The Belgian Fairness Tax falters: impact of the judgment of the European Court of Justice of 17 May 2017

The Fairness Tax is a separate corporate tax assessment of 5,15% introduced in 2013. In a nutshell, the Fairness Tax tax is applicable to Belgian companies that distribute an amount of dividends that exceeds the corporate taxable basis, due to the utilization of tax losses carried forward and notional interest deduction. Small companies are exempt from the Fairness Tax. This measure is tremendously complex, even for experienced tax practitioners.
The Fairness Tax aims to ensure a certain form of tax justice. The goal of the legislator was basically to tax Belgian companies belonging to a multinational group, which distribute large amounts of dividends without paying corporate income taxes, through (aggressive) tax planning based on the notional interest deduction or deduction of losses carried forward. Here is a typical example of companies caught by the Fairness Tax: highly capitalized intragroup financing vehicles of multinationals, which pay out huge dividends while paying a limited amount of corporate income tax due to the use of the notional interest deduction.  But the Fairness Tax is also likely to strike large Belgian companies which realize long-term investments and create jobs. Therefore, any large Belgian company must pay attention to the Fairness Tax when it distributes dividends.

The good news (for the Belgian companies subject to the Fairness Tax, not for the Belgian Treasury!) is that the validity of the Fairness Tax is being challenged from all sides. Serious doubts have been raised about the conformity of the Fairness Tax with the Belgian constitution, double taxation Treaties and European law. Fortum Project Finance, the Belgian cash-pooling entity of the Fortum group (major actor in the energy sector) has brought an action for annulment of the Fairness Tax before the Belgian constitutional Court. This Court has referred three preliminary questions to the Court of Justice of European Union (“CJEU”).

In its judgment of 17 May 2017, the CJEU has ruled that the Fairness Tax violates the Parent-Subsidiary Directive (Article 4), but only to the extent that a Belgian company redistributes dividends received from its subsidiary established in another Member State. Indeed, in this situation, the Fairness Tax can lead to a higher tax burden than the 5% ceiling allowed by the Parent-Subsidiary Directive: the dividend received would not only be subject to corporate tax upon receipt (up to 5%, due to the 95% dividends-received deduction), but also upon redistribution (application of the Fairness Tax).  Further, the CJEU has considered that the Fairness Tax is not a prohibited “withholding tax” in the meaning of Article 5 the Parent-Subsidiary Directive. The CJEU has also highlighted a potential problem of conformity with the freedom of establishment but has let the final decision on this latter point to the Belgian constitutional Court.

As already mentioned, the CJEU has ruled that the Fairness Tax violates the Parent-Subsidiary Directive in the situation where a Belgian company redistributes dividends. Belgian companies who are in this situation could already claim refund of the Fairness Tax paid (request for tax relief laid down in Art. 376 ITC, “demande de dégrèvement d’office / verzoek tot ambsthalve ontheffing”) from the Belgian tax authorities. Example: a large Belgian company distributed a dividend of 10.000.000 EUR to its French parent company. 5.000.000 EUR of this dividend originated from the German subsidiary of the Belgian company. The Belgian company can already claim the refund of half of the Fairness Tax paid.

We advise companies who did not redistribute dividends (operational companies, cash-pooling / treasury companies,…) to wait for the judgment of the Belgian constitutional Court. If the Court annuls the Fairness Tax (which does not seem unlikely in the light of the judgment of the CJEU), these companies would be able to claim back the fairness taxes paid. In this perspective, the Constitutional Court should not be entitled to limit the consequences of such an annulment, to the extent that it results from a violation of European law (see judgment of the Belgian constitutional Court of 7 November 2013).

The Fairness Tax is not as “fair” as its name suggests. The legislator got lost in the twists and turns of this tax … that it has created. The fact that the legislator gets a rap on the knuckles from the CJEU might be a good thing…

What is the next step? What should Belgium do with the Fairness Tax ? Throw it away might be the best thing to do: the complexity of the Fairness Tax adds to legal uncertainty, leading to long and expensive tax disputes.

Do we call for less tax justice? Of course not!  Justice must be put at the heart of our tax system again. We must make a clean slate of the past and start a deep reform of our tax system, while keeping in mind the three following imperatives : justice of course, but also simplicity and efficiency.

La Belgique En Marche!