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Constitutional Court rules on Belgian foreign tax credit in case of insufficient taxable basis

On 29 January 2014, the Belgian Constitutional Court ruled on the constitutionality of the Belgian foreign tax credit system for interest received by a company with an insufficient taxable basis. It found that the obligation for such companies to add the amount of the foreign tax credit to the corporate tax base is unconstitutional, insofar such credit cannot be effectively imputed.  

 

Please click for the full text of the judgment:

Belgian foreign tax credit

Companies receiving foreign-source interest income are entitled to a foreign tax credit in Belgium that is fully creditable vis-à-vis the corporate tax due. When calculating the corporate income tax liability, the foreign tax credit is added to the corporate tax base as a disallowed item (gross-up). The corresponding increase in the tax base negatively impacts loss-making companies or companies with a tax base that is lower than the foreign tax credit. According to the Belgian tax authorities’ interpretation of the law, the amount of the foreign tax credit should offset tax losses and/or other deductions carried-forward, even while the excess foreign tax credit cannot be refunded or carried forward.

Request for a preliminary ruling

Based on the applicable tax treaty, a Belgian company with current-year losses was entitled to a tax credit for the Australian withholding tax on Australian-sourced interest, in accordance with the relevant Belgian domestic law provisions and rate (with a minimum of 10%).

The Belgian company added the amount of the tax credit to the disallowed items as required by law, but claimed the carry-forward of the unused credit. The Court of First Instance of Antwerp decided to refer the case to the Belgian Constitutional Court for a preliminary ruling, requesting whether the treatment of profitable companies and loss-making companies, respectively, is compatible with the constitutional principle of non-discrimination as follows:

  • The fact that companies with a sufficient tax base can effectively impute the foreign tax credit, whereas loss-making companies cannot carry forward the credit, nor get a refund for the excess part;
  • The fact that both profitable companies (that can effectively impute the tax credit on their profits) and loss-making companies must gross-up their taxable bases.

Decision of the Constitutional Court

According to the Constitutional Court, the impossibility to get a refund for or a carry-forward of the excess foreign tax credit, does not constitute an infringement of the non-discrimination principle as such principle does not impose a general prohibition of double taxation. Based on the annuality principle and the fact that it is part of the discretionary power of the legislator to decide for which deductions an exception to this principle is made, the possibility of carry-forwards or refunds for certain other deductions is irrelevant.

The Constitutional Court does find a violation of the non-discrimination principle, however, insofar as the foreign tax credit cannot effectively be imputed while it still has to be added to the taxable bas in its entirety. On the other hand, there is no problem when only the part of the foreign tax credit that can effectively be imputed by the taxpayer must be added to the taxable basis.

Conclusion

Based on this judgment, companies that grossed-up their taxable basis in the past with an amount of foreign tax credit that is higher than the amount that was effectively imputed, can take action to review their tax position within the applicable statute of limitations. It is irrelevant whether the foreign source income is interest or royalties.

For tax assessments older than 6 months, the judgment of the Constitutional Court opens the possibility to submit a request for ex officio tax relief regarding the 5 preceding assessment years. In other words, if such a request for ex officio tax relief is introduced before year-end 2014, the judgment can be invoked to correct assessment years 2010 (FY 2009 if the accounts follow the calendar-year) and following.

For cases in which no tax assessments have been issued since the initial occurrence of excess foreign tax credits, impacted taxpayers may correct the amount of their losses or other deductions in accordance with this judgment in their next tax return.

Please feel free to get in touch with our tax professionals listed here or with your regular contact at EY Tax Consultants for further assistance in this matter.