On January 11, 2016, the European Commission issued a state aid decision concerning the ‘Excess Profit’ tax scheme applicable in Belgium since 2005. The full version of the decision is not yet available, but the Commission’s press release indicates that the tax scheme is considered to constitute unlawful state aid. Belgium is now required to recover the unpaid tax from at least 35 multinational companies that benefited from the scheme, amounting to around EUR 700 million. Companies will have to carefully review their tax rulings in Europe. For those that benefited from the Belgian scheme, there may be grounds to question the analytical approach applied by the Commission in light of a recent series of General Court rulings.
Background. The Commission has been investigating national tax ruling practices in the EU since June 2013. This led to two decisions on October 21, 2015, in which the Commission found that certain tax rulings in the Netherlands (Starbucks) and Luxembourg (Fiat Finance and Trade) were incompatible with EU state aid rules (see our previous Update of October 22, 2015). Three other investigations in relation to Ireland (Apple) and Luxembourg (Amazon and McDonald’s) are still ongoing. The Commission’s investigation into the Belgian Excess Profit tax scheme was opened in February 2015.
The ‘Excess Profit’ tax scheme. Since 2005, multinational companies that have activities in Belgium can apply for a binding tax ruling to reduce their corporate tax base on account of excess profits. The scheme is based on the premise that companies make excess profits when they are part of a multinational group through, e.g., synergies, economies of scale and access to new markets. In a tax ruling, the Belgian tax authorities compare the actual profit of a multinational company with the hypothetical profit that a stand-alone company would have made in a similar situation and reduces the multinational company’s tax base accordingly. The Commission found that these tax rulings led in practice to a reduction of the corporate tax base of multinational companies by between 50 percent and 90 percent.
Key elements of the decision. According to the press release, the Commission takes the view that multinational companies that received an excess profit tax ruling were given an unfair competitive tax advantage over their stand-alone domestic competitors. After all, stand-alone competitors are taxed on their actual profit instead of a hypothetical profit. The Commission also considers that the tax scheme derogates from the ‘arm’s length principle’ that the Commission claims applies under EU state aid rules. According to the Commission, this principle requires that any excess profits reflect economic reality and be taxed where they arise. The Belgian tax authorities were considered to have unilaterally reduced the tax base of multinational companies on the basis of a hypothetical comparison and without demonstrating a risk of double taxation.
Conclusions. The Commission’s conclusion – that the tax scheme confers selective advantages to multinational companies that benefitted from an excess profits tax ruling – seems at odds with recent case law of the General Court. In its judgment of December 17, 2015, the General Court ruled – for the third time – that the Commission cannot assume the existence of a selective advantage when it observes an exception from the reference framework it decides to use, if all undertakings are a priorieligible to profit from a particular tax measure.1 Instead, the Commission must identify a particular category of companies that benefited from a given tax measure. Although some of the relevant General Court judgments are under appeal, it can be questioned whether ‘multinational companies’ as such can constitute a particular category of companies for purposes of the selectivity analysis in the Belgian case.