UK and International Tax news

EC Concludes Belgian ‘Excess Profits’ Tax Scheme Illegal

Tuesday 19th January 2016

The European Commission has recently concluded that selective tax advantages granted by Belgium under its “excess profit” tax scheme are illegal under EU state aid rules. The scheme has benefited at least 35 multinationals mainly from the EU who must now return unpaid taxes to Belgium.

The Belgian “excess profit” tax scheme, applicable since 2005, allowed certain multinational group companies to pay substantially less tax in Belgium on the basis of tax rulings. The scheme reduced the corporate tax base of the companies by between 50% and 90% to discount for so-called “excess profits” that allegedly result from being part of a multinational group. The EC investigation, which opened in February 2015, showed that the scheme derogated from normal practice under Belgian company tax rules and the so-called “arm’s length principle”. This is illegal under EU state aid rules.

The “excess profit” tax scheme was marketed by the tax authority under the logo “Only in Belgium”. It only benefited certain multinational groups who were granted a tax ruling on the basis of the scheme, whilst stand-alone companies (i.e. companies that are not part of groups) only active in Belgium could not claim similar benefits. The scheme represents a very serious distortion of competition within the EU’s Single Market affecting a wide variety of economic sectors.

Belgian company tax rules require companies to be taxed on the basis of profit actually recorded from activities in Belgium. However, the 2005 “excess profit” scheme allowed multinational companies to reduce their tax base for alleged “excess profit” on the basis of a binding tax ruling. These were typically valid for four years and could be renewed.

Under such tax rulings, the actual recorded profit of a multinational is compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The alleged difference in profit is deemed to be “excess profit” by the Belgian tax authorities, and the multinational’s tax base is reduced proportionately. This is based on a premise that multinational companies make “excess profit” as a result of being part of a multinational group, e.g. due to synergies, economies of scale, reputation, client and supplier networks, access to new markets. In practice, the actual recorded profit of companies concerned was usually reduced by more than 50% and in some cases up to 90%.

The EC’s investigation showed that by deducting “excess profit” from a company’s actual tax base, the scheme derogated both from normal practice under Belgian company tax rules and the arm’s length principle under EU state aid rules.

Even assuming a multinational generates such “excess profits”, under the arm’s length principle they would be shared between group companies in a way that reflects economic reality, and then taxed where they arise. However, under the Belgian “excess profit” scheme such profits are simply excluded unilaterally from the tax base of a single group company.

The EC has stated that the scheme’s selective tax advantages could not be justified by the argument raised by Belgium that the reductions are necessary to prevent double taxation. In fact, the adjustments were made by Belgium unilaterally, i.e. they did not correspond to a claim from another country to tax the same profits. The scheme does not require companies to demonstrate any evidence or even risk of double taxation. In reality, it resulted in double non-taxation. The scheme therefore gives companies a preferential tax treatment that is illegal under EU state aid rules (Art 107 TFEU).

The EC decision requires Belgium to stop applying the “excess profit” scheme also in the future. In addition, in order to remove the unfair advantage the beneficiaries of the scheme have enjoyed and to restore fair competition, Belgium now has to recover the full unpaid tax from at least 35 multinational companies that have benefited from the illegal scheme. Which companies have in fact benefited and the precise amounts of tax to be recovered from each company must now be determined by the Belgian tax authorities. The EC estimates that it amounts to around €700 million in total.

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