Executive summary

Following the judgment by the Court of Justice of the European Union (ECJ) on 17 May 2017, there is now certainty on the fate of Belgium's Fairness Tax. On 1 March 2018, the Belgian Constitutional Court ruled that the Fairness Tax is unconstitutional and is therefore annulled. However, the Court has limited which companies can recover the unduly paid tax from the Belgian State on the basis of the Constitutional Court's decision.

Detailed discussion

Violation of the principle of legality

The Constitutional Court ruled that the Fairness Tax violates the principle of legality (Article 170, Section 1 Constitution) because its terms are too vague and obscure for taxpayers. Pursuant to the fiscal principle of legality, the criteria in a tax law should be precise, clear and unambiguous so the taxpayer understands the effective impact of the tax on its financial position. However, the Fairness Tax does not clearly state its taxable basis, since it is not expressed whether "dividends paid" by a foreign company should be interpreted in accordance with the Belgian or foreign qualification of dividends. Furthermore, this is also true in order to determine the accounting result of the foreign company: both Belgian and foreign law could be applicable.

For these reasons, the Constitutional Court has annulled the Fairness Tax. This annulment renders it unnecessary for the Court to determine whether the Fairness tax also constitutes a violation of the freedom of establishment under Article 49 of the Treaty of the Functioning of the European Union. The latter question, which was referred to the Constitutional Court by the ECJ, remains hence unanswered.

Violation of Article 4 Parent-Subsidiary directive

Following the ECJ's earlier judgment, the Constitutional Court also confirmed that the Fairness Tax violates Article 4 of the Parent-Subsidiary Directive, according to which Belgium must refrain from taxing dividends received by a Belgian parent company and originating from a subsidiary in another Member State. In general, these dividends are in Belgium exempt for 95% by means of the Dividend Received Deduction (DRD) deduction.

However, in certain cases, the Fairness Tax results in a taxation of more than 5% of the dividends received by a parent company. Indeed, if a parent company redistributes the received dividends in a later year than the one in which it received the dividends, these dividends are included in the taxable basis of the Fairness Tax.

Such taxation of more than 5% of the dividend received, cannot be accepted and therefore results, once again, in the annulment of the Fairness Tax.

Violations of the principle of equality and non-discrimination

Furthermore, the Court has held that the Fairness Tax violates the constitutional principles of equality and non-discrimination.

The Fairness Tax was intended to counter the excesses resulting from the unlimited deduction of carried forward losses and the notional interest deduction. Other tax deductibles, such as the patent income deduction, investment deduction and the DRD deduction would, according to the legislator, not be affected by the new measure.

However, the Court determined that taxpayers who applied tax deductibles not targeted by the Fairness Tax (e.g., patent deduction), are potentially subject to higher Fairness Tax than taxpayers who did not apply these tax deductibles, notwithstanding both categories made identical use of the deduction of carried forward losses and/or the notional interest deduction.

This unequal and discriminatory treatment results from the very specific and complex calculation method of the Fairness Tax' taxable base and is, in light of the Fairness Tax's purpose, unacceptable according to the Court.

Limitation to reclaim Fairness Tax

The Court annulled the Fairness Tax from assessment year 2019 onwards. Accordingly, the Constitutional Court thus decided to limit the retroactive effect of the annulment.

Hence, not all taxpayers can file a reclaim of the illicit Fairness Tax. Only Belgian companies that redistributed dividends received from a subsidiary in another Member State, can file a reclaim during a new six-month term (Article 18 of the Special Law on the Constitutional Court¹).

Taxpayers who do not meet the abovementioned requirements, but who have already filed an (administrative) appeal, can now reactivate their case in order to get a decision, taking into account the judgment of the Constitutional Court.

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ENDNOTE

¹ Special Law of 6 January 1989 on the Constitutional Court, BOG 7 January 1989.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

HVG Advocaten – Avocats, Brussels

• Leen Ketels
  leen.ketels@hvglaw.be

Ernst & Young LLP, Belgium Tax Desk, New York

• Max Van den Bergh
  max.vandenbergh@ey.com

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ATTACHMENT

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