Background

Instead of the normal "exemption regime" recommended (as one of the two possible options) by the PSD for the treatment of qualifying incoming dividends, Belgium has opted for a system of "inclusion and deduction". This means that instead of being simply exempt, incoming dividends from subsidiaries are, in a first stage, included in the taxable basis of the Belgian parent company, and, only in a second stage, qualifying dividends give rise to a so-called "dividend received deduction" (DRD, i.e., the Belgian participation exemption), which can be deducted from the taxable basis remaining after the first stage.

Back in 2009, this way of transposing the PSD into national law had already been found to be in violation of the PSD in the Cobelfret case, which we obtained from the CJEU. At the time, the so-called "excess DRD", which arises when the amount of qualifying DRD exceeds the taxable basis remaining after stage 1 (i.e., after set-off between the incoming dividends and all other components of the taxable basis, notably current year expenses and losses), could not be carried forward. In this context, the CJEU found that the Belgian implementation legislation was not in line with the PSD because it basically came down to (indirectly) taxing the amount of dividends received to the extent that the excess DRD could not be carried forward. Meanwhile, the Belgian legislator has fixed this flaw by providing for the possibility to carry forward "excess DRD" for dividends originating in the European Economic Area (such possibility is, under tax treaties that include an "equal treatment clause", extended to dividends from the relevant treaty countries). This does, however, not automatically cure all possible issues arising from this system of "inclusion and deduction", as has now proven to be the case with respect to the Belgian group contribution regime.

In 2019, Belgium introduced the group contribution regime which, under certain conditions, allows a Belgian company that has a positive taxable basis to transfer through a "group contribution arrangement" part of its profit to a related company that has a negative taxable basis. The result thereof is that the first company is able to deduct the amount so transferred whilst the second company can include such amount in its taxable basis and offset it against its current year tax losses.

In this context, the Belgian legislator introduced a provision (at the time, article 207, paragraph 8 of the Belgian Income Tax Code) designed to prevent what it considered to be possible abuses of this regime. Under this provision certain tax deductions, including not only losses carried forward (or excess DRD carried forward), but also current year DRD, cannot be set off against any amount of group contribution received.

It is this provision - and the limitation it entails on the use of current year DRD against group contributions received - that was challenged by the group Cockerill with respect to one of its Belgian companies. The group challenged more particularly that its Belgian group company could not receive a group contribution from a Belgian affiliate against which it could offset the DRD it was entitled to in relation to dividends received during that year.

The group argued that, in the absence of any dividend received, no tax would have been due because a group contribution could have been made which the company in question would have been able to offset against its current year losses. It is only because incoming dividends must first be included in the taxable basis (thereby eating up the current year losses and creating a positive taxable basis before application of the DRD), that the group contribution regime could not be effectively used. In effect, this limitation rule thus "forces" the current year losses to first be offset against the qualifying incoming dividends (that should normally be exempt), and only for the surplus (if any) against the group contribution received.

In this context, the Tax Court of Liège decided to ask a preliminary ruling to the CJEU regarding the compatibility of this combination of provisions with the PSD.

Decision of the CJEU

Not surprisingly, the CJEU held that the aforesaid regime or combination of provisions is contrary to the PSD. It indeed ruled that the fact that qualifying dividends need first to be included in the taxable basis and are only then deducted from the remaining taxable base, but with a limitation to offset group contributions against such deduction, was contrary to the PSD.

In line with previous decisions, it was considered that a national provision or regime according to which qualifying incoming dividends are not taxed as such, but which has as a result that the parent company is nevertheless indirectly taxed on such dividends, is infringing article 4, line 1 a) of the PSD.

It is now for the judge that referred the case to the CJEU to confirm, as it is expected, that the prior article 207, paragraph 8, of the Belgian Income Tax Code (BITC) which prevents the DRD from being deducted from the group contribution received (meanwhile the provision has been rephrased and is now contained in article 206/3, §1 of the BITC, but it still has similar effects) indeed leads to an indirect taxation of qualifying dividends received. To come to that conclusion, the Tax Court will need to compare the situation at hand (resulting from the system of "inclusion and deduction" applicable in Belgium, with said limitation in the use of DRD) with the situation (and consequences) that would have applied if Belgium had applied the recommended "exemption system" instead.

The CJEU also confirmed:

1. That it is irrelevant that the group contribution regime is an optional regime, and that the excess DRD (resulting from the application of said limitation) can be carried forward to later years; and
2. That the limitation of deduction provided in Belgian law was not specifically designed to tackle purely artificial constructions (otherwise it could have been justified and be found to not infringe the PSD).

Actions to be considered following this decision

As indicated, it is expected that the referring judge will confirm that the current limitation to the use of DRD against group contributions received leads to an indirect taxation of incoming dividends and that it is therefore contrary to the PSD.

Already before the CJEU ruling of 13 March, the Belgian Government implicitly recognized such violation of the PSD and announced that it intends to replace the current system of "inclusion and deduction" of the DRD with a "full exemption regime". As a first step, the Belgian Government has already prepared a draft bill that would allow to offset the DRD against group contributions received (i.e., the aforementioned limitation would be abolished with respect to current year DRD – but not with respect to other limitations). Such change would be applicable as from assessment year 2025 (i.e., financial years closed on 31 December 2024 or later).

Taxpayers that still have to file their tax return for prior years should also feel comfortable to maximize the group contribution and have any group contribution that exceeds their accounting result (as adjusted under stage 1 of the tax return) offset against the DRD that they can benefit from with respect to that year.

As to the past, Belgian groups that have been affected by the aforesaid limitation either directly because the offset of DRD against group contributions received was refused, or possibly also indirectly because they did not maximize the group contribution that could have been offset against the current year DRD if the limitation had not existed, should consider the following actions:

1. Taxpayers that are already in dispute on this issue may now expect a positive outcome, based on the aforementioned decision of the CJEU, but should make sure to take all relevant action needed to include this new development in their pending dispute.
2. Taxpayers that have not yet lodged a claim against a tax assessment received because of the limitation to use DRD against the group contributions received should consider to file a tax complaint against such tax assessment (if they are still within the time limitation to lodge such a claim) or (if they are not) to file an "ex officio relief" request, which can still be filed within a period of five years as from the CJEU judgement.
3. Taxpayers that have not maximized their group contribution because of the existing limitation to use DRD at the level of the entity that would receive the group contribution, should also consider filing a tax complaint (or ex-officio relief, as the case may be), asking for the additional deduction which they would have been able to benefit from had the limitation rule (now found to violate the PSD) not existed, certainly if they had attached an explanatory note to their tax return in which they already indicated the intention to maximize the group contribution.

We would of course be happy to assist you in any of these actions.