F.19.0056.N
Form of order sought by Advocate General J.
Van der Fraenen:
1. Situation
The dispute concerns additional corporate
tax assessments established by the plaintiff for the assessment years 2002 and
2003. In particular, the claimant contests the classification of reimbursements
received from the Korean company HYUNDAI MOTOR COMPANY for publicity services,
for an amount of EUR 1,965,630.46 in assessment year 2002 and for an amount of EUR
1,057,007.00 in assessment year 2003, as abnormal or gratuitous benefits and
the consequent rejection of the DBI [Definitief Belaste Inkomsten]
deduction from the profits arising from those abnormal or gratuitous benefits
in application of Section 207 ITC92.
The Antwerp Court of First Instance,
Antwerp Division, ruled by judgment dated 13 January 2016 that it was
indisputably established that abnormal or gratuitous benefits were granted to
the plaintiff, so that the tax administration correctly applied Section 207(2)
ITC92 and did not allow a DBI deduction on these benefits. According to the
first court, there was no conflict with the Parent-Subsidiary Directive.
The Antwerp Court of Appeal confirmed this
judgment by judgment of 19 December 2017.
The plaintiff's appeal in cassation against
this judgment is the subject of the current cassation proceedings. In her
application, the plaintiff puts forward a plea in cassation.
2. Discussion
of the single plea in law
2.1. The
plaintiff claims that the appellate courts infringed, inter alia, Articles
202(1), 1° and 207(2) WIB92, Article 77 KB/WIB92, and Article 4(1)
Parent-Subsidiary Directive1, by deciding that the prohibition of
deduction of the FDI on the portion of the result resulting from abnormal or
gratuitous advantages is not contrary to Article 4(1), Parent-Subsidiary
Directive, provided that the portion not deducted remains transferable.
According to the plaintiff, a national rule
which has the effect of preventing the full application of the DBI deduction
because it excludes part of the result from that deduction is contrary to the
obligation incumbent on Member States to achieve the result prescribed by the
first indent of Article 4(1) of the Parent-Subsidiary Directive, that is to
say, under the Belgian DBI regime, to preserve the right to deduct from the
taxable base dividends received by a parent company (provision, 11th sheet, al.
2).
In the plaintiff's view, the possibility of
transferring the DBI deduction to subsequent financial years, insofar as it
cannot be fully utilised in the current financial year, is not sufficient, as
Article 4(1), first indent, Parent-subsidiary Directive requires an immediate
and full tax exemption of dividends received, so that a deferred tax exemption
in the form of immediate taxation of the dividends with subsequent compensation
through a deferred DBI deduction is not sufficient (provision, 11th Sheet, al.
4). At least, according to the plaintiff, there is reason to refer a question
to the Court of Justice of the European Union for a preliminary ruling.
2.2. Article
4(1) of the Parent-Subsidiary Directive provides that when a parent company
receives distributed profits as a shareholder of its subsidiary, other than
when the subsidiary is wound up, the Member State of the parent company:
·
or refrain from taxing such
profits2;
·
or tax such profits, but in
that case authorise the parent company to deduct from the amount of tax due
that fraction of the corporation tax paid by the subsidiary which relates to
those profits and, where appropriate, the amount deducted at source by the
Member State in which the subsidiary is situated, up to the limit of the amount
of the corresponding national tax3 .
Belgium has opted for the exemption system
with the introduction of the FDI deduction in Articles 202 et seq. of the CIR92 .
Article 202, §1, 1°, CIR92, as applicable
to the present dispute, provides that dividends other than income earned as a
result of the transfer to a company of its own shares or as a result of the
total or partial division of the assets of a company, are also deducted from
the profit of the taxable period, insofar as they are included therein.
Article 205, §2, ITC92, as applicable to
the present dispute, stipulates that the deduction pursuant to Article 202 is
limited to the amount of the profit of the taxable period remaining after
application of Article 199 of this Code, less exhaustively listed rejected
expenses.4
Article 207, paragraph 2, CIR92, as
applicable in this case, provides that no deduction may be made on the portion
of the profit arising from abnormal or gratuitous advantages referred to in
Article 79, nor on the basis of the special separate assessment of unjustified
expenses pursuant to Article 219, nor on the portion of the profit allocated to
the expenses referred to in Article 198, paragraph 1, 12° CIR92.
2.3. By
means of Article 207, paragraph 2, ITC92, the legislator aims, among other
things, to safeguard the taxation of profits that are artificially shifted
between companies belonging to the same group. As a result of these profit
shifts, the taxable profit of the transferring company is reduced, while the
increase in profits of the acquiring company is offset by otherwise impossible
or deductible deductions to be carried forward5.
2.4. It
is clear from the findings of the judgment under appeal that the plaintiff, as
a parent company, obtained remuneration from a car manufacturer for marketing
support services which had in fact been provided by a subsidiary. The appellate
courts held that as a result, the claimant enjoyed an abnormal or gratuitous
advantage and that the tax authorities were justified in invoking Article
207(2) WIB92 in order not to allow a DBI deduction from the deferred profit.
In the present case, however, it appears
that the other profit balance (after elimination of the abnormal or gratuitous
advantage) of the claimant is insufficient to still grant the FDI deduction in
full.
The legal question raised is whether the
first indent of Article 4(1) of the Parent-Subsidiary Directive precludes
Belgian legislation under which dividends distributed by a subsidiary are
included in the taxable base of the parent company, after which they are again
deducted from that taxable base via the DBI deduction, but where part of the
parent company's result can be qualified as an abnormal or gratuitous
advantage, with the result that no FDI deduction can be applied to that part,
so that the parent company which otherwise does not have sufficient profits to
which the FDI deduction can be applied can only apply that deduction in later
taxable periods.
2.5. Several
reasons seem to me to call for a negative answer to this question of law.
2.5.1. First
of all, it should be noted that, in its judgment of 12 February 2009 in Case
C-138/07 Belgische Staat v Jacobelfret NV, the Court of Justice ruled that Article
4(1) of the Parent-Subsidiary Directive "precludes legislation of a Member
State (...) which provides that dividends received by a parent company are
included in the tax base of that company and are subsequently deducted from it
to the extent of 95% in so far as, for the taxable period in question, a
positive balance remains after deduction of the other exempted profits"
(No C(2009) 4(1) of the Parent-Subsidiary Directive). 57, confirmed by the
decision of 4 June 2009, Belgian State/KBC Bank nv
and Investments, Risk Capital, Management nv /
Belgian State, joined cases C-439/07 and C-499/07, no. 44).
According to that case-law, in the event of
an insufficient profit balance, the non-transferability of the unused portion
of the DBI deduction to a subsequent taxable period is thus contrary to Article
4(1) of the Parent-Subsidiary Directive6 .
As a result of this case law, Article
205(3) of the Income Tax Code92 was also introduced, which provides that the
income (dividends) referred to in Article 202(1)(1) of the Income Tax Code92
that cannot be deducted, is carried forward to subsequent taxable periods7 .
In line with the Cobelfret
and KBC/BRB rulings, if part of the profit results from an abnormally
favourable advantage within the meaning of Article 207(2) WIB92, for which no
deduction may be made, and the remaining profit is insufficient to fully deduct
the dividend received deduction, the unused part of the dividend received
deduction will be carried forward to a subsequent taxable period.
2.5.1.1. However,
certain legal doctrine argues that the situation in the aforementioned
judgments of the Court of Justice is different from the situation in the
present case. Indeed, in the judgments under discussion, the tax base had
already been reduced to zero as a result of previous operations, so that no tax
was levied on the profits. According to the Court of Justice, the unused part
of the FDI deduction should then be allowed to be carried forward to later
taxable periods, as this is the only way to guarantee the exemption from
taxation required by the Directive. On the other hand, in the present case,
there is a minimum taxable base, that is to say, profits arising from an
abnormal or gratuitous advantage to which no DBI deduction can be applied. That
profit will therefore give rise to actual taxation. According to that legal
doctrine, the result of Article 4(1) of the Parent-Subsidiary Directive cannot
be sufficiently achieved if the combination of the addition of the dividends to
the taxable base and the prevention of the immediate deduction in that same
year results in effective taxation, even if the DBI deduction can be applied on
a deferred basis.8 The plea argues, in the same sense, that the deferred DBI
deduction by transfer is not sufficient to offset the immediate taxation of the
dividends.
2.5.1.2. However,
this view must be qualified. If a company, in a financial year in which it has
received dividends that entitle it to the application of the DBI deduction, has
made a profit from an abnormal or gratuitous advantage for which no deduction
may be made - and the remaining profit is insufficient to make up the entire DBI
deduction - it will not immediately be taxed on part of the dividends, as the
Respondent gives reasons in its Reply. Indeed, in the fourth operation, that
part of the dividend received deduction is deducted from the remaining taxable
profit until that profit is zero. The unused portion of the dividend received
deduction is then carried forward to a subsequent taxable period. In other words,
the sole purpose of Article 207(2) of the CIR92 is to tax that part of the
profit which results from the abnormal or gratuitous advantage. The purpose of
this provision is not to tax the remaining profits, which arise, inter alia,
from the dividends received, and which are reduced to zero as a result of the
various deduction operations.
From that point of view, the result of
Article 4.1, Parent-Subsidiary Directive, i.e. the
exemption from taxation of the dividend received deduction, can be sufficiently
achieved by transferring the surplus dividend received deduction to a
subsequent taxable period. After all, the prohibition of immediate DBI
deduction from profits arising from an abnormal or gratuitous advantage has the
sole effect of taxing the part of the taxable result arising from that abnormal
or gratuitous advantage and not the part of the result arising from the
dividends received.
2.5.2. A
second argument to answer the present question of law in the negative could be,
i.e. The Court of Justice's clarification in its abovementioned decision of 4
June 2009, KBC v BRB, in particular that "the first indent of Article 4(1)
[Parent-Subsidiary Directive] must be interpreted as not requiring Member
States to allow profits distributed to a parent company established in that
State by its subsidiary with its seat in another Member State to be fully
deductible from the amount of profits made in the parent company's year of
assessment and the resulting loss to be carried forward to a subsequent year of
assessment. Member States are free, having regard both to the needs of their
national legal systems and to the option provided for in Article 4(2), to lay
down the procedures for achieving the result prescribed in the first indent of
paragraph 1 of that Article" (No 53).
The prevention of artificial shifts of
profits in order to obtain unlawful compensation for deductions is a
requirement of the national legal order. Therefore, in the light of this Court
of Justice consideration, a Member State appears to be free to provide, as a
modality, that the FDI deduction cannot be made on the artificially shifted
profit and that - in the absence of sufficient residual profit to deduct the
full FDI - the unused part of the FDI deduction is carried forward to a
subsequent taxable period9.
2.5.3. Furthermore,
I believe that Article 4(1) of the Parent-Subsidiary Directive should be read
in conjunction with Article 1(2) of that Directive. Pursuant to that provision,
this directive does not preclude the application of national or agreement-based
rules to combat fraud and abuse.
The Court of Justice has consistently held
that "national legislation is intended to prevent fraud and abuse where
its specific aim is to prevent conduct consisting in the creation of wholly
artificial arrangements which have no connection with economic reality and are
intended to obtain a tax advantage unduly" (ECJ 12 September 2006, Cadbury
Schweppes, C-196/04, paragraph 55; ECJ 7 September 2017, Eqiom
sas, C-6/16, paragraph 30; ECJ 20 December 2017, Deister Holding AG, Joined Cases C-504/16 and C-613/16,
paragraph 60)10.
Therefore, in line with the above, a
national provision aimed at combating fraud and abuse within the meaning of
Article 1(2) of the Parent-Subsidiary Directive concerns (1) wholly artificial
conduct (2) which has as its principal objective - or as one of its principal
objectives - to take unfair advantage of that directive11.
This definition is even more clearly
reflected in the current version of Article 1(2) of the Parent-Subsidiary Directive
2011/96/EU: 'Member States shall not grant the benefits of this Directive in
respect of an arrangement or set of arrangements which is designed to obtain,
as its principal objective or as one of its principal objectives, a tax
advantage which would undermine the purpose or application of this Directive
and which, having regard to all the relevant facts and circumstances, is
artificial'. In its current version, Article 1(3) states that "for the
purposes of paragraph 2, an arrangement or set of arrangements shall be
regarded as artificial in so far as it is not based on valid business
considerations reflecting economic reality" and paragraph 4 that
"this Directive shall not preclude the application of national or
agreement-based provisions to combat tax evasion, tax fraud and abuse "12 .
Article 207(2) of the Income Tax Code92 may
be regarded, inter alia, as a national statutory provision to prevent fraud and
abuse within the meaning of Article 1(2) of the Parent-Subsidiary Directive in
so far as that provision is intended to prevent conduct that (1) consists of
setting up wholly artificial profit shifts (2) with the unlawful aim of
compensating as far as possible for these shifts in profits by means of
deductions, including the DBI deduction on the basis of the Parent-Subsidiary
Directive. Therefore, in the presence of FDI deductible under the Directive,
the purpose of those profit shifts is, inter alia, to obtain a tax advantage
under the Directive, that is to say, to offset the shifted profits against deductions,
including the FDI deduction. In order to prevent that abuse, that unlawfully
pursued advantage of the directive is not granted: no deduction of FDI may be
made from profits resulting solely from artificial shifts.
The relationship between Articles 1(2) and
4(1) of the Parent-Subsidiary Directive makes it possible, inter alia, to
determine the scope of Article 4(1) of that directive. Article 1(2) of the
Parent-Subsidiary Directive also modulates the application of Article 4(1) of
that directive in order to prevent abuse of that provision. Having regard to
the order of the Court of Justice of 4 June 2009 in KBC v BRB, the Member
States were also free to determine the arrangements for achieving the result of
Article 4(1) of that directive.
Well, the granting of a tax advantage under
Article 4(1) of the Parent-Subsidiary Directive, whereby the FDI deduction is
made even on artificially shifted profits, seems to me to undermine the purpose
of that provision. The result would be that the deferred profits would not be
taxed at all: neither in the case of the subsidiary which transferred the
profits, nor in the case of the parent company which would be able to offset
the profits against the FDI deduction. This would constitute an abuse of Article
4(1) of the Parent-Subsidiary Directive.
In my view, it follows from all this that
this provision does not go so far as to require DBI deduction from profits
derived from artificial constructions. In the absence of sufficient other
profits to realise the full FDI deduction, it is sufficient for that deduction
to be carried forward to a subsequent taxable period.
2.5.4. On
the basis of the above, it can be concluded that from the relationship between
Articles 1(2) and 4(1) of the Parent-Subsidiary Directive and the case law of
the Court of Justice, it appears that Article 4(1) follows, that directive does
not have the effect of ensuring that, where, after deduction of the other
exempted profits, the balance of the profits of the parent company is insufficient
to fully deduct from the taxable base dividends received from a subsidiary
established in another Member State, those dividends must be immediately
deducted from the profits arising from an abnormal or gratuitous advantage
within the meaning of Article 207(2) of the CIR92. In that case, the result of
Article 4(1) Parent-Subsidiary Directive is achieved by carrying forward the
unused part of the deduction of dividends to a subsequent taxable period.
Since the purpose of Article 4(1) of the
Parent-Subsidiary Directive is clear from the interrelationship between the
provisions of that directive and the case-law of the Court of Justice which has
been discussed, there is, in my view, no need to put a question to the Court of
Justice for a preliminary ruling.
2.6. The
argument that Article 4(1) of the Parent-Subsidiary
Directive does, however, require that dividends received by the parent company
must in any event be deducted immediately from the taxable base, even if that
means that the deduction must be made, in the event of an insufficient surplus,
from the part of the profits which results from an abnormal or gratuitous
advantage, is a legal error.
3. Decision:
Rejection
1 Council Directive 90/435/EEC of 23 July
1990 on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States.
2 This concerns the exemption system
whereby dividends received remain untaxed in the hands of the parent company.
3 This concerns the imputation system
whereby the corporation tax paid by the subsidiary(ies)
can be offset against the corporation tax paid by the parent company on the
dividends received.
4 Article 205, §2, 1° to 8° WIB92 lists
these rejected expenses. Consequently, the dividend received deduction cannot
reduce the taxable base below the amount of these disallowed expenses. On the
other hand, all non-deductible expenses that are not included in the list in
Article 205, §2, WIB92 will remain in the deduction base of the DBII system.
5 I. CLAEYS BOÚAERT and S. VAN CROMBRUGGE,
"Section 2: Abnormal or gratuitous advantages for the purpose of deduction
compensation: Articles 79 and 207 of the ITC 1992" in Company and
Taxation, Mechelen, Kluwer, 2003, Part XII, Chapter 2
"The prevention of hidden profit shifting", 59; J. KIRKPATRICK, L'imposition des revenusés des sociétés belges par actions et lesurs, obligaires et organes, Brussels, Larcier, 1968,
no. 110; J. VAN HOUTTE, Beginselen van het Belgische belastingrecht, Gent,
Story, 1979, no. 282; Y. VERDINGH, Vennootschapsbelasting,
Mechelen, Kluwer, 2015, 477.
6 I. VAN DE WOESTEYNE, Handboek
vennootschapsbelasting 2017-2018, Antwerpen,
Intersentia, 2017, 266; Y.
VERDINGH, Corporate income tax, Mechelen, Kluwer, 2015, 437.
7 Article 205, §3, WIB92 was inserted by
the Act of 21 December 2009 containing fiscal and miscellaneous provisions,
Official Gazette 31 December 2009 and is applicable as of 1 January 2010
(article 8). As a result of the administrative circular following the Cobelfret case, the transferability of DBI was also
permitted as of assessment year 1992 (entry into force of the Act transposing
Council Directive 90/435 of 23.7.1990), see Circular No. Ci.RH.421/597.150
(AOIF No. 32/2009) dated 23.06.2009.
8 P. BIELEN, "Deduction of FDI from
abnormal or gratuitous benefits received rejected", TFR 2012, 535;
P. BIELEN, "Deduction of DBI from
abnormal or gratuitous advantages received again rejected", RABG 2018,
948; C. BUYSSE, "Also immediate DBI deduction on 'poor' taxable
basis", Fiscoloog 2012, afl.
1310, 7; P. VANCLOOSTER, P. DERÉ and W. VANDENBERGHE, "Everyone
contributes: the introduction of a 'minimum tax' in the Belgian corporation
tax", AFT 2018, 10.
9 See on this subject: J. VAN DYCK,
"DBI deduction: not on abnormal benefits obtained", Fiscoloog 2012, afl. 1287, 8.
10 These last two judgments concerned
specifically national legal provisions to combat fraud and abuse in the context
of Article 1(2) of the Parent-Subsidiary Directive.
11 On this subject, see P. BIELEN,
"Deduction of FDI from abnormal or gratuitous advantages received again
rejected", RABG 2018, 949; C. CHEVALIER, Vademecum
corporation tax, Brussels, Larcier, 2017, 1159; L. DE
BROE and R. DE BOECK, "The Parent-Subsidiary Directive: European fiscal
piecemeal engineering on the road to harmony" in B. PEETERS (ed.),
European tax law, Brussels, Larcier, 2005, 386-387,
no. 65; L. DE BROE, International Tax Planning and Prevention of Abuse,
Amsterdam, IFA Doctoral Series, 2008, 995 et seq.; P. RENIER and T. ENGELEN,
"Nieuwe regels bedrijfswagens:
on(grond)wettelijke knoeiboel?", Fisc.Act. 2012,
4-9, no. 21.
12 Article 1(2-4), Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as replaced by Article 1 Council Directive (EU) 2015/121 of 27 January 2015 amending Directive 2011/96/EU, OJ. L 28 January 2015, expire 21.