On January 11, 2016 the European Commission announced that it has concluded that selective tax advantages granted by Belgium under its "excess profit" tax scheme are illegal under EU state aid rules. According to the announcement the scheme has benefitted at least 35 multinationals mainly from the EU, who must now return unpaid taxes to Belgium. The European Commission estimates the total amount to be recovered from the companies to be around €700 million.
In its announcement the European Commission describes the Belgian Excess Profit scheme as follows:
“Belgian company tax rules require companies to be taxed on the basis of profit actually recorded from activities in Belgium. However, the 2005 "excess profit" scheme, based on Article 185§2, b) of the 'Code des Impôts sur les Revenus/Wetboek Inkomstenbelastingen', allowed multinational companies to reduce their tax base for alleged "excess profit" on the basis of a binding tax ruling. These were typically valid for four years and could be renewed.
Under such tax rulings, the actual recorded profit of a multinational is compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The alleged difference in profit is deemed to be "excess profit" by the Belgian tax authorities, and the multinational's tax base is reduced proportionately. This is based on a premise that multinational companies make "excess profit" as a result of being part of a multinational group, e.g. due to synergies, economies of scale, reputation, client and supplier networks, access to new markets. In practice, the actual recorded profit of companies concerned was usually reduced by more than 50% and in some cases up to 90%.
The Commission's in-depth investigation showed that by discounting "excess profit" from a company's actual tax base, the scheme derogated both from:
· normal practice under Belgian company tax rules. It gives multinationals who were able to obtain such a tax ruling a preferential, selective subsidy compared with other companies. More specifically, at least 35 companies were given an unfair competitive tax advantage over, for example, any of their stand-alone competitors liable to pay taxes on their actual profits recorded in Belgium under the normal Belgian company tax rules; and
· the "arm's length principle" under EU state aid rules. Even assuming a multinational generates such "excess profits", under the arm's length principle they would be shared between group companies in a way that reflects economic reality, and then taxed where they arise. However, under the Belgian "excess profit" scheme such profits are simply discounted unilaterally from the tax base of a single group company.
The scheme's selective tax advantages could also not be justified by the argument raised by Belgium that the reductions are necessary to prevent double taxation. In fact, the adjustments were made by Belgium unilaterally, i.e. they did not correspond to a claim from another country to tax the same profits. The scheme does not require companies to demonstrate any evidence or even risk of double taxation. In reality, it resulted in double non-taxation.
The scheme therefore gives companies a preferential tax treatment that is illegal under EU state aid rules (Article 107 of the Treaty on the Functioning of the EU).”
With respect to the amount to be recovered from companies the following is mentioned in the announcement:
“Since the Commission opened its investigation in February 2015 Belgium has put the "excess profit" scheme on hold and has not granted any new tax rulings under the scheme. However, companies that had already received tax rulings under the scheme since it was first applied in 2005 have continued to benefit from it.
The Commission decision requires Belgium to stop applying the "excess profit" scheme also in the future. Moreover, in order to remove the unfair advantage the beneficiaries of the scheme have enjoyed and to restore fair competition, Belgium now has to recover the full unpaid tax from the at least 35 multinational companies that have benefitted from the illegal scheme. Which companies have in fact benefitted from the illegal tax scheme and the precise amounts of tax to be recovered from each company must now be determined by the Belgian tax authorities. The Commission estimates that it amounts to around €700 million in total.”
More information on the case can be found under the case number SA.37667 in the State aid register on the DG Competition website, where once any confidentiality issues have been resolved also the non-confidential version of the decisions will be made available.
Click here to be forwarded to a press release issued by the European Commission in this respect.
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