Belgian Law not EU compliant in relation to Downward PE adjustment to the Notional Interest Deduction basis

Olivier Hermand 5 July 2013


banking-capital-market-iconeUnder the notional interest deduction (hereafter “NID”) regime, Belgium introduced a sui generis corporate tax deduction, i.e. Belgian corporate income taxpayers are for tax purposes allowed to claim a NID reflecting the economic cost of the use of capital, equal to the cost of long-term, risk-free financing. In practice, the NID is equal to the multiplication of two factors: the “NID basis” and the “NID rate”. In order to avoid abuse of the NID or double exemptions, certain adjustments are made to the NID basis. One of these adjustments was the subject of the court case; the accounting equity as per the last year-end date is reduced by the net book value of assets allocated to permanent establishments (hereafter “PE”) in treaty countries. On 24 June 2011 the Antwerp Court of first instance asked the Court of Justice of the EU (hereafter “CJEU”) for a preliminary ruling as to whether this PE adjustment was EU compliant.

The CJEU first considered the negative adjustment to the NID basis with respect to the net book value of assets allocated to foreign PEs in double tax treaty country to be a restriction to the freedom of establishment.

To justify such restriction, the Belgian Government put forward reasons relating to the need to safeguard the coherence of the Belgian tax system and preserve the balanced allocation of taxing power between EU Member States. The CJEU rejected the argumentation of the Belgian Government.

The NID regime on this point not being in line with EU law, Belgian corporate entities with foreign PEs should assess the impact of this decision on past NID computations as well as on the most recent tax return to be completed.

Also worth mentioning is the still pending infringement procedure initiated by the European Commission on the same subject (Infringement n° 2008/4335). In this procedure, the Commission not only questions the PE adjustment but also the adjustment linked to real estate located in other Member States of the European Economic Area. Same causes having the same effects, we can expect the CJEU to take a similar decision on the foreign real estate adjustment to the NID basis.