New pending case before ECJ: Belgian deduction regulation for group contributions in conflict with the Parent-Subsidiary Directive? Taxpayer, protect your rights!
04 Jul 2024
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, 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 (ECJ) decision (ECJ 19 December 2019, C-389/18, Brussels Securities SA) on a previous preliminary question, 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. The ECJ therefore ruled that the Belgian DRD scheme and the (old) order of deduction of tax attributes were in conflict with the Parent-Subsidiary Directive insofar as they caused other tax benefits, whose transferability over time is limited, to be lost. As a consequence of this decision, the Belgian Tax Authorities (BTA) accepted that companies adjust their fiscal situation for assessment years prior to assessment year 2019.
As a new order of deduction for tax attributes has been implemented as of assessment year 2019 by the Corporate Income Tax Reform Act of 25 December 2017, the BTA considers in its Circular letter of 1 April 2021 regarding the aforementioned case that there would no longer be any violation of the PSD, and therefore, no adjustment would be required anymore.
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 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.
Pending case before the ECJ
In this regard, the Liege Court of First Instance has recently referred two preliminary questions to the European Court of Justice (Case C-135/24). In our opinion, the chances are quite high that the judgement might be favourable to the taxpayer.
Key takeaway
When applying the group contribution regime while dividends are distributed to the loss-making company, it is important to analyze the impact on the DRD and take mitigating actions and/or protect taxpayers’ rights.
For further support in this regard, feel free to reach out to our specialists below.
Patrice Delacroix, Véronique De Brabanter, Gauthier Vael & Louis Kemseke
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