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Monday, 12 December 2016

Advocate General ECJ: Fairness Tax contrary to art. 4 Parent-Subsidiary Directive

In a case pending before the European Court of Justice, the Court has been asked to determine whether the Belgian “Fairness Tax” is compatible with the freedom of establishment and with the Directive 2011/96/EU (“the Parent-Subsidiary Directive”). In her opinion, published on November 17, 2016, Advocate General Kokott concluded that the Fairness Tax indeed (partially) violates EU- law.

The “Fairness Tax”: subject to criticism since its introduction

The Fairness Tax, a separate assessment of 5,15% introduced in July 2013, is levied in case a Belgian or foreign company (with permanent establishment in Belgium) distributes a dividend during a taxable period in which the company’s taxable profits are offset against notional interest deductions and/or carried forward tax losses. For a more technical explanation of the (complicated) computation of the tax, we refer to our previous International Newsletter

Since its introduction, the Fairness Tax has been subject to criticism. In January 2014, a Belgian corporate taxpayer filed an action before the Belgian Constitutional Court seeking the annulment of this tax. The Constitutional Court having doubts on the compatibility of the Fairness Tax with EU law referred three preliminary questions to the ECJ on January 28, 2015.

Opinion of the Advocate General Kokott

The Advocate General concludes that the Fairness Tax is not contrary to the freedom of establishment, but that it (partially) violates the Parent-Subsidiary Directive.

Belgium implemented this Directive by providing that 95% of the received dividends can be deducted from the taxable profit of the parent company, if certain conditions are satisfied (implementation of art. 4 (3) of the Parent-Subsidiary Directive). Hence, the taxable amount may not exceed 5% of the dividend received.

However, if a resident corporate taxpayer redistributes dividends (in a taxable period subsequent to the taxable period in which it received these dividends) the application of the Fairness Tax can lead to a higher tax burden than allowed under the Parent-Subsidiary Directive. This stems from the fact that the received dividends are (again) included in the tax base of the Fairness Tax upon redistribution. As expected, the Advocate General now confirms that this effect of the Fairness tax breaches the Parent- Subsidiary Directive.

The Constitutional Court also asked whether the Fairness Tax can be considered a prohibited withholding tax within the meaning of art. 5 of the Parent-Subsidiary Directive. The Advocate General is however of the opinion that the Fairness Tax cannot be considered a withholding tax, given that the tax is imposed on the distributing company and not on the recipient company. According to the Advocate General, the Fairness Tax is merely an “additional” taxation of the distributing company.

Finally, Advocate General Kokott also concludes that the Fairness Tax is not incompatible with the freedom of establishment. The Constitutional Court has doubts on this issue as the outcome of the Fairness Tax is different in case a foreign company invests in Belgium through a permanent establishment or through a subsidiary.  Indeed, a foreign company with a Belgian permanent establishment is subject to the tax when distributing a dividend (stemming from Belgian sourced profits), whereas a foreign company with a Belgian subsidiary will not be subject to the tax when that foreign company distributes a dividend. Moreover, a foreign company with a Belgian permanent establishment could be subject to the tax even though the Belgian profits are retained, whilst a Belgian subsidiary that entirely reserves its profits, is not subject to the tax. The question is however whether the different treatment of a foreign company operating in Belgium through a permanent establishment as compared to a foreign company holding a Belgian subsidiary, constitutes a restriction of the freedom of establishment. Advocate General concludes this is not the case as there is no separate obligation for the member states to structure tax legislation in a manner that is neutral as to the legal form.  Such a restriction requires instead adverse treatment of the cross-border situation compared with a comparable purely domestic one, which according to the Advocate General is not the case here.


Since the ECJ is not obliged to follow the opinion of the Advocate General, taxpayers will only get full clarity after the final decision of the ECJ (and of the Constitutional Court). If the ECJ would rule that the Fairness Tax is contrary to European Law, the Belgian tax administration will have to recognize that such ruling constitutes a new fact, allowing the taxpayer to file a request for ex officio-tax relief. Such tax relief applies for a period of five years as from the 1st of January of the year of the tax assessment.

Please contact your trusted adviser at Tiberghien in case you have any queries.
Koen Morbée – Partner (
Matthias Vekeman – Associate (

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