Read the opinion: Argenta Spaarbank, C-350/11 (19 September 2012).
Background
Belgium allows a notional interest deduction in computing taxable income, based on a percentage of corporate equity.
For these purposes, corporate equity is reduced by the net asset value of any permanent establishment that is exempt from Belgian tax by virtue of an income tax treaty.
In the present case, a Belgian company—in calculating its notional interest deduction—was unable to take into account the assets of its Dutch permanent establishment. Had the permanent establishment been located in Belgium, or in a country with which Belgium had not concluded an income tax treaty, there would have been no reduction in respect of the permanent establishment’s assets for purposes of calculating the notional interest deduction.
In defending the rules, the Belgian tax authorities asserted:
- The exclusion of the permanent establishment would only affect the permanent establishment’s profits—not those of the Belgian company.
- The difference in treatment was a consequence of the parallel exercise of tax jurisdiction of Belgium and the Netherlands, in that such a deduction is not currently available in other EU Member States.
- The exclusion was justified for coherence of the Belgian tax system and in order to preserve the balanced allocation of taxing rights between Belgium and the Netherlands.
Advocate General’s opinion
The CJEU Advocate General rejected all the arguments of the Belgian tax authorities, finding that:
- Belgian resident companies were subject to tax on their worldwide income.
- The notional interest deduction applied even when only the foreign permanent establishment was profitable.
- The difference in treatment is a result of the Belgian tax system alone, and not the tax system of more than one EU Member State.
The opinion concluded that the Belgian rules were, in principle, contrary to the freedom of establishment.
The Advocate General rejected the claim that the rules were justified by the need to preserve the cohesion of the Belgian tax system on finding no direct link between the tax advantage, in the form of a reduced corporate income tax charge, and the generation of taxable profits in Belgium.
KPMG observation
The Advocate General’s opinion is not binding on the court. Instead, the role of the Advocates General is to propose to the court, in complete independence, a legal solution to the cases for which they are responsible. The judges of the court now will begin their deliberations in this case; judgment will be given at a later date. It remains to be seen whether the CJEU will followed this taxpayer-favorable opinion of the Advocate General.
Note that this case is not a challenge to the notional interest deduction system itself, but only aims at broadening its benefits to companies with “excluded” foreign permanent establishments.
Read a September 2012 report prepared by KPMG’s EU Tax Centre: AG Opinion in Argenta Spaarbank case