Eric Ntini Kasoko holds a law degree from the Congo Protestant University and is a recent graduate of the Solvay Brussels School of Economics and Management, Free University of Brussels, in Belgium.
This article is one of the winning entries in Tax Analysts' inaugural student writing competition.
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Belgium is widely regarded as a relatively attractive location for international companies particularly when it comes to benefiting from tax advantages.1 Ever since the issue of tax competition has surfaced as a result of globalization, the country has been in the process of implementing tax incentives to improve conditions for doing business.2 Since the tax environment may significantly affect a company's costs of debt and equity, most of the incentives offer room for optimal capital structure. Some of them are common practice, such as the tax loss carryforward deduction. Others are specific to the Belgian tax system, such as the deduction for risk capital, or the notional interest deduction.
Until recently, these tax benefits could be used without any time or quantity restriction. Therefore, many corporations could pay no corporate income tax for several consecutive years. The slowdown in Belgian economic growth and, to a lesser extent, the introduction of the principle of fair tax competition at the European level have caused Belgian authorities to minimize the effects of such tax incentives. Hence, a minimum corporate income tax will be levied in Belgium starting with the 2014 tax year. This new tax, called the "fairness tax," applies only to large corporations and is intended to curb the excesses that may occur when using the deduction for risk capital and the loss carryforward deduction.
The conformity of the fairness tax with various sources of law, particularly European Union law, has been questioned. It is debatable whether the fairness tax is compatible with the fundamental principles on which the EU is based, specifically the freedom of establishment. Questions also arise regarding the compliance of the fairness tax with the EU parent-subsidiary directive.
Before delving into the crux of the subject matter, it is useful to discuss the essential features of the fairness tax. Section I of this article describes the two tax benefits covered by the new tax rules, namely the deduction for risk capital and the deduction of losses from previous tax years. The issue of conformity with the directive will be addressed in Section II, and Section III covers compliance with the freedom of establishment.
I. Basic Features of the Fairness Tax
A. Legal Framework
In July 2013 the Belgian federal authorities launched a series of measures to meet the budget deficit reduction targets set by the EU.3 A key measure was the adoption of a separate corporate tax assessment for large companies -- the fairness tax. The basic concept and elements of the new tax regime are contained in articles 219 ter and 233, third subparagraph of the Belgian Income Tax Code (BITC). The Belgian tax authorities have also recently published an administrative circular explaining their point of view concerning the practical application of the above-mentioned provisions.4
B. Ratio Legis
As its name would suggest, the new tax has been created to provide the Belgian corporate tax regime with an additional dimension of fairness.5 It has been designed to be a corrective mechanism, a minimal income tax applicable to corporations that distribute dividends but pay little or no tax as a result of excess use of some tax benefits. In other words, the idea behind the fairness tax is to ensure minimum effective taxation of huge profits made by large companies and distributed to shareholders through dividends. The real objective is therefore to prevent the corporations that are subject to the fairness tax from distributing excessive dividends.6
C. Tax Benefits Covered by the Fairness Tax
Two Belgian tax regimes are covered by the fairness tax: the deduction for risk capital and the tax loss carryforward deduction. These two specific deductions are an integral part of the computation of the Belgian corporate income tax base. The calculation consists of three main steps. The starting point is the financial profit as reported in the financial statements. Second, the financial profit is subject to several adjustments such as the exclusion of nontaxable items (tax-exempt reserves and dividends) and the reintegration of disallowed expenses into the tax base. In a final step, the calculation of the net taxable profit concludes with several deductions made in a specific order, including the deduction of losses from previous tax years and the deduction for risk capital.
1. The Deduction for Risk Capital
This is the background of the Belgian government initiative aimed at bridging the gap between debt and equity in the financing of a business. In most national tax systems, in the case of financing through debt, investors generally receive a return on the investment in the form of interest. At the same time, the borrowing corporation can deduct interest payments as a business expense.9 By contrast, in the case of equity funding, distributions of the borrowing corporation's profits through dividends cannot be deducted from the corporate income tax base. In order to remove tax discrimination between risk capital and borrowed funds, Belgium introduced an innovative tax regime -- the deduction for risk capital.10
Under the deduction for risk capital, companies can deduct a fictional interest from their tax base when computing their income for tax purposes. The first step of the calculation basis consists of determining the amount of net assets eligible for the tax relief. The amount to be taken into account corresponds to the accounting net equity at the end of the previous taxable period. The amount is then subject to a number of adjustments whose objective is notably to exclude assets that are not taxable in Belgium and prevent abuses by taxpayers. Participations in other companies are, for example, excluded from the calculation basis of the tax relief.11
As of the 2014 financial year, the risk capital deduction rate is based on the 10-year Belgian government bonds (OLOs) rate of the third quarter of the penultimate year preceding the tax year (that is, the third quarter of 2012 for the 2014 tax year). As a result, the deduction rate for the 2014 tax year is set at 2.742 percent. For small and medium-size enterprises, as defined in article 15 of the Belgian Corporation Code, the rate is decreased by 0.5 percent. Therefore, the deduction rate for SMEs is set at 3.242 percent for the 2014 financial year.12
This tax scheme is available not only to Belgian corporations and branches but also to foreign corporations owning Belgian immovable property that does not necessarily qualify as a permanent establishment. As from the 2013 tax year, if there is a lack or insufficiency of profits, the deduction for risk capital can no longer be carried over. Despite this, the deduction for risk capital is effective in attracting new investments to Belgium. Thanks to the regime, the tax burden for any eligible taxpayer can be reduced from a standard corporate tax rate of 33.99 percent to an effective corporate tax rate of 26 percent or 27 percent.13 The effective corporate tax rate for highly capitalized corporations can even be much lower since the risk capital deduction is based on equity capital.14
However, following a recent EU decision to examine several Belgian tax incentives in light of its code of conduct for business taxation, debate has arisen about whether the deduction for risk capital can be considered a harmful tax practice. It seems that the conditions of applicability of the deduction for risk capital are aligned with internationally accepted standards in the area of tax competition, including the OECD transfer pricing guidelines. Indeed, as noted above, the BITC prohibits corporations from claiming a tax relief for the part of taxable profits that are derived from abnormal and benevolent advantages.15 Moreover, adjustments referred to above are aimed at preventing corporations from artificially increasing their corporate equity (and the corresponding amount of the deduction for risk capital).
2. The Tax Loss Carryforward Deduction
The first loss limitation rule is enshrined in article 207 of the BITC and concerns losses from both current and previous years. It is intended to prevent profit shifting between two affiliated corporations. According to this provision, taxpayers are not allowed to set off or carry forward losses against profits that result from abnormal and gratuitous advantages. The term "abnormal and gratuitous advantage" refers to advantages received by a Belgian resident taxpayer from an affiliated corporation. Next, the second paragraph of article 206 of the BITC prohibits the deduction of previous losses if a change of control or ownership in a company occurs during the tax year, unless the change of control or ownership can be justified by legitimate economic and financial needs. The rule is, however, not applicable when the corporations involved in the change of control or ownership belong to the same consolidated group. Finally, previous losses may be deducted only partially for some tax-free corporate reorganizations such as mergers, divisions, and spinoffs.17
Note that the use of tax loss carryforwards may be particularly important in terms of tax planning because there are no rules on the consolidation of accounts under the existing Belgian tax legislation.
D. Calculation of the Fairness Tax
The formula to calculate the fairness tax can be summarized as follows:
"Untaxed" part of the distributed profits x [(notional interest deducted + loss carryforwards applied) / "gross" corporate income tax base] x 5.15% = fairness tax.18
The calculation consists of three steps: The taxable basis (that is, the "untaxed" part of the distributed profits) is determined, some corrections are made, and then the tax rate is applied to determine how much the taxpayer will actually have to pay as fairness tax. The determination of the taxable basis begins with the amount of the distributed dividends, reduced by the (final) taxable result that has been effectively subject to the standard corporate tax rate of 33.99 percent (that is, the taxable result that is obtained after the specific tax deductions referred to above are taken off the gross income).19 The resulting amount is then reduced by the amount of retained earnings that are included in the dividends distributed.20
In a second step, the remaining tax base is multiplied by a correction or proportionality factor whose numerator is the sum of the notional interest (that is, the amount of risk capital) effectively deducted and the loss carryforwards used to offset taxable profits in the course of the same taxable period, and the denominator corresponds to the gross corporate income tax base.21 The gross corporate income tax base is the amount obtained after the first step in calculating the taxable basis of the Belgian corporate income tax liability, that is, in adding together the reserves, disallowed expenses, and distributed profits.22
In a final step, a tax rate of 5.15 percent is applied to the amount that results from multiplying the tax base of the fairness tax by the correction factor, as noted above.23 The amount resulting from this last arithmetic operation represents the amount of the fairness tax liability.
E. The Scope of the Fairness Tax
As noted above, article 219 ter of the BITC targets large multinational corporations operating in Belgium.24 SMEs are explicitly excluded from the scope of the tax.25 The fairness tax hits corporations that exceed more than one of the following criteria in both the last and the penultimate approved financial years:
- Annual work force average: 50.
- Annual turnover (excluding VAT): €7.3 million.
- Balance sheet total: €3.65 million.26
Some tax commentators regard the exclusion of SMEs as constituting discrimination against multinational companies. They argue that SMEs may benefit from an advantageous tax treatment only when a specific tax would jeopardize the continuity of their operations. Yet the fairness tax, they argue, is aimed solely at corporations whose financial health is sound enough to pay taxes. They conclude that, in the absence of an explicit reason for that differential treatment, the legislature has made an unfair distinction between two categories of taxpayers.27
When taken on their own, these criticisms are coherent and worth further illustration. To fully appreciate the issue, however, an understanding of some nonlegal aspects is a necessary prerequisite. First, the 2008 financial crisis and the ensuing economic downturn have ushered in a new era in which tax matters have become a topic of considerable interest to society as a whole.28 Some critics argue that public authorities should eliminate some tax incentives to make multinational corporations foot the bill.29 In contrast, other tax commentators have warned against the danger of creating a tax disincentive to foreign investment.30
Next, another explanation for the distinction between SMEs and large companies might be that the Belgian authorities have merely extended their approach in dealing with the corporate tax system as a tool of economic policy, notably its neutrality regarding the size of companies.31 Under the current Belgian corporate tax system, SMEs can benefit from reduced rates if they meet prescribed conditions. The raison d'être behind rate-cutting tax measures in favor of SMEs may be related to two aspects of the Belgian corporate tax system: equity and efficiency. For reduced tax rates, one of the arguments supporting the differentiation between SMEs and large companies is that the former could be in a more difficult position than the latter when it comes to optimizing their tax burden. A stronger argument is that, compared with large companies, SMEs might face higher difficulties to access credit because of, for example, a lack of reputation or a lack of sufficient information concerning their financial situation.32 Therefore, one might say that limiting the fairness tax to large corporations derives from the same considerations. However, such an approach might not be in line with the OECD standards because they traditionally tend to favor nonfiscal measures when dealing with the issue of resource allocation. According to the OECD, nonneutral tax measures might negatively affect SMEs since the measures can act as a disincentive to growth. Moreover, they could lead to economic distortions on the market.33
Finally, another reason for the exclusion of SMEs from the scope of the fairness tax might be directly related to one of the primary purposes for which the tax incentives were originally introduced. As stated above, the fairness tax is particularly designed to prevent corporations from abusively using two specific Belgian preferential tax regimes: the deduction for capital risk and the tax loss carryforward deduction. Interestingly, the capital risk deduction, as laid down in the explanatory memorandum accompanying the law implementing the preferential tax regime, has been primarily intended to strengthen the equity capital structure of SMEs, thus protecting them against the risk of bankruptcy.34 Here again, some argue that the exclusion of SMEs from the application of the new tax lies squarely within the lines of the long-standing policy of the Belgian government on the question.
That said, one could still argue that both categories of taxpayers are legally in equal situations. There are no objective grounds for their differentiation regarding the application of the fairness tax. While it is true that multinational corporations are often in the best position to actually use the advantages provided for in the tax legislation, the fact remains that SMEs can also benefit from the same tax benefits and distribute excessive dividends to their shareholders. The differentiation made by the Belgian legislature may therefore result in a situation in which taxpayers having equal abilities to pay the fairness tax are treated differently. Therefore, one might legitimately wonder whether the fairness tax is in alignment with the principle of equality in taxation.
The principles of equality and nondiscrimination are deeply rooted in the constitutional traditions of many European countries, but more importantly within the European legal order.35 In Belgium, the constitution prohibits discrimination and proclaims the principle of "equality of the Belgians before the law."36 Even more interesting, according to article 172 of the Belgian Constitution, a similar tax burden must be imposed on Belgian taxpayers that are in a similar situation. Accordingly, the Belgian Constitutional Court should rule on the validity of the fairness tax and determine whether it complies with the principle of equality in taxation, as embodied in the Belgian Constitution and established by the case law of both the European Court of Human Rights and the European Court of Justice.
II. The Parent-Subsidiary Directive
A. General Features of the Directive
Profits made by corporations are classically taxed twice: once when those profits are realized and a second time when they are distributed to shareholders through dividends.37 This is known as economic double taxation -- taxation of the same income twice in the hands of two different taxpayers. In contrast with juridical double taxation (that is, taxation of the same income of the same taxpayer in both the source country and the country of residence), the elimination of economic double taxation has not traditionally been a matter of international consensus.38 Income tax treaties are generally intended to avoid international juridical double taxation. In an open economy, however, economic double taxation should also be tackled for neutrality reasons. In order to achieve a single market, the EU strives to remove all tax obstacles to cross-border economic activities on the internal market.39 The EU parent-subsidiary directive40 is an example of such an approach in that it addresses both juridical and economic double taxation.41
The aim of the directive is to avoid economic double taxation of the profits distributed in the form of dividends by a subsidiary located in one EU country to its parent corporation based in another EU country.42 The objective can be achieved in two ways.43 At the subsidiary corporation level, the elimination of double taxation is achieved by the abolition of withholding taxes on outbound dividends. For this to be possible, the parent corporation must hold at least 10 percent of the shares in the subsidiary corporation.44 On the other hand, at the level of the corporation parent, the same purpose can be met through tax relief in the form of a tax exemption or a tax credit for inbound dividends.
Under Belgian tax law as it stands, two tax schemes ensure implementation of the directive. On the one hand, Belgium introduced a participation exemption regime in which dividends paid by a subsidiary located in an EU country (or even any other country in the world) to its Belgian parent corporation are deductible at a rate of 95 percent from the taxable base of the corporate income tax, under specific conditions.45 The participation exemption scheme is based on article 4 of the directive whose aim is to eliminate economic double taxation arising from the application of the corporate income tax imposed by the residence country on the dividend-paying corporation. On the other hand, in order to comply with its obligation to provide for exemption at source of any withholding tax on dividends, Belgian tax legislation grants a full withholding exemption for dividends paid by a Belgian corporation to its parent corporation located in another EU country. In accordance with article 5 of the directive, a minimum holding of 10 percent is required under Belgian tax rules.46
What follows is a discussion about the issue of the conformity of the fairness tax to article 5 of the directive.
As noted above, article 5 of the directive prohibits the imposition of withholding tax on payments of dividends between associated corporations of different EU countries. Since the text does not define the term "withholding tax," the ECJ has tried to provide a definition. According to case law, the term "withholding tax" must be given an autonomous and uniform interpretation.47 In other words, the existence of a withholding tax is not dependent on the domestic laws of EU countries. According to author Luc De Broe:
the goal of the Parent-Subsidiary Directive would be undermined if a Member State would subject taxpayers to taxes upon distributions of profit that have the same effect as withholding taxes by simply labeling the tax differently.48
Therefore, the ECJ has adopted its own definition of withholding tax as any tax:
- for which the chargeable event is the distribution of dividends or any other income from shares;
- the taxable amount is the income from those shares; and
- the taxable person is the holder of the shares.49
What follows is a detailed assessment of whether the fairness tax meets the three cumulative conditions (as defined by the ECJ) to be qualified as a withholding tax.
1. The Chargeable Event Is the Distribution of Dividends
2. The Taxable Amount Is the Income From the Shares
3. The Taxable Person Is the Holder of the Shares
The first is of economic aspect and was firstly applied in Athinaiki Zithopoiia. The case concerned "compensatory tax charges applicable in Greece upon the distribution of dividends in the hands of Greek subsidiaries, insofar as such dividends were distributed out of exempt income or income taxed under a more favorable regime."51 Under the Greek tax legislation at issue, the compensatory tax charges were imposed on Greek subsidiaries. Therefore, the taxable person was clearly not the parent corporation (that is, the shareholder). Surprisingly, however, the ECJ ruled that the Greek tax had the nature of a withholding tax, not that of a corporate income tax. The decisive factor was that in contrast with the ordinary rules of the Greek tax law as it stood at the time of the case, losses from previous tax years could not be offset against the taxed profit.52
In Epson (C-375/98), the ECJ adopted the advocate general's line of reasoning in which a Portuguese inheritance and gift tax actually constituted an income tax.53 As to whether the tax at issue could be considered as a withholding tax, the advocate general stated:
the fact that the tax burden is imposed on the subsidiary rather than on the shareholder cannot be decisive. The economic effect of taxation of the subsidiary is tantamount to taxation of the shareholder since the tax is -- as is the case for a withholding tax -- retained by the subsidiary and paid to the Treasury.54
In the two cases analyzed above, the ECJ rejected as irrelevant, or rather as noncrucial, the third condition. On this basis, there should be no watertight division between the taxation of parent corporations and that of subsidiaries as long as the economic effect of the tax is the same in either case.
The second approach is juridical and was first developed by the ECJ in Burda (C-284/06). The ECJ was asked to interpret EU law regarding an increase in tax burden imposed by Germany when a corporation distributes profits as dividends to its shareholders. Burda, a German subsidiary of a Dutch corporation, was required to pay an additional corporate income tax liability on the grounds that it had distributed profits in excess of its taxable income. Apparently departing from its ruling in Athanaiki Zithopoiia, the ECJ dismissed an argument that the third criterion was not necessary. According to the ECJ, taxing the German subsidiary did not correspond to taxing the holder of the shares (that is, the Dutch parent corporation). In contrast with the above-mentioned Greek case, the ECJ held that the additional tax burden imposed on Burda was part of the German corporate income tax and thus did not constitute a withholding tax. In the latter case, tax losses and other available income tax reductions could be set off against the tax base.55
Similarly, in Ferrero (C-338/08), the ECJ followed the juridical approach and concluded that the tax at issue was not a withholding tax in disguise because the taxable person was not the holder of the shares but the corporation making the distribution. According to the ECJ, economic considerations (when they are relevant) may be taken into account only if the three conditions laid down in the case law are fulfilled.56
Regarding the Belgian fairness tax, the Belgian government notified the European Commission about the measure concerning the introduction of the fairness tax in order for the measure to be examined in light of the directive. While the Belgian authorities are confident about the legality of the fairness tax, it cannot be predicted with certainty what direction the European Commission will take. Even more importantly, in the view of ECJ case law, the least that can be said is that there is no clear and principled position on how the notion of withholding tax should be interpreted when it comes to applying the three requirements noted above. Beyond the seeming contradiction between the two approaches analyzed above, there is a crucial element to be taken into account when assessing the third requirement. Indeed, the ECJ generally chooses to examine the nature of the disputed tax according to the objective characteristics by which it is levied, notably whether there are sufficiently close links between the tax and the distributing corporation. The ECJ seeks to determine whether standard corporate income tax rules, especially those related to tax losses and other income tax reductions, are applicable to the disputed tax.57
Note that Belgian resident corporations are allowed to credit their Belgian withholding taxes on movable income against the fairness tax liability and thus claim a potential reimbursement of the tax. Moreover, a Belgian corporation is also entitled to set off tax credits related to interest and royalties against the fairness tax liability. This brings the fairness tax closer to the standard corporate income tax and, through it, further links the fairness tax with the corporation distributing dividends rather than with the shareholder corporation. On the contrary, however, the fairness tax is a separate corporate tax assessment, and as such, its taxable base cannot be reduced in any way. The fairness tax is, indeed, a minimum tax for the corporations concerned.58
There are sufficient reasons that would eventually induce the ECJ to declare the fairness tax incompatible with article 5 of the directive. However, since further clarifications are needed regarding the third requirement, it would be interesting to see what approach of the notion of withholding tax would be adopted by the ECJ when the opportunity to do so arises. In any event, a Belgian taxpayer facing the fairness tax liability will likely ask a Belgian court to refer questions to the ECJ for a preliminary ruling. Likewise, a foreign (EU) parent corporation whose income is reduced by the Belgian fairness tax might seek a preliminary ruling from the ECJ when the relevant (foreign) tax authorities refuse to issue a tax credit. Finally, if the European Commission finds that the Belgian fairness tax is contrary to the parent-subsidiary directive, it may also bring an action before the ECJ against the Belgian government for failure to fulfill an obligation.
III. Freedom of Establishment
A. Direct Taxation in EU Law
Freedom of establishment, as guaranteed by article 49 of the Treaty on the Functioning of the European Union (TFEU), is one of the fundamental principles of EU law. This freedom enables an economic operator, including a corporation, already established in one EU country to start up and carry on business activities in a stable way across the entire territory of the EU. This involves the freedom to choose the most appropriate form for pursuit of activities in other EU countries.59 An EU corporation therefore has both the right to primary establishment (with a registered office, headquarters, and principal place of business) and secondary establishment (with an agency, a branch, or a subsidiary) in the host state.60 EU law precludes national tax systems from hindering the four fundamental freedoms. Therefore, while member states have retained most of their sovereignty over direct taxation, the ECJ has traditionally been eager to ensure that taxation would not become a barrier to continued increased economic integration.61 In this regard, member states must refrain from taking tax measures that would be contrary to the primary Community law, including the freedom of establishment.
The ECJ has often mentioned the principle of nondiscrimination as being the basis of other EU principles, notably the freedom of establishment.62 The basic nondiscrimination principle within the internal market means that:
EU non-nationals and EU non-resident companies have to be treated in the host Member state in the same manner as nationals and companies of that state . . . or, in general, [that] different treatment of the cross-border situation as compared to the similar domestic situation is in principle prohibited.63
As a general rule, EU countries are free to take tax measures constituting restrictions upon the freedom of establishment as long as those restrictions are not discriminatory. They can justify the national tax rules at issue on different grounds, such as the prevention of tax abuse and the preservation of fiscal coherence.64 However, such a justification will be acceptable only if it does not go beyond what is necessary to achieve its aim or purpose (principle of proportionality).65 In order to determine whether a difference in tax treatment is discriminatory, the ECJ uses a two-stage test.66 At the first stage, the court determines whether the different tax situations are objectively comparable. If so, the ECJ will consider that there is discrimination (and thus a breach of the freedom of establishment) whenever different rules are applied to comparable tax situations or the same rule is applied to different tax situations.
A close look at the ECJ case law under article 49 of the TFEU reveals that there is a substantial body of decisions dealing with the issue of corrective mechanism in the area of corporate income tax. Because other EU countries, under pressure from the economic crisis, have recently introduced taxes similar to the Belgian fairness tax, the EU case law thereon is expected to grow even further in the coming years.67
Pending such case law development, it would be interesting to examine the Belgian fairness tax in light of the principles deriving from the existing case law of the ECJ.
Specifically regarding the Belgian fairness tax, one major issue is at play: potential discrimination between a foreign corporation with a PE in Belgium and a Belgian corporation.
As noted above, a PE of a foreign corporation is liable to the fairness tax as well. However, strictly speaking, a PE is not likely to make profits and distribute dividends to its head office.68 Therefore, tax rules relating to the fairness tax attribute to that nonresident taxpayer the profits that it might be expected to make if it were a distinct and separate entity engaged in the same or similar activities under the same or similar conditions and dealing independently. This is known as the separate entity principle. Yet the issue is not so much about the principle itself, but its practical application to Belgian branches. As discussed below, the question arises of whether the way in which the new tax is applied to Belgian branches is in concordance with EU law, particularly regarding the freedom of establishment.
On the one hand, the Belgian Income Tax Code provisions under discussion state that a foreign corporation with a Belgian PE, whose profits have been reduced by losses of previous years or by the deduction for risk capital, would see its PE be subject to the fairness tax regardless of the size of the dividend distributed to its shareholders as compared with its overall profit. Any dividend paid, however minimal, by such a corporation to its shareholders would be seen as excessive and thus trigger a fairness tax liability in Belgium. Interestingly, the use of the two tax benefits might also trigger a fairness tax liability in Belgium even when the profits of the Belgian branch have not actually been transferred outside the country, but rather reinvested as retained earnings.69
On the other hand, when a Belgian corporation uses negative income from previous tax years and then distributes profits through a dividend to its shareholders, a fairness tax liability is triggered if distributed profits go beyond what is considered to be excessive dividends. Thus, no fairness tax liability arises when a Belgian corporation retains or reinvests its profits.70
The Belgian legislature has applied the same rule to different situations. Since a Belgian corporation and a foreign corporation are likely not in the same situation when it comes to assessing whether distributed dividends are excessive, one would expect that different tax rules may apply to each. In particular, it may be challenging to determine the amount of dividends distributed by a Belgian branch to its head office. In order to ascertain the precise amount of distributed dividends, the new law requires that the Belgian generally accepted accounting principles be applied to the worldwide activities of nonresident corporations, possibly including PEs in other countries. This may, however, lead to many problems in practice.71
All this might make doing business through branches more costly -- and thus less attractive -- than through subsidiaries. The ensuing higher tax burden on inbound dividends is likely to constitute a restriction regarding article 49 of the directive. Some argue that the solution for eliminating this difference in tax treatment between a Belgian subsidiary and a Belgian establishment would consist of running business operations in the form of subsidiaries rather than PEs. However, if reference is made to the ECJ's settled case law, such an objection would be incompatible with the freedom of establishment principle.72
If a Belgian court submitted a preliminary question or if the European Commission brought infringement proceedings before the ECJ, it would make more sense for the Belgian authorities to justify a potential difference in tax treatment on the grounds of general interest relating to the prevention of tax abuse. The principle of prevention of (direct tax) abuse is often invoked by EU countries as a justification when it comes to the freedom of establishment.73 While there can be little doubt that the ECJ would accept such a justification, there is less certainty about the proportionality of such a difference in tax treatment. Indeed, the Belgian authorities could have applied less restrictive measures to achieve the purpose of prevention of tax abuse. For example, they could have proactively addressed the issue by providing derogatory accounting rules from the Belgian GAAP to determining the amount of dividends distributed by Belgian branches. However, it is unclear whether this would be sufficient in the eyes of the ECJ.
Therefore, I argue that there is a risk of incompatibility of the fairness tax with the EU freedom of establishment principle, but it is nonetheless a lower risk than in the case of the parent-subsidiary directive.
IV. Concluding Remarks
The fairness tax raises crucial questions regarding both its practical application and its conformity with EU law. To some extent, these are two sides of the same issue as arguments related to the practical aspects of the fairness tax may play a key role when challenging its legal validity before the ECJ.
From a primary Community law perspective, the fairness tax does not seem to be legally viable. Although the EU countries can successfully rely on the need to prevent tax abuse as an overriding reason in the public interest capable of justifying a restriction on freedom of establishment, the fairness tax would have more difficulty passing the proportionality test to receive support from the ECJ. Because of particular practical challenges that may arise when dealing with the calculation of the fairness tax, one can argue that the new Belgian tax may have the effect of discriminating against foreign corporations and thus deter them from setting up or continuing business operations in the form of a branch in Belgium. However, given the ECJ case law on direct taxation, the ECJ may take into account other considerations -- particularly the EU principle of subsidiarity in the field of direct taxation -- that could tip the scales the other way.
Another potential issue that may arise in connection with the fairness tax is related to its legal validity regarding EU binding secondary law, especially the parent-subsidiary directive. Although the principles to be drawn from the ECJ case law are not very clear regarding the third requirement in the definition of "withholding tax," one can argue that the fairness tax is more associated with the shareholding parent corporation than with the Belgian distributing subsidiary. On the basis of the economic approach adopted by the ECJ in some cases, the fairness tax constitutes a withholding tax on outbound dividends paid to corporations resident in the other EU countries. However, when it comes to the juridical approach, the solution is no longer readily apparent. Should the case arise, the ECJ can assess the objective characteristics of the fairness tax.
1 Pascal Minne, "Group Taxation: Belgium Report," 89b C.D.F.I. 177 (2004).
2 Kim Dirix, "Harmful Tax Competition: Six Belgian Tax Incentives Under the Microscope," 5 EC Tax Rev. 233 (2013).
4 See Circular Letter No. 13/2014, issued Apr. 3, 2014, available at http://ccff02.minfin.fgov.be/KMWeb/document.do?method=view&nav=1&id=869495f0-cc92-434a-9af5-4754eca3caa2&disableHighlightning=true&documentLanguage=fr#findHighlighted.
6 See Law of July 30, 2013, containing miscellaneous provisions: introduction of the fairness tax, published in the Belgian official gazette on Aug. 1, 2013; see also Law of Dec. 21, 2013, containing miscellaneous tax and financial provisions: items attributable to the fairness tax, published in the Belgian official gazette on Dec. 31, 2013; Felix Vanden Heede, "Trois lois prévoyant des modifications fiscales: La loi du 30 Juillet 2013," 370 PACIOLI 10 (Sept.-Oct. 2013).
7 Marjaana Helminen, The Dividend Concept in International Tax Law: Dividend Payments Between Corporate Entities, at 11 (Kluwer Law Int'l, 1999).
9 Patricia Brown, "The Debt-Equity Conundrum: General Report," 97b C.D.F.I. 19 (2012).
10 See articles 205 bis to 205 novies of the BITC.
11 See article 205 ter, para. 1 of the BITC.
12 See Law of June 17, 2013, containing miscellaneous tax and financial provisions, published in the Belgian official gazette on June 28, 2013.
13 Marc Quaghebeur, "Belgium Targets Risk Capital Deduction Abuses," Tax Notes Int'l, Nov. 12, 2007, p. 627 .
14 Dirix, supra note 2, at 239.
15 Id. at 239-240.
16 Michel vander Linden, "Le régime fiscal de la déductibilité des pertes antérieures à l'impôt des personnes physiques et à l'impôt des sociétés," 128 PACIOLI 1 (Oct. 2002).
17 Id. at 2-3.
19 See article 219 ter, para. 2 of the BITC.
20 Nevertheless, profits that are retained as of the 2014 tax year onward and are distributed as dividends in a subsequent year will not be excluded from the tax base of the fairness tax. See id. at para. 3.
21 Id. at para. 4.
22 Available at http://www.ey.com/BE/en/Services/Tax/Fairness-Tax.
23 Article 219 ter, para. 6 of the BITC.
24 Koen Morbée and Nico Demeyere, "The slowdown of economic growth is causing the government to create new taxes," available at http://www.itrworldtax.com/Guide/1005/Belgium.html.
25 See article 219 ter, para. 7 of the BITC.
26 Under article 15 of the Belgian Corporation Code, a company whose annual work force average exceeds 100 is automatically regarded as a large company, even if the two other criteria are not satisfied. See Federal Public Service Finance's Tax Survey 2013, No. 25, at 86 (Oct. 2013), available at http://financien.belgium.be/nl/binaries/FiscaalMemento2013_EN_tcm306-223399.pdf.
28 See David Prosser, "The G20 tax turnaround," 10 T Magazine 8-13 (Jan. 2013); see also Paul Kielstra, "Can Tax Ever Be 'Fair'?" EY Tax Insights, May 16, 2014, available at http://taxinsights.ey.com/ey-ti-ed-1/quotes-ed-1/can-tax-ever-be-fair-.aspx.
29 Bernard Mariscal, "Fairness Tax: mesure contestée et contestable," 32 Act. Fisc. 4-5 (Sept. 2013).
31 Gaëtan Nicodème, Taxation papers: corporate income tax and economic distortions, at 6-7 (European Commission, Brussels, 2009).
32 See Law of June 22, 2005, introducing the deduction of risk capital, published in the Belgian official gazette on Sept. 30, 2005.
33 OECD, Taxation and Small Business, at 19-21 (OECD, Paris, 2004).
34 Bernard Peeters and Thomas Hermie, "Notional Interest Deduction," in: Dennis Weber and Otto Marres (eds.), Tax Treatment of Interest for Corporations, at 69 (IBFD, Amsterdam, 2013).
35 See Victor Thuronyi, Comparative Tax Law, at 82-100 (Kluwer Law Int'l, 2003); see also Gerard Theodora and Karel Meussen, The Principle of Equality in European Taxation, at 279 (Kluwer Law Int'l, 1999); Niels Bammens, The Principle of Non-discrimination in International and European Tax Law, at 1130 (IBFD, 2013).
36 See articles 10 and 11 of the Belgian Constitution (coordinated Feb. 17, 1994).
37 Jane G. Gravelle, Joseph J. Cordes, and Robert D. Ebel, The Encyclopedia of Taxation and Tax Policy, at 212 (The Urban Institute Press, 2005).
38 Guglielmo Maisto, Taxation of Intercompany Dividends Under Tax Treaties and EU Law, at 171-172 (IBFD, Amsterdam, 2012).
39 See Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee, Towards an Internal Market without Tax Obstacles (A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities), Brussels, 2001, COM(2001) 582 Final, p. 3.
40 See Council Directive 2011/96/EU of Nov. 30, 2011, on the Common System of Taxation applicable in the case of parent companies and subsidiaries of different member states.
41 Christiana HJI Panayi, European Union Corporate Tax Law, at 33 (Cambridge University Press, 2013).
42 On June 20, 2014, EU member states agreed to amend the directive to tackle double nontaxation deriving from the use of hybrid financing arrangements. The member states are required to implement the amended directive into their domestic laws by December 31, 2015. The member states are required to implement the amended directive into their domestic laws by December 31, 2015. See Loyens & Loeff, "ECOFIN postpones amendments to the Parent-Subsidiary Directive," available at http://www.loyensloeff.com/nl-NL/News/Publications/Flashes/Pages/TaxFlash7may2014.aspx.
43 OJ L 345, Dec. 29, 2011, p. 8.
44 See article 5 of the parent-subsidiary directive.
45 See article 202 of the BITC.
46 See article 106 of the [Belgian] Royal Decree implementing the BITC.
47 Ministerio Público and Fazenda Pública v. Epson (C-375/98), June 8, 2000; Athinaiki Zithopiia (C-294/99), Oct. 4, 2001; see also Ioanis F. Stavropoulos, "ECJ: Greek Income Tax Provision is a withholding within the meaning of the Parent-Subsidiary Directive," 42 (2) Eur'n Tax'n 95 (Feb. 2002).
48 Luc De Broe, International Tax Planning and Prevention of Abuse: A Study Under Domestic Tax Law, Tax Treaties, EC Law in relation to Conduit and Base Companies, at 21 (IBFD, Amsterdam, 2008).
49 See Anno Rainer, "ECJ rules on concept of withholding tax under Parent-Subsidiary Directive," 10 Intertax 473-474 (2008).
50 Michael Lang et al., Introduction to European Tax Law: Direct Taxation, at 143 (IBFD, 2013).
52 Bart Peeters, "La nouvelle 'fairness tax': conforme au droit européen et aux conventions" 363 Fiscologue International 10 (Dec. 2013).
53 Ministerio Público and Fazenda Pública v. Epson.
54 De Broe, supra note 48, at 21.
55 Peeters, supra note 52, at 10; see also Ioannis F. Stavropoulos, "The EC Parent-Subsidiary Directive and the Decision of the European Court of Justice in Burda," 49(3) Eur'n Tax'n 150-151 (2009).
56 P. Ferrero e C. SpA v. Agenzia delle Entrate -- Ufficio di Alba, and General Beverage Europe BV v. Agenzia delle Entrate -- Ufficio di Torino 1 (joined cases C-338/08 and C-339/08), June 24, 2010.
57 Peeters, supra note 52, at 10.
59 Matthias Dahlberg, Direct Taxation in Relation of the Freedom of Establishment and the Free Movement of Capital, at 223 (Kluwer Law Int'l, 2005).
60 Centros Ltd v. Erhvervs (C-212/97), Mar. 9, 1999; Commission v. Italy (Dealing in transferable securities) (C-101/94), June 6, 1996. See also Catherine Barnard, The Substantive Law of the EU: The Four Freedoms, at 331 (Oxford University Press, 2013); Dennis Campbell, Comparative Law Year Book of International Business, 31 Kluwer Law Int'l 275-276 (2009).
61 Jacobus Johannes and Maria Ansen, Fiscal Sovereignty of Member States in an Internal Market: Past and Future, at 202 (Kluwer Law Int'l, 2011).
62 Alina Kaczorovawza, European Union Law, at 690 (Routledge, 2013).
63 Stephen Daly, "The ECJ's Approach to Matters of Direct Taxation: A Critical Analysis," 1 Cork Online Law Rev. 3 (Mar. 2013).
64 Dahlberg, supra note 59, at 330.
65 Pasquale Pistone, Legal Remedies in European Tax Law, at 163-164 (IBFD, 2009).
66 Daly, supra note 63, at 3.
67 Eric Robert, "Quid de la compatibilité de la contribution additionnelle à l'IS de 3% sur les dividendes avec les engagements internationaux de la France" (Taj, Paris, Jan. 2013), available at http://www.taj-strategie.fr/spip.php?article142.
68 Marc Dassesse, "La Fairness Tax: contraire au droit européen?" 33 Act. Fisc., at 4.
72 Commission v. France (C-270/83), Jan. 28, 1986. See also Dassesse, supra note 68, at 5.
73 Dahlberg, supra note 59, at 331.
END OF FOOTNOTES
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