Belgium: Important Ruling - EJC Issues Judgment in Argenta Case
US multinationals whose Belgian subsidiaries have foreign PEs should be aware of a recent judgment (C-350/11) of the European Court of Justice (EJC), as the ruling may impact both their prior and current notional interest deduction (NID) calculations.
The NID is an attractive Belgian tax incentive, under which local companies and branches of foreign entities subject to Belgium corporate income tax may claim a tax deduction for their cost of capital by deducting “notional” or “deemed” interest on their net equity. Certain items, like the value of net assets invested in a PE located in a country with which Belgium has a tax treaty have to be excluded from this net equity, thereby exempting the PE income in Belgium.
The case involved Argenta, a bank headquartered in Belgium with a PE in the Netherlands, which claimed NID on its Dutch PE’s net assets for tax year 2008. Under the Belgium-Netherlands tax treaty, the profits of Argenta’s Dutch PE are taxable in the Netherlands, but the treaty exempts the Dutch PE’s income from Belgian tax. The tax authorities refused to grant Argenta’s NID on its Dutch PE’s assets, and the case went to the Court of First Instance in Antwerp, which found in 2012 that reducing the NID basis by the net book value of assets allocated to PEs in treaty countries restricts the “freedom of establishment” principle which prohibits an EU Member State from implementing measures that discriminate against nationals of another Member State or amongst its own nationals seeking to establish themselves in a another Member State.
The ECJ has now agreed with the opinion that the provision is counter to EU law, finding in favor of Argenta in deciding that reducing the NID basis by the net book value of assets allocated to PEs in treaty countries restricts the freedom of establishment when compared to taxpayers with a Belgian establishment or a PE whose income is not tax exempt.
The Court decided as follows:
“Article 49 TFEU must be interpreted as precluding national legislation under which, for calculation of a deduction granted to a company subject to full tax liability in a Member State, the net value of the assets of a permanent establishment situated in another Member State is not taken into account when the profits of that permanent establishment are not taxable in the first Member State by virtue of a double taxation convention, whereas the assets attributed to a permanent establishment situated in the territory of the first Member State are taken into account for that purpose.”
This decision will impact Belgian companies with a PE in another EU Member State or in Iceland and Norway, and it will benefit Belgian companies with loss-making permanent establishments in other member states.