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Wednesday, 26 October 2022

EU Court of Justice ruling on Belgian participation exemption regime in case of merger (DBI-aftrek/Régime RDT)

Matthias Vekeman

Matthias Vekeman

Senior Associate
Victor Rosias

Victor Rosias


On October 20, 2022, the European Court of Justice (ECJ) delivered a ruling on the compatibility with the Parent-Subsidiary Directive of certain aspects of the Belgian participation exemption regime (“dividend received deduction – DRD” or “DBI-aftrek”/régime RDT”). More precisely, the ECJ decided that Belgium is allowed, in the context of a merger, to proportionately limit the transfer of DRD- surpluses to the absorbing company, without violating the directive.

The questions in the underlying case related to the tax treatment of dividends received by a Belgian company. Pursuant to the EU Parent-Subsidiary Directive, Belgium must either refrain from taxing these dividends (with the possibility to tax 5% of the amount of the dividend representing non-deductible expenses) or include these dividends in the tax base and grant a credit for the corporate tax paid at the level of the subsidiary.  

Belgium uses the “exemption method”, but it (currently) does so in a peculiar manner: dividends are a priori not excluded from the company’s corporate income tax base, but an amount equal to 95% of the dividend can be deducted from its taxable income (100% for dividends received since 2018). In the original version of the Law, this led to a specific issue: if the total taxable income of the recipient company was not sufficient to allow deduction of the full amount, the surplus deduction could not be used. The inclusion of the dividend in the tax base therefore had the effect of reducing the tax losses of the company, resulting in an indirect taxation of the dividend in subsequent tax years (as tax losses could be carried forward indefinitely). The ECJ found this to be incompatible with the Parent-Subsidiary Directive in its Cobelfret- judgment of February 12, 2009. As a result, the Belgian system was amended by allowing “DRD- surpluses” to be carried forward to subsequent tax years. 

In the case at hand, a Belgian company had such carried forward “DRD- surpluses” from previous years when it was merged in tax neutrality into another Belgian company. This raised the question whether these surpluses could be transferred to the absorbing entity, and to what extent. The Belgian tax authorities took the position that the DRD- surpluses can be transferred, but only partially in function of the percentage of the net tax assets of the absorbed company in the total of the net tax assets of the absorbing company and the absorbed company. The tax authorities thus applied, by analogy, the Belgian rules applicable for the transfer of (carried forward) tax losses of an absorbed company to an absorbing company. The taxpayer disagreed with this position and requested the transfer of the full amount of DRD- surplus to the acquiring company, claiming that the dividends received in previous years would otherwise be (indirectly) subject to taxation. 

In its reasoning, the Court firstly notes that no provision of EU law provides for the possibility of unconditionally transferring surpluses constituting definitively taxed income from an absorbed company to an absorbing company. Secondly, the Court explicitly refers to the Brussels Securities- case of December 19, 2019, in which it argued that the Belgian deduction system should be compared with a system of immediate exclusion of the received dividends from the tax base in the year of receipt (Brussels Securities, C-389/18). In the hypothesis of a company with an insufficient amount of taxable income, an immediate exclusion of the dividend from the base would have resulted in the creation of tax losses instead of DRD- surpluses. The Court concludes that, by applying the rules applicable to the transfer of tax losses to DRD- surpluses, the position of the Belgian tax authorities therefore leads to the same outcome compared to an immediate exemption of the dividend (neutrality). Hence, no breach of the Parent-Subsidiary Directive was found.  

Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:  

Koen Morbée (International and EU corporate tax,; 

Ben Plessers (Transfer Pricing and Valuations,; 

Gert Vranckx (VAT, customs, excises and other indirect taxes,; 

Rik Smet (International and EU corporate tax,

In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.  

This newsflash is for information purposes only and cannot be relied upon as legal advice. 

Matthias Vekeman

Matthias Vekeman

Senior Associate
Victor Rosias

Victor Rosias

Tiberghien Brussels

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