Fairness tax: Court of Justice of the EU finds fairness tax incompatible with EU law

Executive summary

In its judgment of 17 May 2017, the Court of Justice of the EU (ECJ) has ruled that the Belgian fairness tax is not in accordance with EU law. In particular the ECJ finds that the fairness tax violates Article 4 of the ParentSubsidiary directive 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 an additional violation. EY Law has litigated this case before the ECJ and will be handling the follow up procedure before the Belgian Constitutional Court.

Detailed discussion

Background

The compatibility of the Belgian fairness tax with EU law was first questioned in an annulment procedure before the Belgian Constitutional Court. The fairness tax was introduced in July 2013 as a measure to tackle the abuse of the notional interest deduction (NID) and the deduction of tax losses carried forward (TLCF). The fairness tax is a separate corporate tax assessment of 5.15% on distributed profits which have not been effectively taxed as a result of NID or the deduction of TLCF. The fairness tax applies to Belgian resident companies as well as Belgian permanent establishments of nonresident companies. A request to annul the fairness tax was introduced on 31 January 2014 before the Belgian Constitutional Court. On 28 January 2015, the Belgian Constitutional Court requested a preliminary ruling of the CJEU (case C-68/15). In its judgment of 17 May 2017, the ECJ finds the fairness tax incompatible with the following provisions of EUlegislation:

Violation of Article 49 TFEU – freedom of establishment

Pursuant to Article 49 of the Treaty on the Functioning of the European Union (TFEU), a company has the right to choose its legal form when pursuing its activities on the territory of a member state. This choice (i.e. the freedom of establishment) cannot be restricted by the member states, for example by introducing discriminatory tax provisions. According to the ECJ, the fairness tax is as such not discriminatory since it taxes both resident and nonresident companies when distributing dividends. The ECJ hereby confirms the position of the AG.

However, in the situation where a non-resident company operates in Belgium through a permanent establishment (PE) the situation can be different. If the non-resident company is only taxable in Belgium on the profits derived by the PE, the calculation of the taxable basis could be de facto less favorable for the non-resident company than for a residentcompany. The ECJ hereby refers to the situation whereby a nonresident company distributes dividends from a pure nonBelgian origin. In such setting, fairness tax could be triggered although no Belgian profit is distributed. According to the ECJ, it will be up to the Supreme Court to examine and confirm whether such situations exist. At this point, the judgement deviates from the AG’s opinion. The ECJ further adds that in examination by the Supreme Court, the purpose of the legislation needs to be taken into account. Based on this purpose, the discriminatory treatment of non-resident companies operating through a Belgian PE cannot be justified by the need for a balance in the allocation of taxing rights nor by tackling tax abuse.

Violation of Article 4 ParentSubsidiary Directive

Article 4 of the ParentSubsidiary directive states that member states should refrain from taxing profits received by a parent company and originating from a subsidiary in another member state. The ECJ considers that the fairness tax constitutes a violation of Article 4 of the PSD. When a Belgian company receives dividends from a subsidiary, these dividends received are included in the taxable basis of the fairness tax upon redistribution by the Belgian company. Hence, these profits are not exempt from taxation.

This violation of article 4 PSD results from the fact that fairness tax does not take into account the origin of the profits which are redistributed by the parent company through a dividend. The ECJ hereby confirms the position that was taken by the ECJ.

Next steps

Taxpayers should examine whether they finds themselves in a position similar as the ones that were found incompatible by the ECJ. If this is the case, they can already reclaim the fairness tax paid. Other taxpayers should wait for the judgment of the Belgian Constitutional Court in order to determine the next steps. EY Law has litigated this case before the ECJ and will be handling the follow up procedure before the Belgian Constitutional Court.