The Act of 30 July 2013 introduced a so-called "fairness tax", aimed at taxing distributed profits (dividends) which are not effectively subject to Belgian corporate tax due to application of the notional interest deduction and/or carried-forward tax losses.
On 28 January 2015, the Constitutional Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on the question of whether the fairness tax is compatible with EU law. This article describes the measures you can take pending the CJEU's decision.
The fairness tax
In previous newsletters, we explained in detail the fairness tax (Click to read: "The Belgian Fairness Tax Regime" and "The Belgian Fairness Tax - To Obey or Not To Obey?")
The fairness tax is intended to tax distributed profits (dividends) which are not effectively subject to corporate tax due to application of the notional interest deduction and/or carried-forward tax losses. The fairness tax applies as from assessment year 2014 (i.e., financial years ending between 31 December 2013 and 30 December 2014, inclusive) to both Belgian companies and Belgian permanent establishments of foreign companies which are not considered SMEs within the meaning of Article 15 of the Company Code. However, SMEs may still fall within the scope of the fairness tax if they form part of a corporate group since, in that case, the applicable thresholds (number of employees, annual turnover, balance sheet total) are assessed on a consolidated basis.
Questions raised even before the entry into effect of the tax
Questions were raised mainly with respect to the constitutional principle of equal treatment in tax matters and the compatibility of the fairness tax with the Parent-Subsidiary Directive.
In its opinion on the fairness tax, the Council of State asked why SMEs are generally excluded from the scope of the tax. While the Council of State had, in the past, accepted differences in the tax treatment of SMEs and non-SMEs, provided there was a valid purpose for the difference in treatment, it appeared to suggest this time that the difference in treatment was not sufficiently justified and that the fairness tax could thus be challenged on the basis of the constitutional principle of equal treatment in tax matters.
Secondly, to the extent the fairness tax can be deemed a withholding tax (which, according to the government, it is not), its compatibility with the Parent-Subsidiary Directive can be called into question
The Constitutional Court requests a preliminary ruling from the CJEU
In its decision of 28 January 2015 (Click to read: Decision in Dutch - Decision in French ), the Constitutional Court decided to request a preliminary ruling from the CJEU on whether the fairness tax is compatible with the Parent-Subsidiary Directive. Pursuant to this directive, the Member States are not allowed to apply withholding tax or corporate taxes on dividends paid by a subsidiary to a qualifying parent company. In the case at hand, the question was raised as to whether the fairness tax violates the Parent-Subsidiary Directive, as Belgium levies an extra tax on dividends exchanged between a subsidiary and its parent company.
The European Commission no longer deems the fairness tax contrary to the Parent-Subsidiary Directive
In the run-up to the hearing before the Constitutional Court in late November 2014, documents were produced stating that the European Commission considers the fairness tax to violate the Parent-Subsidiary Directive. In the meantime, however, the Commission has unofficially informed Belgium that it no longer deems the fairness tax contrary to the Parent-Subsidiary Directive, even though it has not yet taken a final position on this matter.
Three options are currently available. It should be noted that a direct action to invalidate the Act of 30 July 2013 introducing the fairness tax is no longer possible.
The first option is to wait and see. Once the CJEU renders its decision (most likely in the second half of 2016), if the tax is found to be contrary to European law, the Constitutional Court will set aside the act. Consequently, it will then be possible to claim reimbursement of all amounts paid during the five-year period preceding 1st January of the assessment year. Such a claim can be made based on Article 376(1)(1) of the Income Tax Code, which allows the tax authorities to waive taxes if new factors (such as a decision of the CJEU or the Constitutional Court) show that excess taxes were imposed.
Please note, however, that the Constitutional Court could qualify its decision (e.g. stipulate that it does not have retroactive effect and will only apply going forward). Therefore, it is important to file a claim as soon as possible in order to safeguard your rights. At the end of the day, the objective is to obtain reimbursement of all fairness tax paid for financial years 2013 and 2014, despite any qualifications imposed by the Constitutional Court.
The second option is to not mention the fairness tax on your corporate tax return. When filing your tax return, you can indeed take the position that the fairness tax is contrary to EU law and therefore not include it on your return. Of course, the Belgian tax authorities will most likely disagree with this position and adjust the return accordingly. Upon receipt of the tax assessment notice, you will then have six months to file a claim. If your claim is subsequently rejected, you can decide to litigate.
The third and final option is to mention the fairness tax on your corporate tax return but not pay it. Upon receipt of your tax assessment notice (including the fairness tax), you can claim that the fairness tax is unlawful and thus need not be paid. As mentioned above, you will then have a period of six months within which to file a claim. Litigation at a later stage is possible if your claim is rejected.