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Belgium's "excess profit" tax scheme qualified as illegal state aid

Belgium's "excess profit" tax scheme qualified as illegal state aid

Belgium's "excess profit" tax scheme qualified as illegal state aid

02.02.2016 EU law

On 11 January 2016, the European Commission decided that the selective tax advantages and related "rulings" granted by Belgium under its "excess profit" tax scheme are illegal state aid. According to the Commission's press release, Belgium must recover around EUR 700 million from 35 multinational companies. The decision has not yet been published.

Belgium’s tax scheme on "excess profits" and implementing rulings allows multinational group companies under certain conditions to pay substantially less tax in Belgium. The underlying principle is that multinational companies make in specific circumstances "excess profit" following, among others, synergies as a result of being part of a multinational group. According to the Commission, the accounting profits would often be reduced from 50% to 90% for tax purposes.

Following an in-depth investigation initiated in February 2015, the Commission concluded that by discounting excess profit from a company’s actual tax base, the Belgian "excess profit" tax scheme is contrary to state aid rules because it derogates both from normal practice under Belgian company tax rules and from the "arm’s length principle". Companies operating in Belgium that were not part of a multinational group were unable to obtain such ruling but had to pay taxes on their actual profits generated in Belgium. The "excess profit" tax scheme thus gave multinationals a selective advantage. Furthermore, under the arm's length principle, even if multinationals had generated "excess profits", those would have been shared among the group companies and taxed where the profits were generated in a way that reflected economic reality. However, under the contested scheme, such profits were simply discounted unilaterally from the tax base of a single group company.

According to the Commission, preventing double taxation could not be considered as a justification of the scheme's selective tax advantages because it did not require the companies applying for tax rulings to demonstrate any evidence or even risk of double taxation (compare with the OECD model tax Convention on Income and on Capital). On the contrary, the Commission stated that it resulted in double non-taxation.

This decision follows the Commission's earlier investigation into the tax ruling practices of Member States, and the decisions of October 2015 in which the Commission held that Luxembourg and the Netherlands granted selective tax advantages to Fiat and Starbucks, respectively [see our November 2015 newsletter].

The Commission established that Belgium must cease applying the excess profit ruling system at issue and recover the full, unpaid tax from the involved companies. Belgium has announced it will likely appeal the decision. Several companies are considering to appeal as well or to intervene in the Belgian procedure.

This article was published in the Competition Law Newsletter of February 2016. Other articles in this newsletter:

  1. Court of Justice confirmed independence of EU and national leniency programmes
  2. Court of Justice reduced fine imposed on Galp Energía España and acknowledged excessive duration of General Court proceedings
  3. Court of Justice clarified the concept of a concerted practice for unilateral announcements
  4. Court of Justice dismissed Toshiba's appeal in the power transformers cartel case
  5. German Competition Authority fined ASICS for restricting Internet sales of its distributors

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