European Court of Justice rules Belgium’s initial CFC regime is not in line with ATAD

On 26 February 2026, the European Court of Justice (“ECJ”) has rendered a judgment C-524/23 European Commission v Kingdom of Belgium. The Court ruled that Belgium failed to implement article 8 (7) related to the so called controlled foreign corporation (‘CFC’) rules of the Anti-Tax Avoidance Directive of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (‘ATAD’).
 

Belgian initial implementation of the CFC rules (until tax year 2023)

Following the OECD recommendations on BEPS, more specifically BEPS Action Point 3, the EU introduced CFC rules through the issuance of the ATAD. The CFC rules have the effect of adding the income of a low-taxed controlled subsidiary to the income of its parent company. Member States were free to determine the CFC inclusion amount based on Model A (Entity approach) or Model B (Transactional approach).

Initially, through the Corporate Tax Reform law of 25 December 2017 Belgium implemented Model B, where Belgian parent companies were taxed on undistributed profits from controlled low taxed foreign subsidiaries or foreign branches resulting from an artificial arrangement or a series of arrangements set up with the essential purpose to obtain a tax benefit. This approach required the significant people functions generating income for the CFC to be based in Belgium. Under this CFC regime effective as from tax year 2020 (for any financial year starting at the earliest on 1^st January 2019), no relief was granted in Belgium for tax paid abroad by the controlled foreign entity.

Later on, through the law of 22 December 2023 Belgium changed its CFC rules and transitioned to Model A (Entity Approach), effective as from tax year 2024 (for financial years ending on or after December 31, 2023).

The European Commission brought an action before the European Court of Justice on the basis that Belgium with its initial implementation of the CFC rules through the law of 25 December 2017 had failed to implement article 8 (7) ATAD, since Belgium did not allow a deduction of the tax paid by the CFC from the Belgian tax liability (as it should have done).
 

Opinion of the Advocate General Kokott

• In her opinion of 22 May 2025, Advocate General J. Kokott concurred with the position of Belgium. In the Advocate General’s view, the controlled foreign corporation rules are to be considered a specific case of application of the general anti abuse rule (Article 6 ATAD). Accordingly, when applying the CFC rules non-genuine arrangements should be taxed in the state of residence of the controlling company without providing for a deduction of foreign taxes. In other words, the Member State may treat that income as if it had been obtained only in the controlling taxpayer’s state of residence from the outset.
  
  
• In addition, Advocate General Kokott argued that ATAD solely aims to protect the domestic corporate tax base and this objective can be achieved to a greater extent if no relief for CFC taxes is being provided. According to the Advocate General the risk of having to defend oneself against additional taxation by the state of residence of the controlled foreign company acts as a deterrent to transferring income abroad and thereby additionally protects the domestic corporate tax base. Contrary to the Commission’s argument, in the AG’s viewpoint, simultaneously avoiding the creation of other obstacles to the market, such as double taxation, cannot be regarded as an independent objective of the EU directive.
   

Decision of the ECJ

Opposite to the Advocate General’s Opinion, the ECJ upheld the infringement action of the European Commission and ruled that Belgium failed to transpose article 8 (7) ATAD. According to the ECJ, Member States are required to implement article 8 (7) ATAD regardless of which CFC inclusion option a Member State applies. The CFC rules (as ‘lex specialis’) target specific situations and should be applied in full, over and above the general anti-abuse rule of the ATAD, which may come into play only if no specific anti-abuse provisions were introduced. Thereby the ECJ refuses to follow the teleological interpretation of the concerned provision of the ATAD proposed by the AG.

The ECJ also held that ATAD has a double objective and aims to combat tax avoidance in line with the OECD recommendations on BEPS while preserving the functioning of the internal market. Through the introduction of the CFC rules, and in light of the EU principle of proportionality, the EU strikes a balance to combat tax avoidance without creating new obstacles to the internal market such as double taxation. This aligns with the Court’s viewpoint on domestic tax avoidance measures as legitimate limitations to the EU fundamental freedoms to the extent these limitations do not go beyond what is necessary to attain their objective (as ruled in previous case law, with reference made to Cadbury Schweppes). From an economic viewpoint, an MNE’s total income tax liability resulting from the application of the CFC rules should not exceed the MNE’s income tax liability that would be due in the absence of such non-genuine arrangement. Moreover, refusing the deduction of foreign income tax eventually would result in a discrimination of MNE’s in a similar position, depending on whether or not article 8 (7) ATAD has been implemented in the respective jurisdiction.

The ECJ closes by stating that, in view of a correct implementation of the CFC rules of the ATAD under Model B, the taxpayer should be refused the tax benefit it intended to obtain through the use of non-genuine arrangements, but in that case the additional amount of taxes should be limited to that amount which allows to compensate the tax levied on the income in the CFC jurisdiction.
 

Consequences and possible actions

1. Initial CFC rules (Model B) as applicable in Belgium until tax year 2023

As said, Belgium initially made the choice to include non-distributed profits of a foreign company arising from non-genuine arrangements in the Belgian taxpayer’s tax base (Model B), but no specific provision was included by the legislator to allow a deduction for foreign tax paid by the CFC. These CFC rules were applicable as from tax year 2020 (for any financial year starting at the earliest on 1^st January 2019) until and including tax year 2023 (financial years ending on or after 31 December 2022). As a result, the direct consequences of this judgment for Belgium may still have effect for the tax periods during which these CFC rules were applicable.

Belgian companies should assess their past tax positions, to understand how this ECJ decision may affect their tax liabilities and potential refunds. More specifically these companies should review whether they were taxed on CFC income under the former Model B regime for the relevant tax years without claiming a relief for the foreign taxes paid by the CFC. Where no credit was granted for foreign taxes, Belgian taxpayers may consider filing an objection or an ex officio relief request based on the ECJ judgment.

An ex officio relief request can be filed in accordance with art. 376, § 1 of the Belgian Income Tax Code (BITC) within a period of 5 years starting from January 1 of the year in which the tax is established. Such an ex-officio relief request can be filed on the grounds of the existence of a new fact.

New documents or facts within the meaning of said tax provision, are those that are of such nature that they constitute proof of an over taxation that could not be provided earlier and that the taxpayer was unable to provide before the expiration of the period for an objection.

Prejudicial judgments of the Constitutional Court constitute a new fact within the meaning of Article 376, §1 BITC. Consequently, it can also be sustained that a judgment of the European Court of Justice - which has a similar binding character - should be treated in the same way, and also constitute a new fact within the meaning of Article 376, §1 BITC.
 

2. Amended CFC rules (Model A) applicable as from tax year 2024

In the meantime, Belgium adopted new CFC rules and switched from Model B to Model A of the ATAD. The new CFC rules apply as of tax year 2024 (financial years ending on or after December 31, 2023) and include a non-refundable foreign tax credit for foreign income taxes paid by the CFC. In the preparatory works related to the new CFC rules, the Minister of Finance clarified that the introduction of such tax credit is aimed at addressing the formal notice and infringement procedure initiated by the European Commission.

The application of the CFC rules is complex and increasingly subject to scrutiny by the Tax Authorities during (income) tax audits. Companies should proactively review their foreign direct participations and foreign branches in light of the CFC rules to determine and support their tax filing position. For a detailed overview of the new of CFC rules, we refer to our previous tax alert.

In case of any further questions with regard to the new CFC rules or in case you would like to discuss your tax position in light of a possible ex officio claim, please do not hesitate to reach out to your trusted EY person of contact.