Belgium: Fairness Tax struck down by Constitutional Court

By Daniel Garabedian and Steven Peeters, Liedekerke Wolters Waelbroeck Kirkpatrick, Brussels

On March 1, Belgium’s Constitutional Court declared the so-called “Fairness Tax” unconstitutional, thus nullifying it (judgment n° 24/2018).

Under the Court’s ruling, however, the Fairness Tax is maintained until tax year 2018 (financial year 2017), except to the extent the tax applies to redistributed dividends and violates the Parent-Subsidiary Directive.

Fairness Tax

The Fairness Tax is a special tax on corporations that was introduced in 2013 to limit the benefits of Belgium’s unlimited carry-forward of tax losses and the notional interest deduction (NID). It applied both to Belgian resident companies and to Belgian establishments of foreign companies.

The starting point is the positive difference between (i) the distributed gross dividends and (ii) the fiscal result of a company that was effectively subject to tax in Belgium for the same taxable period.

The tax base is determined by multiplying that difference with a percentage reflecting the use of carried-forward tax losses and the NID, and is subject to a 5.15% tax. 

For Belgian establishments of foreign companies, the Fairness Tax is determined based on ‘notional dividends,’ being the portion of the gross dividends distributed by the foreign company that corresponds to the positive share of the Belgian establishment’s profits in the company’s total profits.

Parent-Subsidiary Directive violation

Before deciding on the merits of the case, the Constitutional Court referred a preliminary question to the Court of Justice of the European Union (CJEU).  In its judgment of May 17, 2017, (Case C-68/15), the CJEU held that the Fairness Tax is inconsistent with the Parent-Subsidiary Directive to the extent that it applies to redistributed dividends that qualify under the Parent-Subsidiary Directive with the effect that  the 5% ceiling, as provided for by article 4(3) of that directive, is crossed.

As a consequence, in its judgment of March 1, the Constitutional Court struck down the Fairness Tax to the extent that, for the determination of the Fairness Tax, dividends are taken into account that a company receives and subsequently redistributes, as a result of which the 5% ceiling is exceeded.

Belgian Constitution

The Constitutional Court further ruled, with regard to the determination of the Fairness Tax’s applicability to Belgian establishments of non-resident companies, that the manner in which the calculation of the ‘notional dividends’ is prescribed leads to legal uncertainty and does not satisfy the constitutional standards for tax legislation. 

But the Constitutional Court also held, more generally, that the method of calculating the Fairness Tax has a discriminatory effect and therefore violates the Constitution. Although the rationale for this tax is to tackle only the excessive benefits of carried-forward tax losses and the NID, the amount of Fairness Tax is also dependent on the use of other tax assets by the taxable company. 

Consequently, the Constitutional Court struck down the Fairness Tax in its entirety. However, in the light of budgetary and administrative difficulties and the litigation that could be provoked by this judgment, the consequences of the annulled tax are maintained for prior tax years, except to the extent the law violates the Parent-Subsidiary Directive.

Thus, the Fairness Tax is annulled with effect as from tax year 2019 (financial year 2018), and from its introduction, to the extent it violates the Parent-Subsidiary Directive.

Belgian corporate income tax reform

In the meantime, the Belgian legislature adopted other measures to limit the benefits of carried-forward of tax losses and the NID as from tax year 2019 (financial year 2018).

The use of certain tax assets –  including carried-forward tax losses and the NID – is now limited for any taxable year to EUR 1 million plus 70% of the taxable income above 1 million, leading to “minimum taxation” of the remaining 30%. The tax assets that cannot be used are carried forward to the next tax year.

The significance of the NID has been moreover drastically reduced because it is no longer an annual deduction calculated on the entire qualifying equity. Instead, the deduction is based on the incremental qualifying equity spread over a five-year period.

For a discussion of the Belgian corporate income tax reform and corporate law reform, see our earlier MNE Tax article.