In a 19 December 2019 judgment, the EU Court of Justice ruled that the method of exempting dividends applied in Belgium is an infringement on the EU's Parent-Subsidiary Directive.
The Belgian dividend exemption works in the following way. In order to achieve the exemption objective, dividends are first integrated into the taxable base of the parent company – of which 95% of the dividends is subsequently extracted. (This exemption rate was increased to 100% in 2019).
To the extent that the taxable base is insufficient (or negative), the deduction's excess amount can be carried forward to subsequent years without any time limitation. This excess amount is then deducted before any other tax deductions regardless of whether these other deductions can be carried forward for a limited time period. This was the case for the notional interest deduction (limited to seven years).
This deduction sequence, however, prevents the allocation of tax deductions that have been carried forward for a limited period. In this situation, the taxpayer could then find himself deprived – either totally or partially – of another tax advantage.
Subsequently, the Court of Justice found that the Parent-Subsidiary Directive precludes both direct taxation of the parent company regarding the profits distributed by its subsidiary and their own indirect taxation (which could result from the loss of another tax advantage due to the time limitation on the carry-forward).
Consequently, the Court of Justice came to the conclusion that the Belgian dividend exemption was in breach of the Parent-Subsidiary Directive.
Although the carry-forward of the notional interest deduction had been eliminated as of 2013, many companies still have a large ‘stock’ of notional interest deductions that they were unable to use in prior taxable periods. This stock could be deducted from the profits of the seven subsequent taxation periods.
The judgment of the Court of Justice is of particular interest to these companies.
Depending on the case, it may be advisable to file a letter of protest to obtain partial relief from corporate income tax in the following two ways:
- By an administrative reclamation letter within the ordinary term of six months from the third working day following the dispatch of the tax assessment notice; or,
- By an application for taxation relief ex officio. Clearly, the judgment of the Court of Justice would constitute a new element required to apply for this relief ex officio.