On 27 April 2017, an opinion was issued from Advocate General (AG) Kokott of the CJEU on whether the EU Parent-Subsidiary Directive conflicts with a Belgian rule according to which interest payments by a company are non-deductible to the extent that in the same tax year it receives exempted dividends from holdings that have been owned by the company for less than a year.
The case involves Belgian-based credit institution Argenta Spaarbank, which in the financial years 1999 and 2000 (tax years 2000 and 2001) incurred interest expense and also received dividends from company shares that had been held for less than a year. The interest paid was not connected with loans for the purchase of the holdings in question. However, in applying the provision of Article 198(10) of the Income Tax Code, the Belgian tax administration disallowed as a deduction the amount of interest expense equal to the amount of the dividend income. Argenta appealed, arguing that the application of that provision must be limited to cases in which there is a causal relationship between the interest and the dividends for which a deduction is being claimed.
In reviewing the case, the Belgian Court of First Instance decided to refer to the CJEU for a preliminary ruling on whether Article 198(10) conflicts with the Parent-Subsidiary Directive as in force for the tax years 2000 and 2001. In particular, whether Article 198(10) violates the Directive and whether Article 198(10) can be considered a provision for the prevention of tax evasion and abuses within the meaning of the Directive given that the interest payments do not need to relate to the holding from which the dividends qualifying for exemption were derived.
In the opinion, the AG holds the view that Article 198(10) does not violate the Parent-Subsidiary Directive on the basis of the exemption clause in the second indent of Article 3(2), which provides that Member States have the option of exempting their companies from the Directive if they have not remained in possession of a holding for an uninterrupted period of at least two years. As such, the opinion proposes that the CJEU answer the request for a preliminary ruling as follows:
- Directive 90/435/EEC does not preclude a legislative provision of a Member State such as Article 198(10) of the Belgian Income Tax Code of 1992, according to which interest up to the level of an amount corresponding to the amount of the exempted dividends received by a company on shares that it has not held for an uninterrupted period of at least one year at the time of their transfer is not to be considered a business expense.
However, should the CJEU not regard Article 198(10) as being covered by the second indent of Article 3(2) of the Directive, the AG proposes that the request be answered in the alternative as follows:
- Article 4(2) of Directive 90/435/EEC precludes a legislative provision of a Member State such as Article 198(10) of the Belgian Income Tax Code of 1992, according to which interest costs up to the level of exempted dividend income from holdings generally cannot be claimed as decreasing profits, without account being taken of whether the interest is causally connected to those holdings. Nor does such a provision constitute a provision of national law for the prevention of tax evasion and abuses whose application is not precluded under Article 1(2) of Directive 90/435/EEC.
Click the following link for the full text of the opinion.