Advance Tax Rulings

Advance Tax Rulings - Untitled design 26

Introduction

In 2016, the Commission found, in decision 2016/1699, that advance tax rulings [ATRs] that had been provided by Belgium to multi-national companies [MNCs] with establishments in Belgium constituted State aid because the ATRs set the taxable income of those companies according to a hypothetical average income rather than their actual income. The profit that exceeded that hypothetical average was considered to be “excess” and was then deducted from the total profit that was taxed. In this way, the so-called “excess profit exemption” deviated from the normal system of taxation and, therefore, it conferred a selective advantage.

However, it is not unusual tax authorities to adjust the taxable income of companies that belong to larger groups because transactions between related companies may be manipulated for tax avoidance. However, the Commission also considered the exemption not to be in line with the arm’s length principle [ALP]. The aid was incompatible with the internal market and had to be recovered.

Belgium brought an action against that decision before the General Court which, in case T-131/16, Belgium v Commission, faulted the Commission for considering all those ATRs as being a single scheme rather than individual measures. The Commission, in turn, lodged an appeal before the Court of Justice, in case C-337/19 P, Commission v Belgium, which agreed with the Commission, put aside the judgment of the General Court and returned the case back to the General Court.

On 20 September 2023, the General Court, in case T-131/16 RENV, Belgium v Commission, dismissed the action of Belgium. The General Court confirmed that Belgium deviated from the normal system of taxation and the ATRs constituted State aid.

State resources

Belgium argued that a state can only renounce tax revenue if it is entitled to tax the corresponding income. According to Belgium, the excess profit corresponded to the profit generated by corporate groups and could not be attributed to Belgian entities.

The General Court rejected that argument. “(28) The scheme at issue involved the exemption of excess profit, which constituted a reduction of tax for the undertakings benefiting from that scheme and, therefore, a loss of tax revenue that would otherwise have been available to the Kingdom of Belgium.”

According to the Belgian tax code, “(29) the total amount of the recorded profit of resident companies is taxable in Belgium. Accordingly, that profit must be regarded as falling within the tax jurisdiction of the Kingdom of Belgium”.

Moreover, “(30) in so far as the present case concerns tax charge reductions that were granted by the Advance Ruling Commission, admittedly in accordance with an administrative practice, but only in response to a request made by the beneficiary, it cannot be maintained that the exempted profit was, fundamentally, profit that was not taxable in Belgium.”

The General Court also noted that “(31) under the ordinary system of taxation of corporate profits in Belgium, […], the total amount of profit recorded by resident companies is, fundamentally, taxable in Belgium. Thus, it is by taking into account the choice made by the Belgian legislature, […], that the Commission was able to conclude that, to the extent that the excess profit was not taxed, when it was fundamentally taxable profit, such non-taxation resulted in a loss of resources that belonged to that State.”

Identification of the reference system

Belgium contented that the Commission erred in the identification of the reference system.

Without a proper identification of the reference or normal system of taxation, it is impossible to determine whether a tax measure confers an advantage that is selective. As will be seen below, in the case of taxation, both the advantage and the selectivity of a measure depend on a comparison with the reference system or the system that would have applied had the measure in question not been implemented.

First, the General Court stressed that “(37) the determination of the reference system is of particular importance in the case of tax measures, since the existence of an economic advantage for the purposes of Article 107(1) TFEU may be established only when compared with ‘normal’ taxation. Thus, determination of the set of undertakings which are in a comparable factual and legal situation depends on the prior definition of the legal regime in the light of whose objective it is necessary, where applicable, to examine whether the factual and legal situation of the undertakings favoured by the measure in question is comparable with that of those which are not”.

The General Court clarified that “(39) outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal’ tax regime, from which it is necessary to analyse the condition relating to selectivity. This includes, in particular, the determination of the basis of assessment and the taxable event”.

“(40) It follows that only the national law applicable in the Member State concerned must be taken into account in order to identify the reference system for direct taxation, that identification being itself an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature.”

In other words, the tax systems in other Member States are irrelevant and so is the view of the Commission, if any, on how Member States ought to structure their tax systems or what product or activity they should tax and by how much.

“(41) In order to determine whether a tax measure has conferred a selective advantage on an undertaking, it is for the Commission to carry out a comparison with the tax system normally applicable in the Member State concerned, following an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of that State. Parameters and rules external to the national tax system at issue cannot therefore be taken into account in the examination of the existence of a selective tax advantage within the meaning of Article 107(1) TFEU and for the purposes of establishing the tax burden that should normally be borne by an undertaking, unless that national tax system makes explicit reference to them”.

Then the General Court reviewed how the Commission determined the reference system in paragraphs 43-45 of the judgment:

  • The reference system was the ordinary system of taxation of corporate profits under the general Belgian corporate income tax system, which had as its objective the taxation of profit of all companies subject to tax in Belgium.
  • The Belgian corporate income tax system applied to companies resident in Belgium as well as to Belgian branches of non-resident companies, regardless of whether they were independent or part of a multi-national group.
  • Companies resident in Belgium were liable to corporate income tax on the total amount of their profit, unless a double taxation treaty applied.
  • Non-resident companies were only taxable on specific Belgium-sourced income.
  • Belgian corporate income tax was payable on the total profit.

Total profit was calculated as corporate income, minus deductible expenses, so that the profit actually recorded formed the starting point for calculating the total taxable profit, and for the subsequent application of upward and downward adjustments provided for by the tax system. However, the important point was that the excess profit exemption was not an inherent part of the reference system. [see paragraph 64 of the judgment]

The Belgian tax law allowed the tax administration to make a unilateral adjustment of a company’s profits where transactions or arrangements with associated companies were concluded on terms that differed from arm’s length conditions.

The tax law also allowed downward adjustments of a company’s profit from an intra-group transaction or arrangement, subject to the additional condition that the profit to be adjusted had to have been included in the profit of the foreign counterparty to that transaction or arrangement.

Adjustment of taxable profit

After it was established that all profit was taxable, the General Court examined the possibility of making adjustments to profit.

The General Court noted that “(72) the downward adjustment is envisaged in the context of cross-border relationships between two associated companies and that it must be a correlative adjustment, in the sense that it is applicable only if the profit that is to be adjusted is already included in the profit of the other company and the profit so included is profit which should have been made by that other company if the conditions agreed between the two companies had been those which would have been agreed between independent companies.”

In other words, the downward adjustment provided by the Belgian tax code was intended to identify the profit that related companies would make, had they been independent, and also to take account of the fact that that profit would be taxed in another jurisdiction.

Indeed, the downward adjustment “(73) was designed to determine the profits of a Belgian entity that are taxable in Belgium and those falling outside its jurisdiction, on the basis of an allocation of those profits between the Belgian entity and the associated companies involved in the intra-group cross-border relationships in question.”

Next, the General Court examined how the excess profit scheme was actually applied.

It found that “(76) in the context of the excess profit scheme applied by the Belgian tax authorities, the downward adjustment of profit enabling that excess profit to be deducted from the tax base was not conditional upon the exempted profit having been included in the profit of another company and that profit being profit which should have been made by that other company if the conditions agreed between them had been those which would have been agreed between independent companies.”

“(77) The exemption applied by the Belgian tax authorities under the scheme at issue was based on an exemption percentage, calculated on the basis of a hypothetical average profit for the Belgian entity, obtained using a profit level indicator derived from a comparison with the profit of comparable standalone companies and fixed as a point in the interquartile range of the chosen profit level indicator of a set of comparable standalone companies. … rather, it was a hypothetical profit that disregarded the total profit made by the Belgian entity in question and the adjustments provided for by law.”

“(80) Accordingly, contrary to the Kingdom of Belgium’s contention, the Commission was right to find that the excess profit exemption applied by the Belgian tax authorities under the scheme at issue did not form part of the reference system.”

Existence of an advantage

The General Court, first, clarified that “(87) selectivity and advantage are two separate criteria. So far as advantage is concerned, the Commission must show that the measure improves the financial situation of the recipient […] However, so far as selectivity is concerned, the Commission must show that the advantage does not benefit other undertakings that are in a factual and legal situation comparable to that of the recipient in the light of the objective of the reference system”.

“(88) In that regard, according to the case-law, the requirement as to selectivity under Article 107(1) TFEU must be clearly distinguished from the concomitant detection of an economic advantage, in that, where the Commission has identified an advantage, understood in a broad sense, as arising directly or indirectly from a particular measure, it is also required to establish that that advantage specifically benefits one or more undertakings”.

“(89) It must however be stated that, according to the case-law of the Court of Justice, those two criteria may be examined together as a ‘third condition’ laid down in Article 107(1) TFEU, requiring there to be a ‘selective advantage’”.

The language used by the General Court is unnecessarily complex. In tax measures, both advantage and selectivity are established as a deviation from a certain benchmark which is the reference system or normal system. However, the difference between the two concepts is who benefits from the advantage. If all undertakings that are in a similar situation and therefore are subject to the same tax receive the benefit, then the measure in question is general and not selective.

Then the General Court explained the meaning of advantage. “(92) Measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or which fall to be regarded as an economic advantage that the recipient undertaking would not have obtained under normal market conditions are regarded as State aid”.

“(93) In the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation […] Therefore, such measures confer an economic advantage on their recipients if the measures mitigate the burdens normally included in the budget of an undertaking and, accordingly, without being subsidies in the strict meaning of the word, are similar in character and have the same effect”.

“(94) Consequently, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with the recipient’s position in the absence of that measure, and under the normal rules of taxation”.

“(96) In the present case, […] Belgian entities that were part of a multinational group and that had requested [ATRs] had been able to reduce their corporate tax liability in Belgium, by deducting from their tax base a percentage of their profit, as ‘excess’ profit, for the five years of the advance rulings’ validity.”

“(98) Next, it should be recalled that it is apparent from Article 185(1) of the CIR 92 that resident companies in Belgium are to be taxed on the total amount of their profit.

Furthermore, […] the starting point for the taxable profit of undertakings is all the profit realised or registered in the accounts.”

“(99) Lastly, […] the tax base can be adjusted downwards where the profit of the company in question is already included in the profit of another company of the same group and it is profit which should have been made by that other company if the conditions agreed between them had been those which would have been agreed between independent companies.”

“(105) The excess profit scheme was not provided for by [reference tax system]; rather, the Advance Ruling Commission implemented the scheme at issue in practice, by departing from the conditions laid down by [the reference tax system]. In that context, on the basis of requests for advance rulings, the Advance Ruling Commission validated the calculation of excess profit proposed in those requests and determined the exemption percentage that could be applied by the Belgian entities in question during the period of validity of the advance rulings. Consequently, the advance rulings covered by the scheme at issue cannot be considered simply to apply the law to the facts in respect of each request.”

Selectivity

“(110) In examining the selectivity of a tax measure, after first identifying and examining the common or ‘normal’ tax regime applicable in the Member State concerned, that is to say, the reference system, it is necessary, secondly, to assess and determine whether any advantage granted by the tax measure at issue may be selective by demonstrating that the measure derogates from that common regime inasmuch as it differentiates between economic operators who, in the light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation”.

“(111) The Commission found, principally, that the Belgian excess profit exemption scheme conferred a selective advantage on its beneficiaries by derogating from the general Belgian corporate income tax system, in so far as that system provided for companies to be taxed on their total profit, that is, their profit actually recorded, not on a hypothetical average profit that disregarded the total profit made by those companies and the adjustments provided for by law.”

“(112) The Commission also pointed out that that scheme was not available to all entities in a similar legal and factual situation in the light of the objective of the Belgian corporate income tax system, which was to tax the profits of all companies subject to tax in Belgium.

In other words, the excess profit scheme was doubly selective: It applied only to MNCs that requested an ATR, while it did not apply to other Belgian companies that had no operations abroad.

Any justification based on the nature and general scheme of the Belgian tax system?

A prima facie selective measure may nonetheless be justified by the logic of the system and other aspects which are inherent in tax systems such as avoidance of double taxation.

Therefore, the General Court also considered whether there was any objective justification of the excess profit scheme.

First, the General Court recalled that “(145) a measure which constitutes an exception to the application of the general tax system may be justified if the Member State concerned can show that that measure results directly from the basic or guiding principles of its tax system. In that context, it is necessary to distinguish between, on the one hand, the objectives attributed to a particular tax regime and which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives. Thus, tax exemptions which are the result of an objective that is unrelated to the tax system of which they form part cannot circumvent the requirements under Article 107(1) TFEU”.

“(146) In the present case, it has been determined, […], that the excess profit exemption applied by the Belgian tax authorities was not conditional on it being demonstrated that that profit had been included in the profit of another company. Nor was that excess profit required actually to have been taxed in another State. Accordingly, it must be held that the measures at issue were not conditional on there being a situation of actual or possible double taxation.”

Therefore, the General Court found no objective justification for the excess profit scheme.

Distortion of competition

Belgium contested the finding of the Commission that the excess profit scheme distorted competition. The Commission concluded that competition was distorted because the beneficiary MNCs were granted an advantage that was not available to their competitors.

The General Court noted that “(152) in principle, aid intended to release an undertaking from costs which it would normally have to bear in its day-to-day management or normal activities distorts the conditions of competition”.

“(153) In particular, […] any grant of aid to an undertaking pursuing its activities in the internal market is liable to cause distortion of competition and affect trade between Member States”.

With respect to the present case, the General Court noted more specifically in paragraph 154-156 that:

“First, […] the exemption of excess profits of companies benefiting from advance rulings, […], constituted an advantage which placed those companies in a more favourable economic position than they would have been in had an advance ruling not been issued.”

“Secondly, […], in so far as those measures derogated from the reference system, they represented an advantage available only to the beneficiaries of advance rulings and, therefore, were selective.”

“Thirdly, […] the excess profits exempted under the measures at issue came from Belgian entities that were part of multinational groups engaging in transactions with other group companies, established in other States. Consequently, in the present case, the aid in question necessarily resulted in a distortion of competition within the internal market. The excess profit exemption system was liable to alter the activities of those Belgian entities and of the

companies within the groups of undertakings concerned, in particular in terms of investments, location of business operations and creation of employment, as well as the flow of intra-group transactions.”

Conclusion

The General Court also rejected a number of arguments advanced by Belgium with respect to the recovery of the incompatible aid. Since the Court rejected all the pleas of Belgium, it dismissed its appeal in its entirety

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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