On 20 September 2023, the General Court of the European Union (“GCEU”), in the case of Belgium v. Commission (Case T-131/16 RENV), in direct contrast to its initial decision in 2019, confirmed the findings reached by the European Commission (“Commission”) in 2016.These findings declare that the Belgian Excess Profits Tax Scheme (“BEPTS”) constituted an unlawful tax scheme that infringed the EU State Aid rules, which caused, or threatened to cause, distortions of the conditions of competition within the Internal Market.
The State Aid Rules and Taxation
State Aid, as established in Article 107 of the Treaty on the Functioning of the European Union (“TFEU”), prohibits Member States ex ante from utilising State resources to favour certain undertakings or the production of certain goods. Favourable tax schemes of Member States are considered unlawful within the context of State Aid where, for example, tax burdens of certain undertakings are eased, or removed entirely, and are thus deemed to have the same effect as a subsidy to the ultimate detriment of trade and competition in the Internal Market.
EU Jurisprudence on Taxation and State Aid has steadily developed since the 1960s, and both the EU Courts and the Commission, acting as a watchdog, must apply certain tests and criteria when deliberating whether a domestic tax scheme constitutes unlawful State Aid. Firstly, the scheme must be tested against the “reference system”, which is broadly defined as the normal tax regime applicable within the Member State concerned, and thus, whether such regime derogates from such “reference system”. Secondly, it must be determined whether the aid granted selectively derogates from such “reference system” in respect of certain economic operators within the same specific sector or industry. Lastly, the local tax incentive must not be considered as compatible with the internal market by virtue of the exceptions exhaustively listed in Article 107(3) TFEU.
The Commission is afforded vast unilateral investigative powers in relation to State Aid, including the power to order that the operation of the scheme being investigated is halted while it completes its investigation, while also being able to order the recovery of any unlawful aid distributed or granted to the beneficiaries entitled to receive such aid by the domestic scheme. In the context of taxation, this would typically constitute an order by the Commission to the Member State in breach to recover any tax which would have normally been charged by the domestic tax system, as if the unlawful scheme had never existed.
Background of the Case
This case concerned the ability of Belgian Corporate Entities, forming part of Multinational Groups, to have their tax base in Belgium effectively reduced by way of unilateral downward adjustments of certain “excess profits” recorded by such entities. “Excess Profits” are those profits which would exceed those hypothetical profits that would have been made by comparable, independent companies operating in similar circumstances. The Belgian Tax Authorities, via tax rulings granted on request by the beneficiary, exempted such profits where such Belgian Entities centralised activities, made investments or created employment in Belgium.
The Commission declared the BEPTS to constitute unlawful State Aid as defined by Article 107(1) TFEU on the grounds that it provided the entitled Belgian Entities with a selective advantage when compared with the “normal taxation” to which undertakings in a comparable factual and legal situation would be subject. Thus, the Commission found the BEPTS to distort the conditions of competition and trade in the Internal Market.
Belgium, along with several beneficiary companies, sought to annul the Commission’s findings by challenging such findings before the GCEU in 2019, and with the support of submissions by Ireland, the GCEU held that the Commission was incorrect in its assessment that the BEPTS constituted unlawful State Aid. However, on appeal by the Commission, the Court of Justice of the European Union (“CJEU”) reversed the GCEU’s initial judgement, and the case was once again put before the GCEU to decide on remaining pleas.
The Analysis of the Court
Following the CJEU’s ruling, the Second Chamber of the GCEU, in its Extended Composition, ultimately rejected all the arguments raised by Belgium and Ireland in defence of the BEPTS, declaring the scheme to constitute unlawful State Aid on the basis of three legal concepts.
Firstly, the GCEU identified that Belgium was entitled to tax corporate income of the Belgian Entities, including those “excess profits” recorded by the such entities, and that by not collecting such tax, Belgium suffered a loss of tax revenue. Despite this not constituting a direct transfer of State resources to the Belgian Entities, such entities were placed in a favourable financial position vis-à-vis other taxpayers. Thus, this was found to amount to State Aid, as previously discussed.
Secondly, the GCEU identified that the normal tax regime applicable in this scenario, namely, the “reference system”, is the Belgian Corporate Income Tax System, which aims to tax the profits of all Belgian companies. The Court, while appreciating that a provision of Belgium’s local tax law allowed for such downward adjustments, noted that no conditions for adjustments were imposed by the local tax law, but rather, were dependant on conditions agreed between related parties. Furthermore, in practice, the exemption relied on hypothetical profits of related companies. This led the GCEU to declare that the BEPTS fell outside the inherent Belgian reference system for corporate income tax.
Thirdly, the Court confirmed that the BEPTS selectively derogated from the reference system because it was not open to companies that had decided not to make investments, centralise activities, or create employment in the Belgian jurisdiction. The scheme at issue was, moreover, also selective because only entities within sufficiently large multinational groups had an incentive to apply for individual tax rulings, and thus, the BEPTS was not available to undertakings that formed part of small groups of companies.
Concluding Remarks
It should be noted that this decision is the latest in a series of cases involving the Commission’s inquiries into the compatibility of the tax ruling practices of Member States with Internal Market, and that the findings of the GCEU are largely in line with settled EU jurisprudence on State Aid and Taxation. Notably, however, the GCEU oftentimes rules in favour of the taxpayer when cases involving State Aid and Taxation are put before it, notwithstanding the fact that several Commission investigations have concluded that unlawful State Aid is present in Member State practices. Therefore, this decision may have a significant impact the approach to be taken by the CJEU in other high-profile cases currently at appeal stage, such as the Joined Cases C-451/21 P and C-454/21 and Case C-457/21 P concerning Luxembourg Tax Rulings.
At the time of writing, Belgium has not yet opted to appeal the decision before the CJEU, and it may only do so on a point of law.
Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.
Author: Benjamin Farrugia
This article was first published in The Malta Independent on 01/11/2023