The European Commission concludes that the Belgian "Excess profit" tax scheme is an illegal State Aid. This means that EUR700 million must be recovered from multinational companies.
In a decision of 11 January 2016, the European Commission concluded that the Belgian excess profits tax exemption scheme was illegal under EU State Aid rules, ordering Belgium to recover all incompatible aid granted under that scheme from the multinational company recipients of that aid, amounting to around EUR700 million. This decision, which was made available on May 4, is in keeping with the Commission’s initiative launched in June 2013 to investigate, under the EU State Aid rules, the practices of certain Member States who purportedly give selective advantages to certain companies on the basis of tax rulings.
Until this decision, the Commission's investigations had involved a limited number of companies. This decision is noteworthy because of its scope: now not only rulings granted on a case-by-case basis to several companies are covered but the entire tax exemption scheme, from which a large number of multinational companies benefited via tax rulings granted by the Belgian authorities, is under challenge. More than 50 companies have benefited from this alleged scheme which authorized them to reduce their tax base by between 50 percent and 90 percent via individual rulings.
The excess profits regime effectively allowed Belgian entities that were part of a multinational group to reduce their tax base in Belgium for so-called "excess profit" on the basis of a binding tax ruling. Under these tax rulings, the actual recorded profit of a multinational was compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The calculated difference in profit was deemed to be "excess profit" by the Belgian tax authorities, and the multinational's tax base was reduced proportionately.
According to Belgium, this exemption ensured that a Belgian entity belonging to a group would only be taxed on its arm’s length profits, and not on the part of its recorded profits corresponding to synergies, economies of scale or other advantages achieved as a result of being part of a group and which do not exist for a stand-alone company.
In its decision, relying on an examination of 22 tax rulings (out of 66 handed down, all of which were favorable to the companies), the Commission initially characterized the excess profits scheme as a State Aid, then demonstrated that the aid was incompatible with the internal market and, lastly, ordered the immediate and effective restitution of the aid granted illegally.
- The Commission concluded that the excess profits exemption was a State Aid insofar as (according to Commissioner Vestager): (i) there is a legal provision based on which the exemption was conferred (implementation and interpretation of the provisions of Article 185 of the Belgian Income Tax Code 1992); (ii) the exemption does not require any additional implementation measures, as the obligation to obtain an individual tax ruling is merely a technical means for implementing the tax scheme; (iii) the tax scheme defines the beneficiaries, as the exemption is only available for entities that form part of “a multinational group of associated companies”.
- The Commission declared this aid incompatible with the internal marketinsofar as, according to Commissioner Vestager, all the criteria set out in Article 107 of the Treaty on the Functioning of the European Union have been fulfilled:
- Aid granted by a Member State or through State resources: the Excess Profit exemption is imputable to the Belgian State and gives rise to a loss of tax resources for Belgium.
- Aid that affects trade between Member States: insofar as the exemption may be granted only for profits derived from a new situation, which entails that the company’s activities need to be relocated or increased in Belgium in order to be able to benefit, and hence the tax scheme is likely to influence the choices made by multinationals regarding the location of their investments within the EU and, therefore, to affect trade within the EU.
- Aid that threatens to distort competition: this tax scheme relieves the beneficiary companies from a burden they would otherwise be obliged to bear and, therefore, distorts competition by strengthening those companies’ financial positions as compared with other companies.
- Aid that favors certain companies – “existence of a selective advantage”: according to the Commission, the exemption regime confers a selective advantage on the Belgian entity members of a multinational group by unilaterally reducing their tax base and by lowering their taxes in comparison to what they would normally have been required to pay under Belgian tax law. The Commission did not accept Belgium’s justification, according to which this exemption aims to prevent (potential) double taxation. In fact, the Commission concluded that, insofar as the tax scheme grants a unilateral exemption in advance, without it being necessary for the exempted profit to have been or to be included in the tax base of an associated foreign group entity in another Member State, the regime clearly goes beyond what is necessary and proportionate to fulfil the objective of avoiding double taxation.
- Under Regulation 2015/1589, the Commission requires Belgium to recover all taxes not paid by the multinationals that benefited from the unlawful tax scheme. The Commission concluded that the Belgian authorities could not rely on the principle of “legitimate expectation” insofar as, according to EU case-law, a Member State which has illegally granted aid cannot plead the legitimate expectation of beneficiaries of the aid to avoid the obligation of taking measures necessary for recovering the aid. The Commission also rejected the principle of legal certainty on the grounds that the excess profits exemption constitutes a deviation from the arm’s length principle. Lastly, the Commission had no difficulty in quantifying the amount of aid to be paid back: the amount is the difference between the tax actually paid and the tax that should have been paid if the generally applicable rule had been applied, plus accumulated interest on that amount (of aid) from the date on which the aid was granted. After two months of negotiations with the Commission, last March 22, Belgium officially appealed against the Commission’s decision to the CJEU, stating that it wished to file an application to suspend the recovery of the taxes due until the CJEU had ruled on the matter. Beyond the legal arguments and those based on tax justice, one can easily see how difficult it will be, both judicially and economically, for Belgium to recover these very large sums from the multinationals to which Belgium granted the rulings in question.