Since 2019 (assessment year 2020), Belgian taxpayers may benefit from a tax consolidation regime (called 'group contribution') under which taxable profits of one company can be absorbed by the current-year losses of another group company.
These consolidation rules however restrict consolidation for holding companies that receive dividends.
In our view, this exception is not compatible with the 2011 EU parent-subsidiary directive (PSD).
How does the Belgian tax consolidation regime work?
Under the new Belgian tax consolidation regime, the current-year losses of a Belgian company can be offset with the profits of another Belgian company belonging to the same group, subject to certain conditions (including a five-year direct 90 per cent shareholder relationship).
This is done via a so-called 'group contribution', which reduces the taxable profits of the profit-making company and increases the tax base of the loss-making company. The profit-making company must make a (tax-neutral) payment to the loss-making company equal to the tax saving.
Company A has current-year losses of €100 and company B has current-year profits of €250. If the conditions of the consolidation regime are fulfilled, the two companies can agree a group contribution of €100, which reduces company B’s tax base to €150 and is fully absorbed by company A’s current-year losses. Company B makes a compensation payment to A of €25 (100 x 25 per cent, the corporate income tax rate).
Only for current-year losses
The purpose of the consolidation regime is to offset current-year losses, not to allow taxpayers to monetise various other tax attributes such as carried-forward tax losses, innovation income deduction, notional interest deduction, etc. The consolidation rules therefore prohibit that such deductions are made from a group contribution.
In the above example, if company A also has €50 of carried-forward tax losses and receives a group contribution of €150 (instead of €100), the additional €50 will be fully taxable in the hands of company A. While the €150 is fully deductible from company B’s profits, company A will not be able to offset its carried-forward tax losses against the group contribution.
What is the issue for holding companies?
The problem is that the consolidation rules also prohibit the so-called dividends-received deduction (DRD) being deducted from the amount of the group contribution.
The DRD concerns the implementation in Belgium of the PSD, which, in summary, provides that EU member states should either:
- refrain from taxing dividends distributed by EU subsidiaries to EU parent companies (the 'exemption method'); or
- tax such dividends, but then allow the parent company to credit the corporate tax paid at subsidiary level (the 'credit method').
Belgium has opted for the exemption method, but in a peculiar way. Dividends received are part of the accounting result of the parent company and are, as such, included in the taxable result. As part of the technical calculation of the corporate income tax base, they can subsequently be deducted from the tax base. This deduction is the DRD.
The fact that the DRD cannot be deducted from the group contribution has a significant impact on holding companies.
Following on from the initial example above, if company A, in addition to an operating loss of €100, also receives a dividend of €80 from a subsidiary, its accounting result and initial taxable result will be a current-year loss of €20. The group contribution of €100 agreed with company B increases company A’s tax base to €80. However, the DRD of €80 cannot be deducted from the amount of the group contribution and so company A will be fully taxed on €80, ie the amount of the received dividend. (The non-deducted DRD of €80 can, however, be carried forward.)
The receipt of a dividend thus causes a holding company with operating losses to suffer higher taxes. Had it not received a dividend, it would be able to effectively compensate current-year losses with the group contribution and pay no or less tax, like company A in the first example above.
The fact that the holding company can deduct the DRD from profits in future years is of little avail, especially if the holding company’s operating loss position is recurrent; even if the holding company became profitable, it would only be able to deduct such DRD over time.
The issue arises irrespective of whether the dividend is distributed by the company that makes the group contribution (company B in the example) or another group company.
Why is this a violation of the PSD?
The PSD requires that the receipt of a dividend is tax-neutral.
The European Court of Justice (ECJ) has already clarified that the exemption method under the PSD must be a real exemption (judgment of 12 February 2009, Belgische Staat v Cobelfret NV (C‑138/07); order of 4 June 2009, Belgische Staat v KBC Bank NV (C-439/07) and Beleggen, Risicokapitaal, Beheer NV v Belgische Staat (C-499/07)).
There is no real exemption if dividends are first included in the tax base and then only deducted subject to certain conditions (such as, like in the legislation at hand in the Cobelfret case, the condition that the taxpayer has enough taxable profits to absorb the DRD in the year of the dividend).
The ECJ recently confirmed that, if the receipt of a dividend results in the forfeiture of another tax benefit, this results in an indirect taxation of the received dividend, which is incompatible with the PSD (judgment of 19 December 2019, Brussels Securities SA v État Belge (C-389/18)).
In its judgment, the ECJ found that the way in which Belgium implements the exemption method – ie first including dividends in the tax base, then providing for a deduction of such dividends – is not per se incompatible with the PSD, but the end result must be a real exemption: as the judgment states, a company cannot be 'taxed more heavily than would have been the case if it had not received dividends from its non-resident subsidiary or if, as the referring court states, the dividends had simply been excluded from the parent company’s tax base'.
The PSD thus prevents a company incurring higher taxation if it receives a dividend than if it does not.
Under the Belgian consolidation rules, a holding company that (disregarding the dividends received) incurs an operating loss and receives a group contribution will be taxed on this group contribution because of the receipt of the dividends. The dividends are thus not exempt as required by the PSD – they are indirectly taxed. In our view, this violates the directive.
Does this only apply to dividends received from EU subsidiaries?
The above clearly applies to dividends received from subsidiaries established in Belgium or other European Economic Area (EEA) state, provided that the DRD conditions are fulfilled (ie the holding, minimum-participation and subject-to-tax conditions).
For dividends received from non-EEA subsidiaries, the non-discrimination clause in applicable double tax treaties may in some cases be invoked to claim the same treatment.
The PSD – as interpreted by the ECJ – has direct effect. Belgian holding companies receiving dividends may thus challenge the prohibition to fully offset their operating loss with a group contribution. In our view, they have a good chance of success.
Holding companies are therefore advised to assess their tax position in light of this development and consider the strategic options to preserve their rights.
If you'd like to find out more about how the above might affect your Belgian group companies or how to respond, please contact Nikolaas.