CJEU (ECJ) reaches decision in SIAT case

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Ruling in relation to deductibility of amounts paid to non-residents

The Court of Justice of the European Union (CJEU) has ruled in the SIAT case that the Belgian tax regime relating to the deductibility of fees paid to certain non-residents is incompatible with the EU freedom to provide services

On 5 July 2012, the CJEU issued a decision (C-318/10) in the SIAT case and found that the Belgian income tax rules regarding the deductibility of commissions paid to certain non-residents is not compatible with the EU freedom to provide services (old Article 49 of the EC Treaty).

Facts

Article 54 of the Belgian Income Tax Code imposes strict conditions over the deductibility of commissions, fees  and certain other payments (such as interest payments and royalties) to foreign beneficiaries who are either not subject to income tax, or are subject to a tax regime on that income that is ‘far more beneficial’ than in Belgium.

Such expenses are not deductible unless the taxpayer can show that the payment:

  1. relates to a genuine transaction, and
  2. is not excessive.

However, for purely domestic payments no such proof is required, even if the beneficiary of the payment is not subject to income tax or qualifies for a far more beneficial regime than normal.

Belgian law does not define clearly when a tax regime is ‘far more beneficial’ than the Belgian tax regime, but instead leaves this to the tax authorities (or the courts) to decide on a case-by-case basis.

In the case at hand, a Belgian company paid commission to a Luxembourg 1929 holding company.  The Belgian tax authorities denied a tax deduction for this commission on the basis that the Luxembourg holding company was subject to a special tax regime that is not similar to Belgian corporate income tax.

During the litigation that followed, the Belgian Supreme Court sent a request for a preliminary ruling to the CJEU to determine whether these deductibility requirements are compatible with the EU freedom to provide services.

CJEU decision

The CJEU considered whether a restriction of the free movement of services had occurred and, if so, whether this restriction was justified by an overriding reason relating to the public interest.

Restriction

The CJEU concluded that a restriction of the free movement of services had occurred because:

  • Belgium imposes stricter deductibility conditions for payments to a non-resident than for entirely domestic payments, and
  • The lack of clarity over the definition of a ‘far more beneficial’ tax regime discouraged Belgian taxpayers from dealing with non-resident service providers.

Justification

Even if a restriction of the freedom to provide services has occurred, it may be justified if there is an overriding reason why this restriction is in the public interest, so long as it pursues a legitimate objective and is not disproportionate in relation to what is necessary to reach that objective.

In the SIAT case, the CJEU ruled that the Belgian provision pursued legitimate objectives, being:

  • The prevention of tax evasion and tax avoidance through taxpayers claiming tax relief for payments made for services that have not been rendered,
  • The fact that the provision did not result in an automatic denial of tax relief but simply required the taxpayer to prove that the underlying transaction was genuine, and the amount of the payment was not excessive, before tax relief would be available, and
  • The balanced allocation of power to tax between EU Member States.

However, the CJEU considered the provision was disproportionate because:

  • It required the Belgian taxpayer to prove that the underlying transaction was genuine and the payment was not excessive, but there was no burden on the tax authorities to provide proof of any tax evasion or tax avoidance, and
  • The scope of the provision was not sufficiently precise as there was no clear definition as to when a tax regime would be considered ‘far more beneficial’ than the Belgian tax regime.

As a result, the CJEU ruled that the Belgian provision was not compatible with the EU free movement of services.

Conclusion

The CJEU decision has confirmed that the Belgian tax authorities are not justified in challenging the deductibility of certain payments to non-residents without some evidence that they believe tax avoidance or tax evasion has occurred.

Taxpayers may therefore consider opposing the application of this anti-avoidance provision when no such proof has been provided by the tax authorities.

It should be borne in mind, though, that this decision is limited to payments to residents within the European Union and the European Economic Area. Payments outside these areas are still capable of being challenged by the Belgian tax authorities without the need to provide proof that tax avoidance or evasion has occurred.

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