On 4 May 2016, the European Commission (Commission) published on its website the state aid decision of 11 January 2016, in which the Commission concludes that the Belgian excess profit rulings constitute illegal state aid. Belgium filed its appeal against the decision on 22 March 2016. The published decision provides valuable insight in the legal reasoning of the Commission in respect of state aid and transfer pricing. You can find the decision published on the website of the Commission.
Under the excess profit rulings, the actual recorded profit of a Belgian company forming part of a multinational group is compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The difference is deemed to be excess profit that is not taxed in Belgium. These rulings are based on the premise that multinational companies operating in Belgium realise excess profit as a result of being part of a multinational group, e.g. due to synergies and economies of scale. In its decision of 11 January 2016, the Commission concludes that the excess profit rulings regime constitutes illegal state aid since it derogates both from the normal practice under Belgian company tax rules and the arm’s length principle that can be derived from EU state aid principles. The Commission requires Belgium to recover all asserted aid granted under the excess profit ruling regime.
Belgium, other Member States, the beneficiaries of the excess profit rulings or other parties who are directly and individually concerned by the decision may challenge it before the EU General Court under Article 263 of the TFEU. Belgium already filed its appeal against the decision on 22 March 2016. For others, there is a 2 months term (increased with 24 days) within which to file such appeal, which starts running once the decision is published in the Official Journal of the European Union. The decision provides detailed insight into the Commission’s reasoning in respect of state aid and transfer pricing. Similar reasoning seems to have been applied in the Fiat and Starbucks case, the final decisions of which are yet to be published. The Commission uses the arm’s length principle to test whether the taxable income of a group company is determined in a way that approximates market conditions. In the view of the Commission, even though non-binding, the OECD Transfer Pricing Guidelines can be helpful and a source of inspiration in determining whether an outcome is at arm’s length. Nonetheless, in the view of the Commission, both the choice for a transfer pricing method as well as the application of such transfer pricing method should be thoroughly tested by tax authorities as to whether the result is in line with a market result. In other words, even an outcome fully in line with the OECD Transfer Pricing Guidelines should still be tested on market conformity based on the Commission’s own interpretation of the arm’s length principle.