The Belgian newspaper L’Echo has reported that a Belgian subsidiary of a US MNE (Johnson Controls) has been caught in the tax net. I had the pleasure of sharing some thoughts on this case with Philippe Galloy.
The amounts claimed by the tax authorities were significant. The Belgian tax authorities denied, amongst other things, the Belgian participation exemption regime -the so-called Dividend Received Deduction / “DRD”- (€249,566,745 in tax year 2015 and €89,520,210 in tax year 2016) on dividend distributions made by a UK company to the Belgian company.
The Belgian tax authorities also challenged the arm’s length nature of the interest rate applied to a €800 million loan granted by a Luxembourg finance company to the Belgian company.
1. EU principle of prohibition of abuse
▪️ The Court ruled that the DRD regime should be denied on the basis of the EU principle of prohibition of abuse (abuse of the Parent-Subsidiary Directive, “PSD”).
▪️ The Court considered that the whole structure was not set up for genuine business purposes, but for the main purpose of obtaining a tax advantage (DRD regime) contrary to the purpose of the PSD => “artificial structure” (“kunstmatige constructie”) the overal objective of which was to upstream profits without triggering any taxes.
🔦 note : the profits of the UK subsidiaries were not subject to corporate tax in the UK thanks to group relief provisions. See also my previous post for more details [1].
☀️ The Court confirmed that the EU principle of prohibition of abuse may be applied “retroactively”, thereby referring to the Supreme Court decision of 30 November 2023 (see also [2]).
2. Transfer pricing
◾ The tax authorities argued that the interest rate applied (7.22%) was excessive and that the market rate should have been 4.88%.
▪️ The Belgian company was however able to produce a TP report prepared by Professors Shapiro and Sarin, supporting the interest rate applied.
▪️ Not satisfied with the conclusions of this report, the tax authorities asked the company to carry out a second TP study (conclusion => market rate = fork between 6.95% and 7.65%, based on the modified CUP method).
▪️ The tax authorities had challenged the conclusions of this second TP report (the modified CUP method was not appropriate; the Belgian company was a “core subsidiary”, and not merely a “strategically important subsidiary”,…).
▪️ The Court largely endorsed the conclusions of the second TP report and ruled that an interest rate of 6,93% was acceptable.
❓ Why 6,93% (and not, e.g., 6,95%) ? The Court refused to take into consideration the subordinated character of the loan (>< 2nd TP report), on the ground that it was “not motivated at all”.
Denis-Emmanuel Philippe
