Notional Interest Deduction: the Argenta Spaarbank case (C-350/11)
On 4 July 2013 the Court of Justice of the European Union (hereafter “CJEU”) declared the obligation under Belgian law to deduct the net equity of branches established in other Member States in calculating the basis for the notional interest deduction (hereafter “NID”), to be incompatible with the EU freedom of establishment (article 43 EC-Treaty, now article 49 TFEU).
Click here for the judgment
The notional interest deduction is a tax deduction for corporate taxpayers based on their adjusted net assets. From such adjusted net assets are excluded, the net assets used by a permanent establishments or invested in real estate located in countries with which Belgium has concluded an income tax treaty.
Argenta Spaarbank NV is a Belgian financial institution with a permanent establishment in the Netherlands. The company did not exclude the net assets of its Dutch branch from its NID basis in its Belgian corporate tax return. The Belgian tax authorities refused to grant the NID on the amount of net assets attributed to the foreign branch.
Litigation before the Court of First Instance of Antwerp ensued, resulting in a request for a preliminary ruling from the CJEU on the conformity of the Belgian NID regime with the EU freedom of establishment. More specifically, the request for preliminary ruling related to the obligation to exclude from the NID basis the net equity of permanent establishments located in other member states.
2. The opinion of the Advocate General and the verdict of the CJEU
According to Advocate General Mengozzi in his opinion of 19 September 2012, the exclusion from the NID base constitutes a restriction of the freedom of establishment as Belgian companies are dissuaded from establishing branches outside Belgium.
The Belgian government had objected that there was no reason to grant NID relief as the profits generated by assets attributed to a foreign permanent establishment are not taxable in Belgium, but subject to income tax in the contracting state where the permanent establishment is located (fiscal cohesion argument). This argument was rejected, however, by the Advocate General on the grounds that a company does not have to make a profit in Belgium in order to benefit from the NID on its Belgian net assest, as the NID can be carried forward for seven years and set off against future profits. Also from a technical standpoint, the Advocate General also pointed out that the necessary link between profits that are tax exempt in Belgium and the refusal of NID relief is not reflected in the way a permanent establishment is accounted for in the annual accounts and tax return of a Belgian company.
On 4 July 2013, the CJEU dismisses, in line with the opinion of the Advocate General, the justification grounds developed by the Belgian government. The Court found that there was no direct link between granting the advantage of the notional interest deduction for invested net assets and effectively submitting to tax the proceeds generated by such net assets. Even if a (second) branch of a Belgian company within Belgium is loss-making, the benefit of the NID is granted to the Belgian net assets applied by such Belgian branch and this NID can be used to offset the taxable profits generated by another Belgian branch of the same company. It is also important to the Court that a Belgian company with loss-making operations in Belgium, is granted an (excess) NID that can be carried forward for seven years. On both grounds, the Court concludes that the denial of NID is not justified to safeguard the coherence of the Belgian tax system because no direct link exists between net assets that generate taxable profits and the granting of the NID benefit.
3. Implications of the CJEU judgment
On the basis of the above judgment, Belgian companies with branches or real estate in other EU member states may claim a reimbursement of taxes paid unduly as a result of the NID exclusion for net assets attributed to foreign permanent establishment or foreign real estate, at least for the years up to 2012. The statute of limitation for reclaims of tax levies that infringe EU law, is generally 5 years, meaning that tax (assessment) years 2009 and following can still be disputed.
Since 2012, the system of the notional interest deduction has been revised and excess NID can no longer be carried forward. Consequently, one of the key arguments of the ECJ to find the NID regime contrary to EU law, no longer applies today. In order to comply w ith EU law requirements, it may suffice that Belgium revises the current NID system so that NID is formally granted to the net assets of foreign permanent establishments. Such an amendment would primarily result in a decreased exempt taxable base with no or only a limited amount of tax savings vis-à-vis the NID system currently in place. For that reason we believe that disputing the assessment for tax years 2012 and 2013 have a more limited chance of success or may result in a lower tax reimbursement when compared to accounting years 2011 and before when excess NID could still be carried forward.
For completeness’ sake, it should be noted that the scope of the freedom of establishment also extends to the member states of the European Economic Area. Therefore, the judgment also relates to branches located in Norway and Iceland. Since Liechtenstein doesn’t have a double tax treaty with Belgium, the net equity of Liechtenstein branches was not excluded from the NID basis in the first place.
4. How EY can help
We have a network of EU tax subject matter professionals in each member state and a vast experience in advising on a broad range of EU tax issues. Based on the above judgment we can assist you in claiming NID on the net equity of member state branches and filing tax claims for past tax assessments. For additional information with respect to this Alert contact your regular contact or alternatively one of the people mentioned under Contacts.