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EC Extends Probe Into Belgian 'Coordination Centres'

by Ulrika Lomas,, Brussels

22 March 2007

The European Commission announced yesterday that it is extending an investigation into Belgian coordination centres, a scheme which grants certain multinational companies corporate and other tax breaks.

In its judgment of 22 June 2006, the European Court of Justice confirmed that the tax scheme for coordination centres was incompatible with the common market, but partly annulled the transitional measures laid down by the Commission for the phasing-out of the scheme.

This annulment leaves the procedure initiated by the Commission on 27 February 2002 partially open. The procedure must therefore be closed by a new decision laying down appropriate transitional measures for the centres concerned. The Commission is therefore extending the procedure before adopting a new decision in order to give interested parties the opportunity to submit their observations.

For the Commission, the judgment's scope is confined to a number of centres which were not given a sufficient transitional period to adapt to the change in the tax scheme.

The ECJ's ruling overruled a 2003 decision by the European Commission, ordering Brussels to withdraw a special tax regime for the coordination centres in which foreign companies conducted administrative functions like human resources, advertising, and accounting. The scheme attracted about 200 multinationals, including General Motors Corp and International Business Machines Corp. (IBM). These companies enjoyed an appreciably lower assessment basis for corporation tax and a number of exemptions from other taxes, such as droit d’apport (capital duty), précompte immobilier (property tax), and précompte mobilier (withholding tax).

In 1984 and 1987, the tax regime for the coordination centres was examined by the Commission. The EC found, in essence, that the regime did not breach rules on state aid, which are designed to maintain fair competition throughout the EU. However, in 1997, as part of an overall review of harmful tax competition, the Council adopted a code of conduct for business taxation, and a subsequent Council report found that the Belgian provisions concerning the coordination centres were harmful tax measures which should be withdrawn by 31 December 2005.

While the ECJ agreed with the Commission that the existence of the coordination centres distorts competition, it ruled that the lack of appropriate transitional arrangements infringed the affected firms' rights to equal treatment, and therefore held that the current system could remain in place until 2010.

"By failing to adopt transitional measures for those coordination centres with an authorisation which terminated, the Commission infringed the general principle of equal treatment," the ECJ stated in its judgment.

"The Court accordingly annulled the Commission's decision in so far as it did not lay down any transitional measures," the judges added.

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