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ECJ AG Urges Ruling Against Belgian 'Excess Profit' Ruling System

by Ulrika Lomas, Tax-News.com, Brussels

10 December 2020


European Court of Justice (ECJ) Advocate General Juliane Kokott has opined that the Commission was right to consider that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups, under the "excess profit" ruling scheme, constituted an aid scheme.

Further, she opined that the Commission, when challenging the regime, was justified in analyzing just a sample of such rulings for the purposes of proving a consistent administrative practice on the part of the Belgian authorities.

In the AG's opinion, a judgment of the General Court of the European Union to the contrary should be set aside and the General Court should rule again on the actions brought by Belgium and Magnetrol International.

Background

From 2004 to 2014, the Belgian tax authorities made downward adjustments, by way of tax rulings, to the taxable profits of a total of 55 Belgian resident undertakings forming part of multinational groups. The adjustments (referred to as an "excess profit exemption") were made on the basis of a provision of the Belgian Income Tax Code pursuant to which, in accordance with the internationally accepted arm's length principle, profits may be adjusted between two undertakings belonging to the same group if the conditions agreed between them were not the same as those which would have been agreed between independent undertakings.

The Commission considered the rules allowed group companies to substantially reduce their corporation tax liability in Belgium, by enabling them to remove "excess profits" from their taxable income that allegedly result from the advantage of being part of a multinational group.

Specifically, the Commission is concerned that it is not remuneration for services between two associated undertakings that is reassessed by means of the arm's length principle, as provided for in the Income Tax Code. Rather, the Belgian tax authorities compare, independently of such services, the profit of the undertaking forming part of a "cross-border group" with the hypothetical profit of a non-associated undertaking, by estimating the hypothetical average profit that a standalone business carrying out comparable activities would have generated in comparable circumstances. The "excess profit" is then subtracted from the profit actually recorded by the relevant Belgian undertaking forming part of an international group of undertakings.

A summary of the case, prepared by the ECJ, explained that for an advance ruling to be obtained to receive an adjustment, it was sufficient for a request to be made to that effect and for the profits to be linked to a new situation, such as a reorganization leading to the relocation of a central entrepreneur to Belgium, the creation of jobs, or the making of investments.

EU infringement proceedings

By decision of January 11, 2016, the Commission found that this practice on the part of the Belgian tax authorities constituted an aid scheme that was incompatible with the internal market and that had also been unlawfully put into effect, since it had not been notified to the Commission. In addition, the Commission ordered that the aid granted be recovered from the beneficiaries, a definitive list of which was to be drawn up by Belgium at a later stage.

In particular, the Commission considers that the deductions that a company can claim (for intra-group synergies or economies of scale) significantly overestimate the actual benefits of being in a multinational group. The deductions granted through the excess profit ruling system usually amount to more than 50 percent of the profits covered by the tax ruling and can sometimes reach 90 percent, the Commission highlighted.

However, following actions brought by Belgium and Magnetrol International, the General Court of the European Union, by judgment of February 14, 2019, annulled the decision of the Commission. It held that the Commission's finding of the existence of an aid scheme was incorrect. In particular, the General Court said the Commission had not reviewed all the advance tax rulings issued, but only a sample of them. Thus, according to the General Court, the Commission had failed to prove that the Belgian tax authorities had followed a systematic approach in all the advance tax rulings.

AG Kokott's opinion

Kokott has delivered an opinion in favor of the Commission. She said the ECJ should find that the Commission sufficiently demonstrated in its decision that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups meets the conditions for the existence of an "aid scheme".

Further, she said the European Commission was justified in analyzing a batch of rulings, rather than looking at all of them; she opined, contrary to the view of the General Court, the Commission sufficiently demonstrated in its decision that its sample is representative overall and thus sufficient for the purposes of proving a consistent administrative practice.

She recommended that the case should be returned to the General Court, noting that that court must still assess whether the advance tax rulings concerning the downward adjustment of profits constitute really State aid and whether the recovery of the alleged aid infringes, in particular, the principles of legality and of the protection of legitimate expectations.

She highlighted that, as a pilot case, the case is significant, with 28 further actions by beneficiaries of the alleged aid currently stayed.

TAGS: court | tax | investment | business | European Commission | Belgium | law | corporation tax | transfer pricing | European Union (EU) | services | Europe | BEPS

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