Belgian Fairness Tax: Status Quaestionis (update)

As a recall, by request sent to the Constitutional Court, a Belgian taxpayer company has filed in January 2014 an action for annulment of the so-called Belgian ‘Fairness Tax’. This action comprises four different causes of action each of them including different headings or arguments:

  • European law: freedom of establishment and Parent-Subsidiary Directive;
  • Constitutional law: lawfulness principle;
  • Constitutional law: equal treatment principle;
  • Treaties for the avoidance of double taxation.

Considering the first cause for action put forward is about European law, and before even ruling on any aspect of the action, the Constitutional Court has decided on 28 January 2015 (Decision no. 11/2015) to raise a series of preliminary questions to the Court of Justice of the European Union (‘CJEU’). The Advocate General Kokott issued on 17 November 2016 her opinion in this regard. On 17 May 2017, the CJEU issued its decision.

The Fairness Tax in a nutshell

For those not familiar with the Fairness Tax, it is only applicable if the following conditions are cumulatively met during a taxable period: (i) the company has distributed dividends during the taxable period and (ii) the company’s taxable profit has been partly or fully offset against notional interest or carried forward tax losses. A complex calculation applies to determine the taxable basis. The tax rate is 5.15%. The Fairness Tax applies to Belgian companies and to Belgian branches of foreign companies.

Key takeaways

  • Belgian subsidiary vs Belgian establishment

First of all, the CJEU requires, as a condition for the Fairness Tax not to infringe EU law, that the tax treatment reserved for a non-resident company conducting its activity in Belgium through a permanent establishment is never less advantageous than that to which a resident company is subject.

Clearly, our practice shows that this is not always the case (as recognised by the Advocate General herself).
One example of that less advantageous treatment for non-resident companies, as highlighted by the CJEU, is when the Fairness Tax is applied, due to the apportionment rule laid down in art. 233(3) BITC, on profits not falling within the Belgian tax jurisdiction (i.e. on profits which cannot be attributed to a Belgian establishment pursuant to the relevant treaties for the avoidance of double taxation). In such a case, the CJEU states that the Belgian legislation infringes EU law.

Along the same lines, one could argue that applying the Fairness Tax on the profits of a Belgian permanent establishment which have not been repatriated to its head office (and distributed by the head office, the same year) also constitutes a less advantageous treatment compared to resident companies. After all, a Belgian company is only taxed upon its impoverishing (dividend distribution) while a Belgian establishment can be subject to the Fairness Tax even if its reserves remain in its books (no repatriation of profits to its head-office, hence no impoverishing). The CJEU does not pronounce itself of that particular point however (which would probably have required a more in-depth understanding of the Belgian tax system).

  • Withholding at source

The CJEU then confirms that the Fairness Tax is not a withholding tax in the meaning of the Parent-Subsidiary Directive. As such, it does not infringe article 5 of the directive.

  • Exemption from the Parent-Subsidiary Directive

Under the Belgian implementation of the Parent-Subsidiary Directive (the deduction of ‘Definitely-Taxed Income’) 95% of qualifying dividends received are exempted from (non-resident) corporate income tax. The remaining 5% is in principle subject to tax (implementation of article 4(3) of the directive).

In the typical case of an intermediary holding company however, the complexity of the taxable basis leads to situations where the Fairness Tax applies on more than 5% of qualifying dividends received and redistributed by the intermediary holding.

In such case, the CJEU, following the Advocate General Kokott, finally considers that the Fairness Tax infringes article 4(3) of the Parent-Subsidiary Directive.

Next steps

Besides the EU law cause for action, the Constitutional Court still needs to rule on the many arguments dealing with Constitutional law (lawfulness and equal treatment principles) and with treaties for the avoidance of double taxation. The case can thus still take some time before being settled.

Of the advisability to protect one’s rights

Based on the above, we consider companies active in Belgium (either Belgian companies or Belgian establishments of foreign companies) having suffered the Fairness Tax should consider (to continue) safeguarding their rights.