On 1 March 2018, the Belgian Constitutional Court annulled the fairness tax. However, some of its consequences have been maintained, thus reducing the impact of the decision and raising new questions.
The fairness tax was introduced into the Belgian Income Tax Code ("ITC") in July 2013 as a measure to tackle exaggerated use of the notional interest deduction and tax losses carried forward. The tax has been highly controversial since its implementation. Both its scope and its calculation method, as well as its effects on EU freedoms, have been subject to much criticism. This led to an action for annulment before the Constitutional Court and the corresponding referral for a preliminary ruling to the European Court of Justice ("ECJ"). The ECJ rendered its decision on 17 May 2017 (Case C-68/15), and the Constitutional Court delivered its judgment on 1 March 2018, resulting in the annulment of the fairness tax.
What did the Constitutional Court decide?
This judgment is not entirely surprising. The abolition of the fairness tax was already discussed during the corporate tax reform after the ECJ had stated that the tax was in breach of the Parent–Subsidiary Directive (the "Directive"). However, the Constitutional Court's decision and its exact consequences remain to be discussed, as the judgment does not answer all questions and, instead, raises some new ones.
The bad news first: The Constitutional Court, following the ECJ's reasoning, does not consider the fairness tax as a withholding tax prohibited under the Directive. It also finds no violation of the principle of legality in the fact that the fairness tax is calculated on the basis of the tax result that is determined by a Royal Decree and not by the ITC. Also, the Constitutional Court considers it sufficiently clear and, hence, not in violation of the Constitution, how the legislator has excluded the retained earnings built up until, at the latest, the assessment year 2013 from the taxable base. The same goes for the provision in the ITC precluding any deduction from the taxable base of the fairness tax.
However, the Constitutional Court criticises the fairness tax for a number of other reasons.
First, the Constitutional Court finds that there is a lack of clarity with respect to the determination of the taxable base for foreign enterprises with a Belgian permanent establishment. The principle of legality is therefore violated.
Secondly, and in line with the preceding decision of the ECJ, the Constitutional Court rules that the fairness tax infringes the Directive in cases where dividends that fall within the ambit of the Directive are redistributed in later financial years and are included in the taxable base of the fairness tax. Indeed, the Directive provides for a maximum taxation of 5% of the dividends received, which is already completely "absorbed" by the Belgian dividends received deduction of 95%. Hence, any inclusion of such dividends in the calculation base of the fairness tax results in the 5% cap being exceeded.
Finally, the Court is of the opinion that the calculation of the fairness tax is discriminatory. Specifically, a distinction is made between those enterprises that used other tax deductions and/or applied tax-exempt impairments, provisions and/or capital gains, on the one hand, and those that did not (with, as a result, a lower fairness tax), on the other hand. Moreover, the fraction used to limit the effects of the fairness tax to the use of the notional interest deduction and tax losses carried forward further increases this discrimination due to poor legislative drafting.
All the above legal deficiencies result in the annulment of the fairness tax as a whole.
A Pyrrhic victory?
Despite finding that the fairness tax violates the Belgian Constitution, the Constitutional Court limits the legal consequences of the annulment for political and budgetary reasons. It maintains the consequences of the fairness tax for the tax years 2014 to 2018.
The sole exception to this, according to the Constitutional Court, is the redistribution of the received dividends covered by the Directive. In this situation, a reimbursement of the fairness tax can be sought for preceding tax years by the affected taxpayers.
New questions arising
The tax administration will, most probably, simply follow the Constitutional Court's ruling and will therefore only reimburse the fairness tax to the extent that it relates to redistribution of dividends falling with the ambit of the Directive. However, we believe that other ways and arguments exist for claiming additional reimbursements. Indeed, it remains to be seen whether this limitation of the legal effects of the annulment is, as such, compatible with international rules – such as the EU law provisions (the violation of which the Constitutional Court has not investigated), the double tax conventions and the European Convention on Human Rights and its Protocols.
First, the sole exception to the maintaining of the legal effects only covers dividends received from foreign subsidiaries. However, the Belgian legislator extended the scope of the Directive to purely domestic situations. Hence, one could argue that the exception provided for by the Constitutional Court should be extended to dividends received by Belgian parent companies from their Belgian subsidiaries.
Secondly, in view of the reasoning underpinning the Constitutional Court's decision to maintain the effect of the fairness tax, which is deficient from the perspective of legality, one could invoke a violation of the first Protocol to the European Convention on Human Rights, which is a more authoritative source of law.
Thirdly, the Constitutional Court did not decide on the application of the fairness tax to a Belgian company with respect to profits derived from its foreign permanent establishments, which are exempt under the applicable double tax conventions. It should still be possible to invoke such violations of double tax treaties against the fairness tax assessments.
Finally, the Constitutional Court has not investigated various other potential violations of EU law (e.g. violations of (i) the free movement of capital, in cases where income from foreign real estate is also subject to the fairness tax; (ii) the freedom of establishment, as the fairness tax makes it less attractive for foreign companies to operate through a Belgian permanent establishment rather than through a subsidiary and vice versa; and (iii) the Directive, to the extent that the use of the dividends received deduction might result in a higher taxable base for the fairness tax). The taxpayers should be able to invoke such violations as well.
Who is affected?
Taxpayers whose tax protest will be handled by the tax administration in accordance with the ruling of the Constitutional Court should carefully investigate what other potential additional arguments may be invoked to contest the fairness tax assessments.
The ruling of the Constitutional Court and the ECJ's decision both constitute important new elements for those taxpayers who have not yet contested their fairness tax assessments and who might now wish to reconsider their decision.
Would you like to know more about the fairness tax and how your company can take any further steps?
Please contact one of our experts.