EU General Court quashes the Commission's decision on Belgian excess profit rulings
The EU General Court decided yesterday that the Belgian excess profit ruling ("EPR") regime is not a State aid scheme. Yesterday's judgment is the first judgment in the series of pending tax aid appeals against the EU Commission's recovery decision with respect to the so-called Belgian EPR regime that it found to constitute State aid.
Unlike most tax aid cases, the Belgian EPR case is not about individual aid but about an aid scheme. The judgement of the General Court regarding the absence of a scheme is based on the fact that the essential elements of the EPRs did not feature in the relevant Belgian underlying tax provisions and that the Belgian Ruling Commission, which issued the EPRs, did more that just technically applying these provisions without discretion.
The judgment also confirmed - unsurprisingly to most - that Member States' measures of direct taxation are subject to State aid review, which allows the EU Commission to investigate these measures. But the Court does not examine the other grounds of appeal and so did not consider the Commission's new theory of selectivity specifically developed for tax rulings which underpins all of the tax ruling decisions and is at the core of all related appeals. This judgement thus has limited predictive value for the pending tax aid cases which are not about aid schemes but about individual aid.
The question now is whether the Commission will accept the Court's judgement or whether it will appeal it before the Court of Justice. Even if the Commission accepts the judgement, it is, however, not excluded that it would continue an investigation into individual EPRs so as to determine whether these rulings, while not being part of a State aid scheme, could nevertheless constitute individual State aid.
As a recap: the Belgian EPRs
Since 2005, the Belgian excess profit rulings allowed Belgian companies and establishments belonging to a multinational group to exempt from corporate income tax the so-called "excess profit" generated because of the taxpayer's membership of a group. This excess profit was considered to be the profit that exceeds the profit which a comparable standalone entity operating in similar circumstances would have generated, as it resulted from synergies or economies of scale arising from membership of a corporate group that could not be attributed to the Belgian company or establishment of such group.
Article 185, §2, b) of the Belgian Income Tax Code provided for the legal basis to exempt such excess profit as it is the relevant Belgian tax provision that allows for so-called corresponding transfer pricing adjustments. The Article could, however, also be applied without the excess profit being actually taxed in another country. It thereby also allowed for a kind of correlative transfer pricing adjustment without requiring a prior initial transfer pricing adjustment abroad. It was in this respect considered not to be for the Belgian tax authorities to determine which foreign countries should tax the excess profit. In order to benefit from this regime, an advance tax ruling was required (the so-called EPR).
EU Commission decision: EPR benefits are unlawful aid received under a State aid scheme
In its decision of January 11, 2016, the European Commission found that the Belgian excess profit regime amounted to a State aid scheme under which the taxpayers that obtained an EPR were considered to have received State aid.
Belgium was ordered to recover the alleged unlawful aid in the amount of more than 700 million EUR from about 55 beneficiaries.
Yesterday, the General Court disagreed: the EPR exemption regime is not an aid scheme!
Belgium brought an action before the General Court seeking the annulment of the Commission's decision. The General Court analysed in this respect the alleged encroachment by the Commission upon Belgium's exclusive tax jurisdiction in the field of direct taxation and the argument that the EPRs did not constitute an aid scheme.
The General Court rejected the alleged encroachment. Even though direct taxation falls within the competence of the Member States, such competence must be exercised consistently with EU law. Interventions by Member States in the field of non-harmonised areas, such as direct taxation, are thereby not excluded from the scope of the State aid rules. Consequently, the Commission is entitled to investigate and decide whether or not a certain direct tax measure qualifies as State aid and is compatible or not.
As to the second argument, the General Court finds that the Commission was wrong to determine that the EPRs constitute an aid scheme as defined in Article 1 (d) of Regulation 2015/1589 and such for the following reasons:
- Certain essential elements of the EPR (such as the methodology for calculating the excess profit) are not reflected in the legal provisions invoked by the Commission as the alleged basis of the aid scheme. As a result, the grant of the deemed aid necessarily depends on the adoption of further implementing measures, such as the issuance of a ruling.
- When issuing excess profit rulings, the Belgian Ruling Commission cannot and does not carry out a mere technical application of the regulatory framework but rather a qualitative and quantitative assessment of the ruling request on a case-by-case basis. In assessing EPR applications, the Ruling Commission is found to have a genuine margin of discretion which allows it to determine the amount and essential elements of the excess profit exemption and conditions under which it can be applied.
- The legal provisions invoked by the Commission as the basis of the aid scheme do no allow for the identification of the beneficiaries. The identification of the beneficiaries hence requires further implementing measures.
- The Commission did not show that the Ruling Commission adopted a systematic approach when issuing the excess profit rulings.
As a result, the General Court ruled that the Belgian EPR regime and the underlying legal provisions cannot be considered to be an aid scheme and annulled the Commission decision.
Most Belgian taxpayers concerned have filed a tax complaint against the tax assessments issued by the Belgian tax authorities to recover the alleged State aid. The decision on such tax complaints (at least to the extent that the tax complaint relies on the argument that the excess profit regime is not to be considered as State aid and not also on subsidiary arguments such as the requested application of the patent deduction or an exemption for an upward adjustment abroad) has been put on hold awaiting the outcome of the present procedure. For those taxpayers who have not yet filed a tax complaint, it is recommended that an ex officio relief be filed (referring to the General Court's judgement as a new fact).
It should be noted that the Commission may decide to bring an appeal before the Court of Justice against the judgement of the General Court. Such an appeal would then have to be lodged within two months and 10 days of the notification of the judgement and should be limited to points of law.
In the meantime, the Belgian tax authorities may retain the alleged aid that has been reimbursed by the relevant taxpayers until the judgement of the General Court cannot longer be appealed, and in the case of an appeal, until the Court of Justice renders a final (favourable) decision.