Belgium: Tax rulings, downward adjustments to profits constituting “aid scheme”

Belgium: Tax rulings, downward adjustments to profits

The Advocate General of the Court of Justice of the European Union (CJEU) today issued an opinion concluding that the European Commission was right to consider that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups constitutes an aid scheme.

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The Advocate General found that a judgment of the EU General Court should be set aside and the General Court should rule again on the actions.

The case is: Commission v. Belgium and Magnetrol International NV, case C-337/19 

Background

As explained in a release [PDF 248 KB] from the CJEU, the Belgian tax authorities from 2004 to 2014 made downward adjustments, by way of tax rulings, to the taxable profits of a total of 55 Belgian resident undertakings forming part of multinational groups—this has also been referred to as an “excess profit exemption.”

The adjustments were made on the basis of a provision of the Belgian income tax law that—in accordance with the internationally accepted arm’s length principle—profits may be adjusted between two undertakings belonging to the same group if the conditions agreed between them were not the same as those which would have been agreed between independent undertakings.

According to the EC, however, it was not remuneration for services between two associated undertakings that was reassessed by means of the arm’s length principle (as provided for in Belgian tax law); rather, the Belgian tax authorities compared the profit of the undertaking forming part of a “cross-border group” against the hypothetical profit of a non-associated undertaking, by estimating the hypothetical average profit that a stand-alone undertaking carrying out comparable activities would have generated in comparable circumstances. That amount was then subtracted from the profit actually recorded by the relevant Belgian undertaking forming part of an international group of undertakings. The difference represented the tax-exempt excess profit, which could be secured by means of an advance ruling.

For such an advance ruling to be obtained, it was sufficient for a request to be made to that effect and for the profits to be linked to a new situation, such as a reorganisation leading to the relocation of a central entrepreneur to Belgium, the creation of jobs, or the making of investments. It was reported that the Belgian authorities even advertised the possibility of obtaining such a tax exemption in respect of excess profits.

The EC in January 2016 found that this practice on the part of the Belgian tax authorities constituted an aid scheme that was incompatible with the internal market and that had also been unlawfully put into effect, since it had not been notified to the EC. In addition, the EC ordered that the aid granted be recovered from the taxpayer-beneficiaries, a definitive list of which was to be drawn up by Belgium at a later stage.

The EU General Court in February 2019 annulled the action of the EC and held that the EC’s finding of the existence of an aid scheme was incorrect (in particular, on a finding that the EC had not reviewed all the advance tax rulings issued, but only a sample of them). Thus, according to the EU General Court, the EC had failed to prove that the Belgian tax authorities had followed a systematic approach in all the advance tax rulings. The EC appealed to the CJEU.

The EC in September 2019 opened “separate” in-depth investigations of whether Belgium’s “excess profit” tax rulings granted to 39 multinational companies were in breach of the EU state aid rules. Read TaxNewsFlash

Advocate General’s opinion

The Advocate General’s opinion proposes that the CJEU set aside the judgment of the EU General Court, on the ground that the EC has, contrary to the findings of the General Court, sufficiently demonstrated that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups meets the conditions for the existence of an “aid scheme.”

The Advocate General stated that the present appeal did not concern whether the advance tax rulings at issue actually constitute prohibited aid, but that the subject of the appeal was merely whether and under what conditions the EC could object to a large number of tax rulings “as a package” as being an aid scheme (given that the present case is a pilot case and 28 actions are currently stayed).

According to the Advocate General, the EC may use a sample for the purposes of proving a consistent administrative practice and the EC “sufficiently demonstrated” that its sample was representative overall and sufficient for the purposes of proving a consistent administrative practice.

The Advocate General proposed that the case be referred back to the General Court for an assessment as to whether the advance tax rulings concerning the downward adjustment of profits constitute state aid and whether the recovery of the alleged aid infringes, in particular, the principles of legality and of the protection of legitimate expectations.

What’s next?

The Advocate General’s opinion is not binding on the CJEU. Rather, it is the role of the Advocates General to propose to the CJEU a legal solution to the cases for which they are responsible. The CJEU judges now will begin their deliberations in this case, with a judgment to be given at a later date.

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