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Advocate General Opinion Published on Compatibility of Belgian Fairness Tax with EU Law — Orbitax Tax News & Alerts

On 17 November 2016, the opinion of Advocate General Juliane Kokott of the Court of Justice of the European Union (CJEU) was published concerning whether Belgium's Fairness Tax is compatible with both the freedom of establishment under Article 49 of the TFEU and the rules of the EU Parent-Subsidiary Directive (2011/96/EU). While the Advocate General concluded that the Fairness Tax is compatible in most aspects, it is not compatible when it subjects a company to a tax burden that exceeds the amount allowed under the Directive when that company distributes profits with respect to dividends it has received and then redistributes.

The Fairness Tax

The Fairness Tax was introduced in 2013 and was first due in assessment year 2014. The tax is a separate corporate assessment of 5.15% (5% + 3% crisis surcharge) on distributed profits (dividends) that were not effectively taxed due to the application of the notional interest deduction or losses carried forward. The Fairness Tax applies to companies established in Belgium and to non-resident companies with a permanent establishment (PEs) in Belgium. For non-resident companies, the tax applies to the portion of the gross dividends distributed that corresponds to the share of the company’s total profits that were contributed by the Belgian PE.

Questions Referred to the CJEU

Action was brought before the Belgian Constitutional Court to annul the articles of the law that introduced the Fairness Tax. Since the Court had doubts about the compatibility of the Fairness tax, the case was referred to the CJEU for a preliminary ruling on the following questions:

  1. Must Article 49 TFEU be interpreted as precluding national rules under which
    • companies established in another Member State and having a Belgian permanent establishment are subject to a tax if they decide to distribute profits which are not included in the final taxable profits of the company, irrespective of whether profits have flowed from the Belgian permanent establishment to the main establishment, whereas companies established in another Member State and having a Belgian subsidiary are not subject to such a tax if they decide to distribute profits which are not included in the final taxable profits of the company, irrespective of whether or not the subsidiary has distributed a dividend;
    • companies established in another Member State and having a Belgian permanent establishment are, if they retain the Belgian profits in full, subject to a tax if they decide to distribute profits which are not included in the final taxable profits of the company, whereas Belgian companies are not subject to such a tax if they retain their profits in full?
  2. Must Article 5 of the Parent-Subsidiary Directive be interpreted as meaning that there is withholding tax in the case where a provision of national law requires that a tax be imposed on a distribution of profits by a subsidiary to its parent company in that, in the same taxable period, dividends are distributed and the taxable profits are wholly or partly reduced by the deduction for risk capital and/or by tax losses carried forward, whereas under national law the profits would not be taxable if they remained with the subsidiary and were not distributed to the parent company?
  3. Must Article 4(3) of the Parent-Subsidiary Directive be interpreted as precluding national legislation under which a tax is levied on the distribution of dividends if that legislation has the effect that, in the case where a company distributes a received dividend in a year subsequent to the year in which it received that dividend itself, it is taxed on a portion of the dividend which exceeds the threshold laid down in the aforementioned Article 4(3) of the directive, whereas that is not the case if that company redistributes a dividend in the year in which it receives it?

Advocate General's Opinion

In the Advocate General's opinion, the three questions should be answered as follows:

  1. Article 49 in conjunction with Article 54 TFEU is to be interpreted as not precluding legislation of a Member State which provides that
    • a non-resident company with a profit-making permanent establishment in that Member State is subject to a tax under certain conditions when it distributes profits, whereas a non-resident company with a subsidiary in that Member State is not subject to such tax;
    • a non-resident company with a profit-making permanent establishment in that Member State that retains in full the profits generated there is subject to a tax under certain conditions when it distribute profits, whereas a resident company is not subject to such tax when it retains profits in full;
  2. National legislation that subjects a company to additional taxation of revenue when it distributes profits does not constitute a withholding tax within the meaning of Article 5 of Directive 2011/96/EU.
  3. Article 4(3) of the directive 2011/96/EU precludes national legislation that has the effect of subjecting a company to a tax burden that exceeds the amount allowed under |P Article 4(3) when it distributes profits with respect to dividends that it has, within the scope of the directive, received and then redistributes.

Click the following link for the full text of the Advocate General's opinion.