Belgian limitation of interest deduction contrary to the Parent Subsidiary Directive
The Court of Justice judges that although the Directive permits limitation of interest deduction, a causal connection should still exist between the non-deductible interest and financing of the acquisition of a participation.
15 january 2018
On 26 October 2017, the Court of Justice of the EU judged a Belgian limitation of interest deduction to be contrary to the provisions of the Parent Subsidiary Directive.
Facts and circumstances
The Belgian credit institution Argenta holds interests in several participations, established in Belgium and elsewhere in the EU. Some participations were held longer than one year, other less than one year. The participations paid dividend to Argenta. Argenta itself paid interest on the savings accounts and investment products it held for its clients. No interest was paid for loans taken out to acquire participations.
Belgian dividend received deduction
Under Belgian tax law, the dividends received by Argenta were included in the tax base, after which a deduction of 95% the dividend received was applied. This is essentially in line with the provisions of the Parent Subsidiary Directive.
In addition, the Belgian dividend received deduction (DRD) provided for a limitation of deduction for interest paid. In accordance with the regulation, deduction of the interest was not permitted up to the amount of dividend received from participations held less than one year. Parties disputed whether this limitation of interest deduction is in line with the provisions of the Parent Subsidiary Directive.
The Court of Justice of the EU takes the view that it concerns a violation of the Parent Subsidiary Directive. The Directive is based on the principle of neutrality. For this reason, the qualifying dividends received should effectively remain tax-free. The principle of neutrality is effectively circumvented by subsequently not deducting the interest up to the amount of the dividends received from participations held less than one year.
Although the Parent Subsidiary Directive provides for an exception that permits interest deduction limitations under certain circumstances, this should be interpreted restrictively. The exception is provided for to avoid that the country in which the parent company is based first has to exempt the dividends received and then also has to allow deduction of the costs relating to the participation. That would create a double benefit.
The Court of Justice therefore rules that the limitation of interest deduction cannot in a general sense relate to all interest paid, but only provides for a limitation of deduction of interest on financing for the acquisition of participations. Since this was not the case here, deduction of the interest had to be permitted.
Possible impact on Dutch legislation
Tax literature suggests that the judgment can also affect Dutch legislation, such as the provisions on excessive participation interest. These provisions exclude deduction of interest and costs of loans relating to the funding of participations insofar as the amount of excessive participation interest exceeds EUR 750,000. The Dutch regulation provides for a simplified calculation method and does not necessarily correspond with the facts and circumstances of a specific case. Moreover, the taxpayer does not have the possibility to provide evidence to the contrary. The Dutch rules may thus constitute a violation of the Parent Subsidiary Directive.
On the other hand, it should be noted that there is a closer link in Dutch legislation between the limitation of interest deduction and financing of the acquisition of participations. As a result, it remains to be seen to what extent the Argenta judgment will effectively affect Dutch legislation.
Source: Court of Justice of the EU of 26 October 2017, C-39/16 (Argenta), ECLI:EU:C:2017:813.