Belgian fairness tax and French surtax partly incompatible with EU law
On May 17, 2017 the Court of Justice of the European Union ruled on the issue of whether the Belgian `fairness tax’ and the French `surtax on dividend distributions’ are compatible with primary and secondary EU law.
31 May 2017
On May 17, 2017 the Court of Justice of the European Union (CJEU) ruled on the issue of whether the Belgian `fairness tax and the French `surtax on dividend distributions’ are compatible with primary and secondary EU law. The court essentially follows the opinion of Advocate General (AG) Kokott that the tax is partly incompatible with the EU parent-subsidiary directive (PSD).
Fairness tax and surtax
Belgium has been applying a separate, 5.15% income tax on dividend distributions since 2014. This is the so-called fairness tax. It applies to companies (with the exception of small or medium-sized companies) that offset taxable income in the year of distribution with the current year notional interest deduction and/or tax losses carried forward. The fairness tax is levied on both resident companies and permanent establishments (PEs) of foreign companies.
The French surtax is a 3% levy on dividend distributions made by French-based companies. The taxpayers liable for the surtax are dividend paying companies.
AG Kokott’s opinion in the case regarding the Belgian fairness tax was published on November 17 2016. Her position is that the fairness tax does not violate the freedom of establishment guaranteed by the TFEU, nor does it constitute a prohibited withholding tax under the PSD. However, the AG concluded that the fairness tax violates the PSD to the extent it would be due upon a redistribution of dividends received.
The judgment of the CJEU is essentially in line with the AG’s opinion:
- The fairness tax does not violate of the freedom of establishment principle, subject to the Belgian constitutional court verifying that, in practice, a foreign company with a Belgian PE is not treated less favorably than a Belgian company when calculating the taxable base of the fairness tax;
- The fairness tax is not a prohibited withholding tax under the PSD; and
- The fairness tax violates the PSD requirement for member states to refrain from imposing tax on dividends received. While Member States are free to regard up to 5% of the dividend received as non-deductible costs, the fairness tax may lead to more than the permitted 5% effectively being taxed. Insofar as the fairness tax leads to a higher tax burden, this is contrary to the PSD.
The request for a preliminary ruling in the French surtax case was limited to the question of compatibility with the provisions of the PSD. Since many of the features of the French surtax are comparable to those of the Belgian fairness tax, the CJEU dealt with the French case without a prior conclusion. On the same day as its judgment on the fairness tax, the CJEU pronounced a separate judgment in which it ruled in similar fashion.
The cases have now been referred back to the Belgian and French courts. They will have to issue their own judgments, taking into account the CJEU’s findings. If the conclusion is that the levies infringe on EU legislation, the courts have the power to not take into account, fully or partially, the fairness or surtax legislation, respectively. As yet it is unknown when the courts will issue their decision. It should be noted that both levies already have been amended in a certain way to ensure they are more in line with EU law. Whether this is sufficient remains to be seen.