Judgment of the Union European Court of 26 October 2017

This judgment resolves a preliminary ruling that was raised by a Court of First Instance of Belgium about the Corporate Tax Belgium Law relating to the Directive 90/435 of Union European which rules the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. This Directive aims to avoid the disadvantages that companies of different Member States have in comparison between companies that are in the same Member State.

The main dispute derives from two amended tax assessments sent to a Belgian credit institution which had applied a deduction amounting to 95% of dividends from subsidiaries. Also, the credit entity applied a deduction of interests, within that there were interests which were not paid in respect of loans for the purchase of holdings in subsidiary. In this case, the Belgian tax authorities considered that part of the interests could not be deducted (an interest amount equal to exempt dividends). The entity claimed to the National Control Centre of the Belgium Tax Authorities, but this Centre rejected the complaints logged by the entity.

 

Controversial Belgian Law 

Belgian legislation provides the possibility of deducting these dividends whenever the entity receiving them has a holding in the subsidiary of 5% or a holding of at least BEF 50 million, without this requirement being applied to credit institutions. The balance after the deduction must be positive. About interests, the Belgian legislation considers that they may deduct up to the limit of the positive balance, when derive from a holding held for at least one year uninterruptedly.

 

Article 4 of the Directive 90/435 

The preliminary ruling concerns the question whether that Belgian legislation is contrary to the Directive, concretely, to the Article 4 thereof, which corrects the double taxation of distributed profits by requiring Member States to introduce a system of exemption or deduction in respect of them. In its second section, the article includes the possibility for Member States to provide a non-deductibility rule for interest related to the participation and losses arising from the distribution of profits, which have already enjoyed a tax advantage.

 

Court Resolution 

The Court declares that Belgian legislation precludes Article 4.2 of the Directive which excludes deductible expenses only when are related with the acquisition of the holding of a subsidiary and when whose distributed profits have already been deducted or exempted under Article 4.1 of the Directive. In other words, Member States may consider non-deductible interest that has a causal relationship with the distributed benefits that have enjoyed the tax benefit and this second section must be interpreted strictly.

The Court also concludes that the Directive does not authorize Member States to apply a national provision in so far as it goes beyond what is necessary to prevent fraud and abuse.

In conclusion, the Article 4.2 of the Directive exclude the deductibility of interest only when are linked to the acquisition of the shares giving rise to the distribution of exempt profits. It is necessary to bear in mind the purpose of the Directive, which aims at the neutrality of the payment of profits by a subsidiary to its parent company in another Member State.

 

Spanish Corporate Tax Law 

In the Spanish Corporate Tax Law there are two different articles to regulate the deduction of interest. First, we find a rule of interests related with the acquisition of the holding of a subsidiary that stablishes the non-deduction of these kind of interest (article 15.4). Also, in the article 16 there are a general rule that stablishes a limitation for the rest of interest (a million of EUR and the 30% of the operating profit).

Relation with the distributed profits, the Spanish Corporate Tax Law establishes a system of exemption in the article 21 which applies if some requirements are met.

 

B LAW & TAX
Alfonso Garrido Picon

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