Global Tax Alert | 28 May 2014

Belgian Tax authority issues circular letter regarding notional interest deduction on foreign permanent establishments for preceding assessment years

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On 16 May 2014, the Belgian Tax Authority issued a circular letter regarding 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.

Background

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 (treaty).

According to the Argenta Spaarbank case decision nr350/11 of 4 July 2013 of the CJEU,1 the exclusion from the NID base of the net assets of a PE located in another member state of the European Union constituted a restriction of the freedom of establishment as Belgian companies are dissuaded from establishing branches in other member states.

Recently, the Belgian legislature also acted to align the rules relating to the NID with the above mentioned judgment of the CJEU.2 Going forward, equity allocated to foreign branches and foreign real estate does qualify for the NID. However, in such case, this portion of the NID has to be imputed first on the foreign source income. Only excess NID relating to branches and real estate located in the European Economic Area can be effectively used against Belgian taxable income.

Circular letter

In a very concise circular letter, the Belgian Tax Authority provides some information on the approach that will be taken when affected taxpayers claim NID for periods prior to tax year 2014 based on this judgment.

The circular letter lists some possible scenarios:

  • A company can file a tax claim within the normal period of six 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 ”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 PEs located in the Member States of the European Economic Area with which Belgium has concluded a tax treaty.

According to the Belgian Tax Authority, the calculation of the NID on these PEs 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 by the NID portion relating to the net assets attributed to the PE, 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. Moreover, the possibility to carry-forward excess NID was the main reason for the CJEU not accepting the position submitted by the Belgian Government and this possibility has persisted up to and including assessment year 2012. It appears questionable, for assessment years prior to 2013, whether 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 as to the extent the above mentioned principles would also apply to cases involving foreign real estate which is not part of a foreign PE. 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 Authority apparently chose not to react in advance by spontaneously including them in the circular letter.

Implications

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 cases should take appropriate action as soon as possible considering the statute of limitations in Belgium.

It is noteworthy that the Belgian Tax Authority imposes the same calculation method as 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 PE in the EEA only if this deduction is larger than the profits of the PE. 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 as to the extent these guidelines would also apply to cases involving foreign real estate which is not part of a foreign PE.

Endnotes

1. See EY Global Tax Alert, EU Court holds Belgian notional interest deduction incompatible with EU freedom of establishment, dated 8 July 2013.

2. See EY Global Tax Alert, Belgium enacts new tax laws, dated 8 January 2014.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Consultants SCCRL/BCVBA, Brussels
  • Herwig Joosten
    +32 2 774 9349
    herwig.joosten@be.ey.com
  • Werner Huygen
    +32 2 774 9404
    werner.huygen@be.ey.com
  • Steven Claes
    +32 2 774 9420
    steven.claes@be.ey.com
  • Peter Moreau
    +32 2 774 9187
    peter.moreau@be.ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Global Tax Desk Network – New York
  • Bart Desmet
    +1 212 773 3068
    bart.desmet@ey.com
  • Bart Baeteman
    +1 212 773 4488
    bart.baeteman@ey.com

EYG no. CM4442