Belgium - Rule limiting deduction for supplies provided by non-residents 

The case is: Société d’investissement pour l’agriculture tropicale SA (SIAT) v. Belgian State
C-318/10 (5 July 2012)

Background

A Belgian company established a “joint subsidiary” with a Nigerian group for the production of palm oil. The Belgian company:

• Supplied services in return for payment, and sold equipment to the joint subsidiary
• Was required to return part of the profit obtained from the joint subsidiary to the company heading the Nigerian group (here, the Nigerian group head company was established in Luxembourg) as a “commission” for the introduction of business

When the venture ended, the Belgian company paid the Luxembourg group head company a sum of U.S. $2 million to settle all accounts. The Belgian company recorded this amount as an expense on its books.

However, the Belgian tax authorities—on finding that the Luxembourg company was a Luxembourg 1929 holding company and, as such, did not pay a tax that was comparable to Belgian corporate income tax—concluded that the $2 million amount was not an allowable business expense deduction.

A special rule under Belgian tax law (1992) provides that the deductibility of an expense is limited if the foreign supplier is not subject to tax in its country of residence or is subject to a tax regime that is “appreciable more advantageous” than the Belgian tax regime. The term “appreciable more advantageous” is not defined. Also, this rule does not apply with respect to payments made between Belgian resident companies. Rather, the expenses are deductible if necessary for acquiring or retaining taxable income and if the taxpayer can justify the authenticity and amount of the claimed expenses.

Judgment

On a referral from the Belgian Cour de cassation, the CJEU found that the Belgian rule for the deductibility of business expenses:

• Had the effect of discouraging Belgian companies from using services provided by suppliers in other EU Member States, and of discouraging these suppliers from offering their services to Belgian recipients (in breach of the freedom to provide services)
• Did not define what is “appreciable more advantageous” and thus would be applied on a case-by-case basis—thus, not satisfying the requirements under the EU principle of legal certainty and not proportionate to the objective of preventing fraudulent conduct