Fairness Tax (FaTa)
Conformity with other sources of law
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Since the introduction of the FaTa, numerous concerns were raised regarding the legality of the new tax. We have identified some of them:
- Small Medium sized Enterprises (SME’s) are excluded from the FaTa (see article 219ter §7 ITC92). Article 15 of the Belgian Company Code defines the meaning of a SME. The Belgian Council of State, who was requested to advise on the legality of the draft bill heavily criticized the exclusion of SME’s from the scope of the FaTa (see nr.53-2891/009, p.7). Beneficial taxation regimes for SME’s can be acceptable when a tax would specifically and negatively impact SME’s and jeopardize e.g. their continuity. The FaTa only targets / hits companies who have sufficient profits and not companies in difficulties. Therefore, the FaTa could give rise to an unfair differentiation of two equal categories of taxpayers, thus infringing the principles of equality and non-discrimination cf. article 10 and 11 of the Belgian Constitution.
- The FaTa is only applicable upon the distribution of dividends. Article 5 of the European Parent-Subsidiary Directive explicitly prohibits the levy of a withholding tax on the distribution of dividends. To the extent the FaTa would qualify as a (hidden) withholding tax, the tax would be incompatible with EU-law.
During the debate in Parliament on the FaTa the Secretary of Finance referred to the decision of the European Court of Justice (‘ECJ’) in the case of ‘Burda’ (C-284/06). In this case the ECJ ruled that a similar tax did not constitute a hidden withholding tax, since the tax was levied on the company distributing the dividend and not on the shareholder. It thus qualified as a corporation tax and not a withholding tax.
On the other hand, the ECJ ruled in another case that – although the tax was levied on the company distributing the dividend – all the conditions of a withholding tax were met. Crucial to the ECJ was the consideration that “the taxation relates to income which is taxed only in the event of a distribution of dividends and up to the limit of the dividends paid.” The court did not consider the tax as a corporation tax because “the distribution of profits cannot be offset by the subsidiary using negative income from previous tax years, contrary to the fiscal principle enabling losses to be carried forward which is nevertheless laid down in Greek law.”
The facts of the Athinaiki Zithopiia-case (C-294/99) are very close to the FaTa. The Secretary of Finance announced that the FaTa would be notified to the European Commission for approval. Even if the European Commission would approve the FaTa, we expect taxpayers to collectively reject the legality of the FaTa, because itinfringes EU-law.. The last word in this matter will be left to the ECJ. The highest European Court will probably be addressed by means of a preliminary referral by a Belgian court.
- The non-linear character of the FaTa could have disproportional effects inspecific occasions (see schedules 2bis & 2ter). Computations show that a difference of 1 euro in the taxable result after the first computation could give rise to ‘a all or nothing’- effect. One could make an argument that such effect is arbitrary and therefore not reasonable in view of the principles of equality and non-discrimination cf. article 10 and 11 of the Belgian Constitution.
- The way in which the Fairness Tax has been made applicable to Belgian PE’s of foreign companies raises a number of practical difficulties and legal questions.
Firstly, in order to determine the equivalent amount of ‘dividends distributed’ for a Belgian PE, the FaTa requires that the ‘Belgian accounting income’ of the PE is compared to that of the foreign company. Applying Belgian GAAP to the worldwide activities of non-resident companies, possibly including PE’s in other countries, contradicts with various legal sources, such as the principle of sovereignty, double tax treaties and EC-law.
Secondly, in the current definition of ‘distributed dividends’ of a Belgian PE, the FaTa Tax does not take into account that a foreign entity may also have loss-making PE’s in other countries, and therefore does not indicate how such losses should be dealt with for the purpose of the calculation of the Fairness Tax.
Thirdly, the Fairness Tax can apply to a Belgian PE even though it has not actually transferred its earnings outside of Belgium Even if the earnings of a Belgian PE are reinvested in Belgian operations as retained earnings, a dividend distribution by the non-resident company will trigger a Fairness Tax liability in Belgium, regardless of the source of the distributed profits. Again, compatibility with the EU freedoms and the double tax treaties is at stake.
Finally, the legislator merely introduced the FaTa for Belgian PE’s to be consistent from an EU-law point of view, but never thought about the practical implications of the law. This totally impracticable part of the FaTa raises serious questions on the legality in view of the principles of equality and non-discrimination cf. article 10 and11 of the Constitution.
- Taxed reserves that have been accumulated in FY2013 or before, i.e. grandfathered reserves, are in principle excluded from the FaTa calculation when they are distributed. However, earnings that are retained as of FY 2014 and that are distributed as a dividend in subsequent financial years (FY2015 onwards), will no longer be grandfathered and will be included in the ‘untaxed’ part of the distributed profits.
There is no reasonable explanation of this ipso facto double taxation and it appears arbitrary. There are numerous reasons why a company would decide not to distribute dividends in a given year and postpone the distribution in another year. Delaying a dividend distribution is actually in line with the stated purpose of the FaTa, i.e. stimulating Belgian companies to invest their earnings in their own activities. It is then difficult to understand why such a desirable course of action results in an overall higher tax burden when compared to (immediately) distributing earnings in the same year that they have been earned. One could question the compatibility with the principles of equality and non-discrimination cf. Articles 10 and 11 of the Belgian Constitution.
How to safeguard your rights?
- PENDING ANNULMENT PROCEDURE
Every corporate taxpayer that potentially could be subject to the FaTa had a legal ‘interest’ to introduce a claim to nullify the law that introduced the FaTa based on the ground that the law infringes the Belgian Constitution, in this case the principles of equality and non-discrimination within a period of 6 months as from the publication of the law (i.e. until 1 February 2014).
One taxpayer introduced such a claim against this measure before the Constitutional Court. This procedure is currently still pending.
- PROACTIVE APPROACH IN FILING TAX RETURN
Corporate taxpayers can opt to take the position in their corporate income tax return that the FaTa is illegal and that - consequently - the FaTa is not due. Most likely, the tax authorities will challenge this position upon a tax audit. This will give rise to an additional tax assessment. The corporate taxpayer can then file an administrative appeal cf. article 366 ITC92.
Such appeal should be filed within 6 months after the third day upon the receipt of the tax bill (‘avertissement extrait de role’ / ‘aanslagbiljet’). The petition should be properly motivated and include the arguments on which the claim is based.
- ACTION AFTER RECEIPT OF TAX ASSESSMENT
After having properly reported the FaTa in the income tax return and after the receipt of the tax assessment (i.e. tax bill), the corporate taxpayer can file an administrative appeal cf. article 366 ITC92 against his own tax return claiming that he made a legal error since the FaTa itself is illegal.
Such appeal should be filed within 6 months as from the third working day following the date on which the tax assessment (‘avertissement extrait de role’ / ‘aanslagbiljet’) was sent. The petition should be properly motivated and include the arguments on which the claim is based.
- SIT & WAIT and HOPE FOR THE BEST
If the Constitutional Court or the European Court of Justice would come to the conclusion that the FaTa is void, corporate taxpayers could potentially file a claim for an ex officio relief cf. article 376 ITC92. The judgment is considered as a ‘new fact’ giving rise for an opportunity to get the paid FaTa refunded.
This option is not recommended. In similar cases the Belgian State requested to limit the effects of such judgment to those who actively litigated against the tax and to exclude those corporate taxpayers who filed for a refund after the tax was declared void (e.g. Cobelfret-case – C-138/07).