ECJ-decision of 13 March 2025 (case C-135/24): The Belgian deduction regulation for group contributions in conflict with the Parent-Subsidiary Directive
17 Mar 2025
Context
The Parent-Subsidiary Directive (2011/96/EU) (PSD) obliges EU member states to refrain from taxation of dividends distributed by companies established in the EU to EU subsidiaries. Belgium has implemented this obligation by the Dividend-Received Deduction (DRD), i.e. the dividends received are first included in the taxable basis and subsequently, under certain conditions, deducted. Any unused portion of the DRD can be carried forward to the future years.
From the European Court of Justice’s case law, it follows that if the receipt of a dividend results in the forfeiture of another tax benefit, this amounts to indirect taxation of received dividends, which is incompatible with Article 4 of the PSD.
Belgian tax consolidation regime
The Belgian 'group contribution' regime (applicable as of assessment year 2020) allows, under certain circumstances, the set-off of losses against the profit of a related company. However, if a loss-making company that received a dividend also receives a group contribution, then the portion of the group contribution that exceeds the operational loss, after adding the received dividends that qualify for the DRD deduction, is considered a minimal taxable base, against which no deduction (including the DRD deduction) can be offset.
As the combination of the group contribution with the receipt of a dividend also leads to a loss of a tax benefit, there is a clear violation of the PSD. In practice, certain companies remediate this violation by taking an alternative filing position in their tax return that allows them to obtain a PSD conform result. However, the BTA does not accept this position which leads to administrative and judicial procedures.
ECJ finds the Belgian deduction regulation to be in conflict with the PSD
In this regard, the Liege Court of First Instance has referred two preliminary questions to the European Court of Justice on February 20, 2024.
The ECJ now rules that the Belgian DRD regime combined with the group relief regime leading to an exclusion of the DRD from the amount of the intra-group transfer included in the taxable base, is violating the PSD.
The ECJ notes, among other things, that under the current Belgian regime, the receipt of dividends in certain cases is not tax-neutral for the parent company, which is contrary to the objective of Article 4, paragraph 1, a) PSD.
The ECJ also mentioned that it is irrelevant, in that context, that the intra-group transfer scheme is a voluntary mechanism under national law or that the DRD that could not be used for a given year may be carried forward to the following year. It’s also interesting to note that ECJ found that the prohibition on deduction laid down in Article 207, §8 ITC92 generally excludes the deduction of the DRD from the intra-group transfer, irrespective of the existence of tax abuse, whereas article 1(4) of PSD does not authorise to apply a national provision, such as Article 207, §8 ITC92, in so far as it goes beyond what is necessary to prevent tax evasion, tax fraud or abuse.
Key takeaway
This ruling by the ECJ in favor of the taxpayer is relevant for taxpayers who have legitimately made use of the Belgian group contribution regime while applying the DRD. The judgment is relevant for pending disputes as well as for all tax assessments established as of 1 January 2021 where the tax authorities have applied the group contribution rules that are contrary to European law.
It should be noted that the legislator was likely well aware of this European law problem since it is quite similar to the one that was also addressed by the ECJ in the Brussels Securities case, where the Belgian State had already been condemned for its DRD regime (ECJ 19 December 2019, C-389/18, Brussels Securities SA).
The current government was not fooled and had anticipated this new condemnation by planning, as part of the government agreement, to modify the deduction regime for the future by an ab initio exemption regime for dividends, more in line with the Parent-Subsidiary Directive.
It took many years to get to this point, which is unfortunate, since all informed tax specialists knew the outcome of such a dispute. It is therefore unfortunately a waste of time for everyone... Let us hope that the new tax legislations are better thought out, better drafted and finally take into account European law and European tax case law.
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