In a decision on January 11, 2016, the European Commission concluded that the Belgian Excess profits exemption tax scheme was illegal under EU State aid rules, ordering Belgium to recover all incompatible aid granted under that scheme from the multinational companies recipients of that aid, around €700 million! This decision, which was made available last May 4, is in keeping with the Commission’s initiative since June 2013 to investigate, pursuant to 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.
Although up to now the investigations had involved a very limited number of companies expressly mentioned, this decision is noteworthy because of its scope : now not only rulings granted on a case-by-case basis to several companies are covered , the entire tax exemption scheme, from which a large number of multinational companies benefited on basis of the Belgian authorities’ tax rulings, is covered. More than 50 companies have benefited from these rulings, which authorized them to reduce their tax base by between 50% and 90% to discount.
The relevant tax scheme effectively allowed Belgian entities being part of a multinational group to reduce their tax base in Belgium for alleged "excess profit" on the basis of a binding tax ruling. Under such tax rulings, the actual recorded profit of a multinational is compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The alleged difference in profit is deemed to be "excess profit" by the Belgian tax authorities, and the multinational's tax base is reduced proportionately..
According to Belgium, this exemption ensured that a Belgian entity belonging to a group would be taxed only based on its arm’s length profits, and not based on the profits corresponding to the synergies, economies of scale or other advantages procured from being part of a group and which do not exist for a stand-alone company.
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 disputed tax scheme as an aid scheme, then, subsequently, it demonstrated that the aid was incompatible with the internal market and, lastly, it demanded the immediate and effective restitution of the aid granted illegally.
- The Commission concluded that the excess profits exemption is indeed an aid scheme insofar as: (i) acts exist based on which the exemption is awarded (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 limited to entities that form part of “a multinational group of associated companies”.
- The Commission declared this aid incompatible with the interior market insofar as 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: 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 will be relocated or increased in Belgium, the tax scheme is likely to influence the choices made by multinationals regarding the location of their investments within the European Union and, therefore, to affect trade within the European Union.
- 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 these companies’ financial positions as compared with other companies.
- Aid that favors certain companies – “existence of a selective advantage”: the exemption regime confers a selective advantage on the Belgian entities members of a multinational group by unilaterally reducing their tax base and by lowering their taxes due in relation to the taxes these companies would have been required to pay pursuant to the corporate income tax under ordinary law in Belgium. The Commission did not accept Belgium’s justification, which is that this advantage prevents potential double taxation. Quite to the contrary, 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, this tax scheme clearly goes beyond what is necessary and proportionate to fulfill the objective of avoiding double taxation.
- Pursuant to 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 assert the principle of “legitimate expectation” insofar as, according to the case-law of the Union courts, a Member State which has illegally granted aid cannot plead the legitimate expectation of aid beneficiaries’ 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 aid to be paid back: the amount is the difference between the tax actually paid and the amount which should have been paid if the generally applicable rule had been applied, plus the cumulated interest on such amount as of the date on which the aid was granted. After two months of negotiations with the Commission, last March 22, Belgium officially appealed the Commission’s decision to the EUCJ, stating that it wished to file an application to suspend the recovery of these taxes until the EUCJ holds a decision. 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 a theoretically long-lasting, preferential tax status.