ECJ rules that Belgian participation exemption conflicts with E.U. Parent Subsidiary Directive!

With respect to dividends collected from a qualifying participation, the Belgian participation exemption applies the "exemption-method". The Belgian parent can apply a deduction for 95% of the received dividends ("dividend received deduction"). However, if a parent company incurs an operational loss (i.e. a loss from its operational activity) during the same financial year, the received dividends must first be offset with the operational loss. As a consequence, the Belgian participation exemption prevents carry forward losses being created up to the amount of the received dividends.

During the last few years, Belgian courts have ruled that this situation conflicts with the parent-subsidiary directive. The same issue was pending before the ECJ (case of Belgische Staat v. Cobelfret NV (C-138/07)). On February 12, 2009 the ECJ ruled as follows.

Decision of the ECJ of February 12, 2009

The ECJ ruled that article 4(1) of the Directive is unconditional and sufficiently precise to be capable of being relied on before the national courts (i.e. direct effect).

Further the ECJ ruled that the Belgian participation exemption conflicts with the Directive and states that article 4(1) of the Directive must be interpreted as precluding legislation of a Member State "which provides that dividends received by a parent company are to be included in its basis of assessment in order subsequently to be deducted from that basis in the amount of 95%, in so far as, for the tax period in question, the parent company has a positive profit balance after deduction of other exempted profits."

Finally the ECJ stated that it was not appropriate to limit the effects of its judgment in time, since Belgium was unable to demonstrate that there is a risk of serious economic repercussions.

Conclusion

Belgian resident companies that received qualifying dividends while suffering operational loss are recommended to recalculate their tax losses taking into account that the decision of the ECJ gives rise to the creation of carry forward losses to the extent that qualifying dividends can not be set off against the taxable base of the year. In this respect it is also recommended to verify whether it is necessary to file tax protests and/or start up court proceedings.