Limitation of excess DRD after merger is in line with Parent-Subsidiary Directive


On 20 October 2022, the European Court of Justice (ECJ) rendered its judgment in the “Allianz Benelux” case relating to the limitation of excess dividends-received deduction (DRD) of Belgian companies that are involved in a tax-neutral merger. 

A dividend received by a Belgian company is in principle taxable income. But if certain conditions are met (in essence 10% of €2.5m shareholding in a ‘normally taxed’ company for an uninterrupted period of at least one year), the Belgian company can benefit from a 100% DRD. 

Any DRD that cannot be deducted in a certain year due to an insufficient tax base can in principle be forwarded to the following taxable periods (exceptions are possible). In the case of a tax-neutral merger, such ‘excess DRD’ of the merging companies is however subject to a pro rata limitation based on the fiscal net value of the companies.

In the case at hand, the taxpayer claimed the full amount of excess DRD after the merger, arguing that a limitation would violate the EU Parent-Subsidiary Directive (PSD). But the ECJ rejected this position and concluded that the pro rata limitation applied does not infringe the PSD. 

Remarkable about this case is that both the Belgian tax authorities and the Belgian Court of First Instance had accepted a pro rata transfer of the excess DRD, while the facts date back to the late nineties. At that moment, Belgian legislation did not yet allow any carry forward of excess DRD – and obviously did not yet provide any rules on the transfer of excess DRD in case of a merger – and the PSD had not yet entered into force. Also the ECJ saw no issues in applying these ‘futuristic’ rules to the case.