The Belgian tax regime enables undertakings to carry forward losses without limitation to future assessment periods and to claim a deduction for so-called risk capital. This resulted in a situation where certain undertakings paid virtually no tax but still distributed profits.
Case C-68/15 X concerns a preliminary reference ruling on the Belgian “fairness tax” which was introduced to deal with this perceived unfairness. The “fairness tax” is calculated on the basis of the amount by which the company’s distributed profits exceeded its taxable profits and is levied on domestic companies and foreign companies with a permanent establishment in Belgium but not on subsidiaries.
Examining whether the tax was compatible with the freedom of establishment, Advocate General Kokott concluded that the tax regime did not pose an obstacle to non-resident companies by preventing free choice of legal form.
Further, article 49 did not preclude the levying of a tax in such a way that a non-resident company with a permanent establishment in a Member State is subject to it when it distributes profits, even though the permanent establishment’s profits were retained, whereas a resident company that retains profits in full is not.
However, article 4(3) of the Parent-Subsidiary Directive which sets a maximum tax burden, did render the tax offensive because it operates so as to exceed the tax limit when a company distributes a received dividend in a year subsequent to the year in which it received the dividend. Article 4(3) of the directive could not be interpreted so as to apply only to received dividends and not subsequent redistribution.
This article appears in the JHA November 2016 Tax Newsletter, which also features:
