageous treatment of a Belgian PE compared to a resident company (i.e. a resident subsidiary of a non-resident company).
Possibility to reclaim the fairness tax
In view of the above, companies that find themselves in a situation in which fairness tax is levied in violation of Article 4 PSD, can in our opinion already reclaim (part of) the fairness tax that was levied. Non-resident companies of which the Belgian establishment was subject to fairness tax, will have to wait for the Belgian Constitutional Court’s decision.
Future of the fairness tax
Finally, please note that there is still uncertainty about the government’s plans with respect to the fairness tax. Two political parties (the French-speaking and the Flemish socialist parties) have declared being in favor of maintaining the tax by only carving out the situations in which it is found to infringe EU law. The French-speaking socialist party has already introduced a law proposal in this respect. On the other hand, the Minister of Finances seems to be in favor of a deep reevaluation of the system which could lead to the full abolishment of the fairness tax, as stated in the proposal for corporate tax reform (regarding which there is still no political agreement, except on the fact that a potential reform would only apply as from assessment year 2019).
MarcDhaeneAttorney at law Local Partner
Marc Dhaene is a member of the Loyens & Loeff International Tax Services in Belgium and of the Tax Controversy and Litigation Team. His expertise covers a broad range of international and domestic corporate tax issues.T: +32 2 743 43 22 E: firstname.lastname@example.org