The General Court of the European Union has held that the Belgian tax system for providing rulings in respect of the "excess profits" of MNEs did not constitute an illegal State Aid scheme.
In a Decision of 11 January 2016, the European Commission declared the Belgian excess profit scheme, pursuant to which Belgium granted advance tax rulings authorising Belgian entities which were part of multinational groups to exempt part of their profits from corporate income taxation, incompatible with the internal market and unlawful. The Commission also ordered the recovery of all incompatible and unlawful aid. This last measure affected a large group of potential beneficiaries (the annex to the Decision contained an indicative list of 55 beneficiaries). The Decision was part of a broader investigation into compliance of tax rulings in various Member States with State aid rules.
This Decision has now been annulled by the General Court of the European Union (GC), following appeals by Belgium and Magnetrol International (joined Cases T-131/16 and T-263/16) in its judgment of 14 February 2019.
The excess profit scheme allows undertakings to resolve potential transfer pricing issues with the Belgian tax administration via an advance tax ruling. Such a ruling is a legal act by which the tax administration determines how the law will apply to a particular situation or transaction, thus avoiding subsequent disputes. This particular scheme makes it possible to adjust the profits resulting from intra-group cross-border transactions. Adjustments can, in principle, be upwards or downwards, but in practice, only requests for downward adjustments had been made. Whilst Belgium argued that one of the objectives of downward adjustments was to avoid or undo actual or potential double taxation, the GC noted that, since any downward adjustments were not dependent on the multinational group showing that the excess profit had been taxed elsewhere, this argument could not be sustained.
The European Commission treated the Belgian excess profit mechanism as a State aid scheme. Pursuant to Article 1(d) of Regulation 2015/1589, a State aid scheme concerns “any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner (…)”.
State aid in the form of a State aid scheme is to be distinguished from State aid in the form of an individual aid as the former does not require the individual identification of beneficiaries.
The key question in this case was whether the European Commission was correct in characterising the Belgian excess profit mechanism as a State aid scheme. More specifically, the issue was whether the mechanism had been designed in such a way that it could lead to individual aid being granted to undertakings belonging to an abstract group without “further implementing measures being required”.
Decision of the GC
The GC firstly dismissed the claim of the applicants that the European Commission had encroached upon Belgium’s exclusive jurisdiction in the field of direct taxation. Just as in the application of the fundamental freedoms, Member State’s competence in the area of direct tax must be exercised in a manner which does not breach EU law. This includes not adopting tax rules which are liable to constitute illegal State Aid.
Secondly, however, the GC endorsed the applicants’ argument that the Belgian scheme was not a State aid scheme in the sense of Article 1(d) Regulation 2015/1589. This was because the granting of benefits under the scheme required “further implementing measures”. The GC stated in this respect that: (i) some of the essential elements of the Belgian excess profit scheme did not emerge from the acts which the European Commission considered to be the basis of the scheme but from the individual advance tax rulings adopted on the basis of the scheme; (ii) these advance tax rulings were based on a case-by-case analysis and (iii) the Belgian tax authorities had a margin of discretion in granting the advance tax rulings. The GC further pointed out that even the identification of potential beneficiaries of the scheme required further implementing measures.
Finally, the GC also dismissed the European Commission’s claim that, on the basis of a review of a sample of 22 of 66 advance rulings (of which only 6 were discussed in more detail), there was an alleged existence of a systematic approach by the Belgian tax authorities. The GC stated in this respect that in its Decision the European Commission had not relied on a systematic approach and had in any event failed to prove its existence.
The GC accordingly annulled the Decision of the European Commission.
The Decision was part of a broader campaign pursuant to which the European Commission has been investigating tax ruling practices of Member States in light of State aid rules.
So far, the Belgian excess profit scheme has been the only European Commission decision adopted in relation to a State Aid scheme. All other decisions concern tax rulings granted to individual companies including Apple, McDonalds, Starbucks and Engie. All of these decisions have been appealed and the Belgian case is the first in which the GC has rendered a judgment. However, it should be noted that the GC’s judgment exclusively focuses on the notion of a State aid scheme. The more interesting question in this case would have been whether the decisions in which the Belgian tax authorities applied the scheme in individual cases contained elements of State aid (this question will be at the core of the appeals in the individual State aid cases). However, this question was not addressed in this case since the European Commission’s Decision considered the legislative scheme as a whole to be a State Aid scheme. The precedent value for the other pending appeals is therefore limited.
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