Opinion of Advocate General Kokott: Belgian fairness tax (Case C-68/15).
Opinion of the Advocate General
Advocate General Kokott of the Court of Justice of the European Union (CJEU) has rendered on 17 November 2016 her opinion in the pending case C-68/15 pursuant to which the Belgian fairness tax is partially contrary to European law. According to Advocate General Kokott, the fairness tax breaches article 4 of the Parent-Subsidiary Directive. The fact that dividends received by a Belgian company from its subsidiary in another EU Member State are to be included in the taxable base of the fairness tax upon redistribution by the Belgian company violates article 4 of the Parent-Subsidiary Directive.
The fairness tax has been introduced in July 2013 as a separate tax of 5,15% on the distribution of profits, if the distributing company has benefitted in the year in relation to which the distribution occurs from the use of notional interest deduction and/or tax losses carried forward. The fairness tax is applicable both to domestic companies and to Belgian permanent establishments of foreign companies.
European and constitutional law issues raised before Belgian Constitutional Court
Since the introduction, questions have arisen in particular concerning the compatibility with European law. In January 2014, a company launched an annulment action before the Belgian Constitutional Court, arguing that the fairness tax infringed Belgian constitutional law, the Treaty on the Functioning of the European Union and the EU Parent-Subsidiary Directive. The Belgian Constitutional Court has therefore decided to refer several preliminary questions to the CJEU to assess whether the fairness tax violates European law (Constitutional court judgment No. 11/2016 of 28 January 2015).
Questions referred to CJEU by Constitutional Court
1) Does the application of the fairness tax to Belgian branches of companies residing in other EU Member States violate the freedom of establishment?
A comparison is made between Belgian companies and Belgian branches of EU-resident companies. A foreign company with a Belgian permanent establishment could be subject to the fairness tax when distributing a dividend, whereas a foreign company with a Belgian subsidiary will not be subject to the fairness tax when that foreign company distributes a dividend. In addition, a foreign company with a Belgian permanent establishment could be subject to the fairness tax even though those profits originating in the Belgian permanent establishment are fully reserved, whilst a Belgian subsidiary that entirely reserves its profits, is not subject to the fairness tax.
According to the Advocate General, however, the imposition of the fairness tax with respect to Belgian branches of EU-resident companies does not violate the freedom of establishment.
2) Does the fairness tax constitute a prohibited withholding tax according to Article 5 of the Parent-Subsidiary Directive?
A Belgian subsidiary could be subject to the fairness tax when distributing its profits to its parent company, whereas these profits would not be subject to the fairness tax if they would be retained within the Belgian subsidiary. Given that fairness tax is connected to a distribution and the tax base depends on the volume of distribution, it could qualify as a source taxation prohibited by the Parent-Subsidiary Directive. The key issue here is that fairness tax is imposed on the distributing company and not (as usual for withholding taxes) the dividend recipient. A similar issue exists for the French 3% tax on distributions (case pending before the CJEU under number C-365/16).
The Advocate-General interprets the fairness tax as an additional corporate income tax, which is imposed only upon distribution of profits, and not as a withholding tax in the sense of article 5 of the Parent-Subsidiary Directive.
3) Does the Parent-Subsidiary Directive preclude that dividends that a Belgian company has received from a subsidiary and redistributes it to its parent in a subsequent year form part of the Belgian company’s fairness tax base?
According to the AG opinion, it is not conform with the Parent-Subsidiary Directive that dividends received by a Belgian company are taxed upon receipt pursuant to the 95% dividends-received deduction and upon redistribution additional tax is imposed by way of the fairness tax.
According to the Advocate-General, the fairness tax is partially contrary to European law because the fairness tax breaches article 4 of the Parent-Subsidiary Directive. Although the AG opinion is not binding, the CJEU follows it in most cases.
After the CJEU decision, it will be for the Belgian Constitutional Court to render its final judgment (reflecting the CJEU decision but addressing also the Belgian constitutional law issues raised).
The ultimate impact of the ongoing litigation for those taxpayers that have suffered fairness tax will become fully clear only once both CJEU and Belgian Constitutional Court have rendered their judgments.
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