18 February 2016

The Belgian government announces its intention to challenge European Commission sweetheart tax ruling

On 11 February 2016, the Belgian government announced its intention to challenge an order from the European Commission (Commission) that €835 million in tax breaks given to 35 multinational companies should be recovered. This follows a recent announcement from the Netherlands, Luxembourg and the financial arm of Fiat Chrysler Automobiles of their intention to challenge the Commission's October 2015 decision that the incorrect application of transfer pricing methodology constituted illegal state aid.

Under the Belgian excess profits tax scheme, which was implemented in 2005, certain multinational companies were able to transfer earnings between subsidiaries and claim tax relief where it could be shown that the transfer of these “excess profits” resulted from intragroup synergies or economies of scale. It was claimed that this avoided double taxation, but the Commission investigation has found that the arrangement derogated from normal practices under Belgian company tax law and "the arm's length principle", whereby transactions between subsidiaries are meant to be based on prices an unrelated company would pay for tax purposes. Indeed, the tax base of the 35 multinationals subject to the order was reduced by between 50% and 90%.

The Belgian finance minister has now instructed lawyers to file an appeal at the European General Court, but the basis of the appeal is yet to be made public. Interestingly, despite not being named in the order, certain multinationals have chosen to announce that they have been ordered to return funds to the Belgian government. Atlas Copco, a Swedish industrials company, is believed to be liable for the largest repayment following the release of a statement that it has set aside €300 million in light of the Commission decision.

Commentators note that these cases are part of the Commission’s overall focus on so-called “sweetheart” tax deals across Europe, with various probes still ongoing. However, the Commission’s campaign in this area has drawn criticism from the United States Treasury within the last month, which claims that the Commission (i) is using a retroactive tool to override existing tax arrangements and (ii) appears to be disproportionately targeting US companies.

Competition Commissioner Margrethe Vestager dismissed both accusations and stated that, far from being retroactive, the bases of the Commission’s investigations are well-established and aimed at ensuring that Member States do not give unfair select advantages to multinationals simply to secure investment. Multinationals and Member States alike will await the announcement of the grounds for the Belgian government’s appeal with great interest.

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