On 11 January 2016 the European Commission (EC) announced its final decision on its State aid investigation into the Belgian so-called ‘excess profit’ tax rulings system (the Decision). The Decision confirms the EC’s preliminary view that the tax system in question constitutes state aid, incompatible with the internal market. As a result, Belgium has to recover the tax relief granted from its beneficiaries. It is now open to both Belgium and the companies concerned to appeal the EC recovery order in the Decision to the General Court of the EU (GCEU).
Under EU law, the EC is entrusted with the review of State aid granted by EU Member States to undertakings. If it finds that the aid is not compatible with the EU’s internal market, it has the power to require the Member State concerned to recover the incompatible aid from its beneficiaries (taxpayers in this instance).
In the Decision, the EC first observes that the ‘excess profit’ tax legislation constituted a scheme as it was meant to apply to more than one undertaking; therefore all rulings granted under this scheme are affected. The rulings issued allowed multinational companies to reduce their tax base for alleged ‘excess profit’ on the basis of the comparison between their actual recorded profit and the hypothetical average profit a stand-alone company in a comparable situation would have made.
The EC then states that the benefit from the rulings under this scheme is not available to all undertakings subject to Belgium corporate income tax equally (i.e. it is selective) and that Belgium does not apply the arm’s length principle properly when providing the rulings. The EC could not justify the scheme under any exemptions available under EU State aid law. The EC estimates that at least 35 multinationals have benefited from this scheme and that the total amount of aid to be recovered from all of them could reach €700 million. The Belgian Government would have to follow a complicated process to calculate precisely the amount of aid received by each multinational in the last 10 years the scheme was in operation and further calculate the compound interest for each one to determine the final amount of aid to be recovered.
This Decision has to be seen in the context of the other EC State aid investigations into tax rulings that started in 2013/2014 and the wider tax avoidance agenda of the EC, announced in March and June 2015. At this point in time it is difficult to draw any firm lessons since the text of the Decision has not yet been published. It should be noted that the Decision can be appealed by Belgium and the multinationals in question and only becomes final either if not appealed or if confirmed by the EU Courts. Any application to the GCEU will not automatically suspend the recovery process, which the Belgian Government needs to conclude within a period specified in the Decision.
For further information, KPMG’s EU Tax Centre have published a Euro Tax Flash on this decision.