Belgian tax authorities release circular letter regarding notional interest deduction on foreign permanent establishments for preceding assessment years
On 16 May 2014, the Belgian tax authorities issued a circular letter on the application of the notional interest deduction (NID) on foreign permanent establishments following the decision of the Court of Justice of the European Union (CJEU) in the Argenta case.
Please click for the full text of the circular letter:
The NID is a tax deduction for corporate taxpayers based on their adjusted net equity. Typical adjustments were, among others, the net assets used by a foreign permanent establishment (PE) and the net assets invested in real estate, located in countries with which Belgium has concluded a double tax treaty (DTT).
According to the Argenta Spaarbank case decision n°350/11 of 4 July 2013 of the Court of Justice of the European Union (CJEU) (click here) , the exclusion from the NID base of the net assets of the PE located in another member state of the European Union constituted a restriction of the freedom of establishment as Belgian companies were dissuaded from establishing branches in other member states.
Recently, the Belgian legislator also acted to align the rules relating to the notional interest deduction (NID) with the above mentioned judgment of the CJEU (click here).
In a very concise circular letter, the Belgian tax authorities provide some information on the approach that will be taken when affected taxpayers claim NID based on this judgment for periods prior to tax year 2014.
The circular letter lists some possible scenarios:
- A company can file a tax claim within the normal period of 6 months as from the third working day after the date on which the tax assessment was sent;
- For tax assessments older than six months, a company can submit a request for an ‘ex officio’ tax relief. The statute of limitation for these type of reclaims is five years, meaning that if the request is introduced before year-end 2014, assessment years 2010 and following can still be disputed.
The circular letter further acknowledges that the scope of the judgment extends to permanent establishments located in the Member States of the European Economic Area with which Belgium has concluded a tax treaty.
According to the Belgian tax authorities, the calculation of the NID on these permanent establishments must be performed in accordance with the method put forward in the recent NID legislative reform, meaning that the NID to be deducted in Belgium is to be reduced with the NID portion relating to the net assets attributed to the permanent establishment, but that such reduction of the NID should not be higher than the positive result derived from these (foreign) assets. In other words, only to the extent that the NID portion related to these foreign (EEA) assets exceeds the result derived from them, the company effectively benefits from the NID on foreign (EEA) assets for the excess amount in Belgium.
This circular letter attempts to remedy the historical restriction on the right of establishment, as it has been established by the CJEU in the Argenta case, by transposing the current NID calculation method to situations prior to the introduction of the revised NID regime in assessment year 2014. However, the current legislative context of the NID regime is materially different from the backdrop in the Argenta case. More in particular, the possibility to carry-forward excess NID was the main reason for the CJEU not to accept the justification grounds submitted by the Belgian government and this possibility has persisted up to assessment year 2012 (included). It is questionable whether, for assessment years prior to 2013, the new calculation method proposed by the circular letter is sufficient to remedy the EU law infringement that existed under the historical NID context.
Finally, the circular letter leaves the question unanswered to which extent the above mentioned principles would also apply to cases involving foreign real estate which is not part of a foreign permanent establishment. These cases have specifically been dealt with in the recent legislative NID reform for situations going forward. For the past, however, the CJEU did not explicitly address them although the outcome should be similar. The Belgian tax authorities apparently chose not to react in advance by spontaneously including them in the circular letter.
The circular letter provides little guidance, besides confirming that affected taxpayers can take action based on the decision of the CJEU to claim NID that was unduly refused. Taxpayers in such a situation should take appropriate action as soon as possible considering the statute of limitations in Belgium.
It is noteworthy that the Belgian tax authorities impose the same calculation method as in the current NID legislation which applies as from tax year 2014. As a result, the circular letter allows companies to effectively benefit from the NID on their permanent establishment in the EEA only if this deduction is larger than the profits of the permanent establishment. It is to be noted, however, that the proposed NID calculation method does not significantly alter the legislative background to the Argenta case and that it is likely that even under the proposed calculation method an infringement of EU law is still imminent for situations prior to assessment year 2013.
Finally, the circular letter leaves the question unanswered to which extent these guidelines would also apply to cases involving foreign real estate which is not part of a foreign permanent establishment.
Do not hesitate to get in touch with the contact persons listed here or with your regular contact at EY Tax Consultants for assistance if you wish more information on this alert.