TAX SAVINGS THROUGH BELGIAN “EXCESS PROFIT” RULINGS CONSIDERED TO BE ILLEGAL STATE AID AND SHOULD BE RECOVERED
13 January 2016
In the framework of the OECD and G20 Base Erosion and Profit Shifting (BEPS) project to counter harmful tax practices, the European Commission has been investigating the Member States’ tax ruling practices since 2013.
Illegal State Aid
In February 2015, the Commission started an investigation of the Belgian excess profit rulings and more particularly their conformity with EU state aid regulations. Upon this notice the Belgian authorities promptly stopped granting excess profit rulings.
In its press release earlier this week (January 11th, 2016), the Commission announced its conclusion that the tax savings realised under excess profit rulings have to be considered as illegal state aid and hence should be recovered by the Belgian authorities. The official decision is not yet published but will be made available after confidentiality issues have been resolved.
In the past, Belgium allowed multinational companies under certain conditions to deduct excess profit from the actual recorded accounting profit. The excess profit is the profit which the Belgian company would not be able to realise on a standalone basis but merely realises due to being part of a multinational group and as such benefits from certain intangibles such as synergies, economies of scale, client and supplier network, markets access, etc.
The Commission concludes that the tax advantages realized through excess profit rulings qualify as unlawful state aid because these rulings:
- deviate from normal corporate tax rules in a selective manner; only multinationals could benefit;
- are not in line with the arm’s length principle; the excess profit is deducted unilaterally from the tax base of a single company whereas it should in principle be shared between group companies on an economic valid basis.
Belgian State is deemed to recover tax benefits granted
Following this decision, the Belgian authorities have to identify the beneficiaries of these rulings and recover the amount of taxes (estimated by the Belgian government at 700 million EUR). The Belgian Minister of Finance Johan Van Overtveldt already announced that the consequences of recovering the 700 million EUR would be difficult for the affected companies and is considering deliberation with the Commission and possibly even an appeal like the Netherlands and Luxembourg in related cases.
The Belgian state and beneficiaries can appeal against this decision before the EU general court within two months and subsequently before the European Court of Justice. Such appeal does not suspend the aforementioned recovery obligation of the Belgian State.