The CJEU concluded that the Belgian participation exemption regime infringed the EU parent-subsidiary directive. The newly established commission evaluates the rules for the taxation of multinationals in the Netherlands. Tax-free repayment of capital is also possible for non-EU subsidiaries based on the recent Germany’s federal tax court decision. The European Commission initiated in-depth investigation of profit regime rulings issued by Belgium between 2005 – 2014.
Belgian participation exemption infringed on the EU parent-subsidiary directive
In a 5 September 2019 opinion, an Advocate General (AG) to the Court of Justice of the European Union (CJEU) opined that the application of Belgium’s dividends received deduction (DRD) in conjunction with the notional interest deduction (NID), infringed the EU parent-subsidiary directive (PSD). Belgium implemented article 4(1) of the PSD through the DRD regime, which provides for an exemption for 95% of qualifying dividends received by a Belgian parent company, via a tax deduction, which may be carried forward for an indefinite period provided the parent company is in a loss-making position. The DRD regime, therefore, does not qualify as a plain tax exemption of dividends but instead functions as an “inclusion-deduction” regime. The Belgian NID provides for a domestic deduction from the tax base equal to a certain percentage of the equity of a company. The AG then determined that the DRD regime applied in conjunction with other tax deductions results in a less favourable position for the parent company, since in certain situations unused NID may be lost after seven years because the DRD must be applied first, whereas this would not be the case if Belgium applied a tax exemption. The AG compared the tax burden imposed under the inclusion-deduction regime with that of a tax exemption regime and found that the former regime resulted in a higher tax burden for the company. According to the AG, the loss of the unused NID results in the indirect taxation of the dividends and thus infringes the PSD.
Commission on taxation of multinationals in the Netherlands
The commission was set up on 1 August 2019 with a broad remit and is expected to publish a final report by the end of 2019. The following points shall be evaluated in the final report: the classification of corporate income tax (CIT) revenues according to different types of companies and sectors, an inventory of the types of companies currently mainly paying CIT and a determination to which extent such companies are multinationals or nationally oriented, and whether they are large or small companies; in which areas the Dutch CIT (for multinationals) differs materially from the income tax in surrounding countries and economically comparable countries and in which of these areas systems are becoming more alike; the importance of multinationals and head offices for the Dutch economy; and whether there is increased tax competition and/or evasion and what that means for the taxation of multinationals.
Germany allows a tax-free repayment of capital by a non-EU subsidiary
In a decision dated 10 April 2019 and published on 12 September 2019, Germany’s federal tax court considered the possibility of a tax-free repayment of capital by a non-EU subsidiary and ruled that the payment received by the German corporate shareholder could be treated as 100% tax-exempt repayment of capital. Under German domestic tax law, dividends and liquidation proceeds received from a domestic or foreign subsidiary generally are 95% tax-exempt at the level of the German corporate shareholder, with the remaining 5% being subject to the general corporate tax rate of approximately 30% (including the solidarity surcharge and trade tax, resulting in an effective tax rate of approximately 1.5%). The 5% that is taxable is deemed to represent non-deductible business expenses under the “5% addback rule.” To the extent dividends or liquidation proceeds qualify as a repayment of capital, the payment is considered non-taxable and, therefore, 100% tax exempt at the level of the corporate shareholder. To qualify for a 100% tax exemption, it is necessary to provide proof that the payment is not funded from current and/or prior-year profits (retained earnings, earnings and profits (E&P)), but rather is funded from the tax “contribution account”. However, German domestic tax law does not specifically address the treatment of a repayment of capital by a non-EU subsidiary to a German corporate shareholder. In light of the court’s decision, it is possible that the tax law could be amended, and that a formal approval procedure also could be introduced for non-EU cases. Affected taxpayers that were subject to a 5% add-back in connection with a repayment of capital made by a non-EU subsidiary should carefully revise the facts of their case and consider filing an objection against the relevant assessments and claim a 100% tax exemption for any repayment of capital, based on the BFH’s decision.
The investigation of EC on Belgian excess profit rulings
On 16 September 2019, the European Commission announced that it had opened separate in-depth investigations to assess whether rulings granted by Belgium under its excess profit rulings regime to 39 Belgian companies belonging to multinational groups gave those companies an unfair advantage over their competitors, in breach of EU state aid rules. The intention for such investigation has arisen from the recent European General Court’s decision (T-131/16 and T-263/16) annulling the Commission decision form 2016, since according to the court, the compatibility of the tax ruling with EU state aid rules must be assessed individually. The opened investigations concern rulings issued by Belgium between 2005 and 2014.
The article is part of dReport – October 2019, Tax news; Grants and investment Incentives.