On 11 January 2016, the European Commission published its decision that the Belgian “Excess Profit” tax regime was contrary to the EU State Aid rules. Under the standard corporation tax regime in Belgium, companies are taxed on the basis of profits actually earned throughout the tax period. However, the “Excess Profit” tax regime, in effect since 2005, allows certain multinational enterprises to reduce their tax liability on the basis of binding tax rulings. In essence, the regime makes allowance for profits which the companies would not have earned but for the fact that they are members of a multinational group. It is estimated that some 35 companies benefited from the Excess Profit tax regime enabling them to reduce their corporate tax liability by up to 90% in some cases.
The Commission found that the Belgian excess profit regime offered a selective advantage to multinational companies as opposed to other companies which were not members of a multinational group. An interesting point to note is the development of the “arm’s length principle” as a principle of EU State Aid law. Under the arm’s length principle, “residual profits” (referred to in the Belgian legislation as “excess profits”) are to be shared amongst group companies in a manner which reflects economic reality. However, the Commission reasons that, by discounting unilaterally the excess profits from the Belgian tax base, Belgium contravenes EU State Aid rules by disregarding the arm length’s principle.
The Commission estimates that a total of EUR 700m is recoverable. The Belgian Minister of Finance, on 12 January 2016, indicated that Belgium intends to appeal the decision.
This article appears in the JHA February 2016 Tax Newsletter, which also features:
