Belgian denial of interest deduction violates EU law, court rules

by Davide Anghileri, University of Lausanne

The European Court of Justice (ECJ) has ruled that Belgian provisions on interest deduction are not compatible with EU law, specifically, the parent-subsidiary directive, in a decision given on 26 October in the case Argenta Spaarbank (C-39/16).

Argenta Spaarbank, a Belgian credit institution, received dividends from holdings in companies incorporated in Belgium and in other EU Member States that it had, in certain cases, held for less than one year. These dividends were paid during the financial years 1999 and 2000 (tax years 2000 and 2001).

In addition, Argenta Spaarbank also paid interest in the course of those financial years. That interest was not paid in respect of loans for the purchase of holdings in a subsidiary; rather, they were related to savings accounts, current accounts, term deposits, and other investment products held on behalf of clients in the capacity as a credit institution. The payments could therefore have been deductible as business expenses.

The Belgian tax authorities denied the interest deduction following article 198 of the income tax act, which provides that Belgium resident companies may not deduct interest payments to the extent that, in the same tax year, they receive exempt dividends from participations owned for less than a year.

Contesting this outcome, Argenta Spaarbank brought an action before a Belgian court. The court referred case to the ECJ, questioning on the compatibility of the Belgian rules on interest payment deduction with the parent-subsidiary (Directive 90/435/EEC of 23 July 1990).

In particular, the court asked the following question; whether the parent subsidiary directive precludes a provision of national law, pursuant to which interest paid by a parent company under a loan is not deductible from the taxable profits of that parent company up to an amount equal to that of the dividends, which already benefit from tax deductibility, that are received from holdings of that parent company in the capital of its subsidiary companies that have been held for a period of less than one year, even if such interest does not relate to the financing of such holdings.

Moreover, the remitting court asked whether the Belgian provision goes beyond what is necessary for the prevention of such tax evasion or abuses.

Parent-subsidiary directive

With regard to the first question, the ECJ stated that a domestic provision that excludes, generally and automatically, tax deductibility, as business expenses or charges, of interest relating to loans taken out by a parent company up to an amount equal to the amount of dividends paid out by a holding of that parent company in the capital of a subsidiary, that already benefit from tax deductibility, even if the payment of that interest does not relate to the financing of the acquisition of that holding, is not a compliant with article 4(2) of the parent subsidiary directive.

In fact, article 4(2) of the parent subsidiary directive grants Member States the right to deny the deduction of costs “relating to the holding”, since the dividends stemming from the holding are exempt, but it excludes the right for Member States to deny the deduction of interest incurred by the parent company, which are not related to the holding in the subsidiary, up to the amount of the dividends received, the ECJ said.

Moreover, the ECJ stated that the objective of Article 4(2) is to prevent the parent company to benefit from a double tax advantage, arising, first, from profits that are tax-exempt pursuant to the first indent of article 4(1) of the parent subsidiary directive and, second, from the tax reduction by means of the deduction by virtue of charges relating to holding losses resulting from the distribution of such profits.

Therefore, article 4(2) of the directive must be interpreted strictly and beyond its actual wording, hence it cannot be used to deny the deduction of interest unrelated to the acquisition of the holdings.

Fraud and abuse

With regard to the second preliminary question, the ECJ stated that that article 1(2) of the parent subsidiary directive must be interpreted as not authorising Member States to apply a domestic provision to the extent that that provision goes beyond what is necessary for the prevention of fraud and abuse.

In fact, article 1(2) of the parent subsidiary directive reflects the general principle of EU law that any abuse of right is prohibited and that EU law cannot be relied on for abusive or fraudulent ends, the ECJ said.

Moreover, the ECJ stated that, while article 1(2) is a provision of principle, it is article 4(2) that seeks in particular to counteract abuse by parent companies resulting from a double tax deduction and that should be considered an effective and proportionate means to counteract such arrangements.

Davide Anghileri

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues. He can be reached at danghileri@yahoo.it.

Davide Anghileri


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