The Advocate General recommends that the exclusion of the net equity of Member state branches from the basis for the notional interest deduction in Belgium should be held to be incompatible with the EU freedom of establishment
On 19 September 2012, Advocate General Mengozzi delivered his opinion in the Argenta case (C-350/11). He advised the Court of Justice of the European Union (CJEU) to declare 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 (NID), to be incompatible with the EU freedom of establishment (article 43 EC-Treaty, now article 49 TFEU).
The NID is a deduction for corporate taxpayers based on their adjusted net equity. The NID provisions provide for some items that must be excluded from this basis, such as the net equity of branches and real estate located in countries with which Belgium has concluded a double tax treaty. Argenta Spaarbank NV is a Belgian company with a branch in the Netherlands. The company did not deduct the net equity of its Dutch branch from its NID basis in its tax return. The tax authorities refused to allow the NID on this foreign branch net equity.
The Advocate General’s opinion
The Court of First Instance of Antwerp requested a preliminary ruling from the CJEU, asking whether the obligation to deduct the net equity of branches in other Member States from the NID basis is compatible with the EU freedom of establishment. Advocate General Mengozzi has now issued his opinion on this matter.
Restriction of freedom of establishment
The Advocate General found that this obligation to deduct the net equity of branches in other Member States from the NID basis clearly constitutes a restriction of the freedom of establishment: a Belgian company with a foreign branch must deduct the net equity of the branch from the NID basis whereas this would not be the case for a Belgian company with a Belgian branch. In other words, Belgian companies are dissuaded from establishing branches outside Belgium.
The Belgian Government argued that the restriction is justified by two overriding reasons in the general interest, being the cohesion of the tax system and the balanced allocation of taxing power between Member States. The cohesion argument was based on the fact that although no NID is granted on the net equity of foreign branches, profits of such branches are not taxed in Belgium, in accordance with the applicable double tax treaty. The Advocate General found no sufficient direct link between those two tax concepts, as a company does not have to make a profit in Belgium in order to benefit from the NID on its equity. Moreover, the Advocate General was of the view that the concept of balanced allocation of taxing power does not justify an unequal treatment of Belgian companies with foreign branches, compared to Belgian companies with Belgian branches. As a result, the Advocate General concluded that there is no justification for the restriction of the freedom of establishment and advised the CJEU to find the deduction of branches located in other Member States from the NID basis incompatible with the freedom of establishment.
We now await the CJEU to deliver its judgment. On the basis that it may follow the opinion of the Advocate General, Belgian companies with branches in other EU Member States may wish to consider claiming NID on the net equity of these branches in their tax returns in the future and filing tax claims against past tax assessments insofar this is still possible. The scope of the freedom of establishment also extends to the Member States of the European Economic Area and as such the Advocate General’s opinion also relates to branches in Norway and Iceland. An exception must be made for branches located in Liechtenstein: Liechtenstein does not have a double tax treaty with Belgium so that the Liechtenstein branch net equity is not currently excluded from the NID basis. The European Commission has also undertaken action in this matter and sent a reasoned opinion to Belgium on the question at hand (press release IP/12/61 of 26 January 2012). In that reasoned opinion the European Commission also questioned the compatibility of the deduction of the net accounting value of foreign real estate from the NID basis with the principle of the free movement of capital. It might be expected that on this issue, the same conclusion would be drawn as for the deduction of foreign branch net equity but this was not part of the reference to the CJEU in this case.
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