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Sunday, 02 July 2017

ECJ decides on Belgian “Fairness Tax” and French “Contribution Additionnelle”

18-05-2017 - The European Court of Justice decided that both the Belgian “Fairness Tax” and the French “Contribution Additionnelle” are – to a certain extent – incompatible with art. 4 of the Parent-Subsidiary Directive (decisions C-68/15 and C-365/16 of 17 May 2017). The Court also decided that the Belgian Fairness Tax cannot be considered a prohibited withholding tax within the meaning of art. 5 of the Parent-Subsidiary Directive (‘PSD’). The Court does not analyse this issue in the French case, due to the wording of the preliminary question.

Only in the Belgian case, the Court was asked to rule on the freedom of establishment. The Court holds that there is no prima facie violation of that freedom, but leaves it to the national judge to determine whether there is de facto a less advantageous treatment of non-resident companies.

The Belgian “Fairness Tax” and the French “Contribution Additionnelle”

The Belgian Fairness Tax is a separate assessment of 5,15% levied on dividend distributions when the distributing company’s profits are offset against notional interest deductions and/or carried forward tax losses. It applies to Belgian companies and foreign companies with a Belgian PE. For more details, see International Newsletter.

The French “Contribution Additionnelle” is a corporate income tax surcharge of 3% assessed on dividend distributions by certain French corporate taxpayers. Unlike the Belgian Fairness Tax, the French surcharge applies irrespective of the use of any tax deductions reducing the French corporate tax base.

The Belgian Constitutional Court and the French Conseil d’Etat referred preliminary questions to the ECJ on the conformity of these taxes with Art. 4 and 5 of the ‘PSD’. In addition, the request of the Belgian court also includes a question regarding the freedom of establishment.

Impact at the level of the dividend receiving company and the conformity with art. 4 PSD

The Belgian Fairness Tax can lead to a higher tax burden than allowed under the PSD if a corporate taxpayer receiving a dividend redistributes this dividend in a later taxable period. This stems from the fact that received dividends are taxed again upon redistribution since they are included in the tax base of the Fairness Tax. As expected, the Court follows the opinion of Advocate General Kokott (see International Newsletter) and confirms that this feature of the Fairness Tax is incompatible with the PSD.

The “Contribution Additionnelle” also has the effect that dividends received are included in the tax base of this surcharge upon redistribution. Logically the Court came to the conclusion that the “Contribution Additionnelle” violates Art. 4 PSD as well.

Prohibited withholding tax within the meaning of art. 5 PSD?

The Belgian Court also asked whether the Fairness Tax can be considered a prohibited withholding tax within the meaning of Art. 5 PSD. With reference to the Burda-case (C-284/06), the Court is of the opinion that the Fairness Tax cannot be considered a withholding tax, because the tax is imposed on the distributing company and not on the recipient company. The Court then states that Art. 5 PSD must be interpreted as not precluding tax legislation subjecting resident companies and PE’s to a tax upon distribution of dividends, which, as a result of the use of certain tax advantages provided for by the national tax system, are not included in their final taxable profits. This latter statement leaves room for doubt on the Court’s reasoning to conclude that the Fairness Tax is compatible with article 5 PSD. Indeed, if the Fairness Tax cannot be considered a withholding tax on the basis of the Burda-reasoning, the Court’s reference to this specific feature of Fairness Tax is redundant.

This may be relevant with regard to the Contribution Additionnelle as the Court did not answer the question whether the latter could be considered a prohibited withholding tax under the PSD.

Although the Fairness Tax and the Contribution Additionnelle share similar features, there is no doubt that both taxes are substantially different. Unlike the Fairness Tax there is no link whatsoever between the Contribution Additionnelle and any tax benefits reducing the tax base of the distributing company. Hence, the fact that the Court decided that the Fairness Tax is compatible with article 5 PSD does not necessarily imply that the same should be true for the Contribution Additionnelle. Therefore, the Contribution Additionnelle could still be challenged under Art. 5 PSD.

Restriction of the freedom of establishment?

The outcome of the Fairness Tax is different in case a foreign company invests in Belgium through a PE or through a subsidiary. A foreign company with a Belgian PE is subject to Fairness Tax when distributing a dividend, whereas a foreign company with a Belgian subsidiary is not subject to the tax when that foreign company distributes a dividend. Moreover, a foreign company with a Belgian PE could be subject to the tax even though the Belgian profits are retained, whilst a Belgian subsidiary that entirely retains its profits is not subject to the tax.

In her opinion, Advocate General Kokott stated that the Fairness tax is not incompatible with the freedom of establishment since there is no obligation for the member states to structure its tax legislation in a manner that is neutral as to the legal form. A restriction of this freedom requires instead adverse treatment of the cross-border situation compared to a domestic situation. According to the Advocate General, this is not the case here. The Court now nuances this opinion by leaving it to the referring court to ascertain whether the method of determining the taxable amount of the Fairness Tax does not lead to a non-resident company being de facto treated in a less advantageous way than a resident company.

With regard to the Contribution Additionnelle the Conseil d’Etat did not ask the Court whether there could be a restriction of the freedom of establishment. However, distributions made within French tax groups are exempt from the surcharge. As only French companies are allowed to be members of a French tax group, one may question whether this different treatment violates the freedom of establishment. The ruling of the Court in the Groupe Steria SCA-case (C-386/14), indicates that the French regime can indeed be considered as an unjustified restriction. Following a decision of the French Conseil Constitutionnel, the exemption of the surcharge has been extended to qualifying foreign parent companies (Law of 29 December 2016). This extension however only applies to dividends distributed as from January 1st, 2017.

Practical consequences

With regard to the Fairness Tax, this decision constitutes a new fact, allowing Belgian taxpayers to file a request for ex officio-tax relief. Such tax relief applies for a period of five years as from the 1st of January of the year of the tax assessment. Please note that the case is still pending before the Belgian Constitutional Court, which still has to decide on some additional issues.

With regard to the Contribution Additionnelle, the taxpayers concerned should take the necessary steps to benefit from the consequences of this decision and be aware that further developments can be expected.

Please contact your trusted adviser at Tiberghien in case you have any queries.

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