BRUSSELS: An Advocate General of the European Court of Justice has concluded that Belgium’s fairness tax is incompatible with the EU Parent-Subsidiary Directive.
Belgium’s fairness tax applies where companies distribute profits but have paid little tax on those profits, typically through the use of loss carry-forwards and deductions for risk capital. The tax is based on the amount by which a company’s distributed profits exceed its taxable profits. This amount is multiplied by a “proportionality factor,” which reflects the extent by which profits were reduced through the use of deductions.
The case has been referred to the ECJ by a Belgian court after a Belgian taxpayer challenged the fairness tax on the grounds that it is incompatible with both the principle of freedom of establishment and the Parent-Subsidiary Directive.
In a preliminary ruling delivered on November 17, ECJ Advocate General Julianne Kokott disagreed that the fairness tax conflicts with the freedom of establishment. Kokott observed that in the case in question, a non-resident company that exercises its activities in Belgium through a permanent establishment must be treated adversely compared with a resident company (which in turn may be the subsidiary of a non-resident company) with regard to the levying of the Belgian fairness tax. In Kokott’s opinion, no such adverse treatment is apparent.
However, the AG determined that the fairness tax is in breach of the Parent-Subsidiary Directive because it could permit Belgium to place a higher tax burden on dividends than permitted under Article 4(3) of the Directive.
The Belgian court also asked the ECJ to ascertain whether the fairness tax is a withholding tax and therefore in conflict with Article 5 of the Directive. On this point Kokott found that the fairness tax cannot be considered a withholding tax within the meaning of the Directive because the taxable person owing the fairness tax is not the recipient of the distribution but rather the company distributing the profits.
