Belgian Supreme Court confirms controversial decisions on tax abuse

On 30 November 2023, the Belgian Supreme Court ruled that the Court of Appeal of Ghent – in its decision of 1 December 2020 – rightfully applied the EU principle of prohibition of abuse of law to deny a withholding tax exemption under the EU Parent-Subsidiary Directive for a dividend distribution by a Belgian company. The same EU principle, however, cannot be applied to requalify a (tax-exempt) capital reduction into a (taxable) dividend distribution, as the exemption from withholding tax of a capital reduction is based on domestic law and not on EU law.
 

Background

In its decision of 1 December 2020, the Court of Appeal of Ghent denied the exemption from withholding tax (“WHT”) under the EU Parent-Subsidiary Directive (“PSD”) in relation to a dividend distribution from a Belgian company (“BelCo”) to a Luxembourg holding company interposed as a sub-holding (“LuxCo”) in the group structure. Moreover, the Court of Appeal of Ghent requalified a (tax-exempt) capital reduction into a (taxable) dividend distribution, to subsequently deny the exemption from WHT on the requalified dividend distribution. For both transactions, the exemption from WHT was denied by applying the EU principle of prohibition of abuse of law.

Noteworthy is that the ‘new’ general anti-abuse rule (“GAAR”), i.e., the GAAR as applicable as of tax year 2013, could not be applied ratione temporis as the underlying facts and (series of) transactions reviewed by the Court of Appeal of Ghent date between 2006 and 2012. This does however not prevent the (potential) application of the EU principle of prohibition of abuse of law.  

The Court of Appeal of Ghent assessed the potential presence of abuse in line with the case law of the European Court of Justice (“ECJ”), such as in the so-called Danish cases where the ECJ stated that “proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it”.

For a detailed discussion on the reasoning of the Court of Appeal of Ghent, see EY Belgium Tax Alert, Belgian Court of Appeal issues controversial decisions regarding tax abuse, dated 15 February 2021.
 

Key take-aways and attention points

Below are some key take-aways and attention points further to the decision of the Court of Appeal of Ghent as well as the subsequent judgement of the Supreme Court:

1. Assessment of whether there is "abuse of law" in view of the broad context of the (series of) transaction(s): the Supreme Court confirms that all transactions within the group should be considered in assessing both the objective and subjective components of abuse of law, i.e., not limited to those conducted by the Belgian taxpayer alone, but also in relation to other entities involved in the transaction and considers also tax benefits obtained not or not only at the level of the Belgian entity. The assessment of these components may pose practical challenges, as the Belgian taxpayer may not always possess adequate information about the underlying rationale of the overall transaction and/or (group) entities involved.
2. Assessment of the tax and non-tax motives: the Supreme Court confirms that the incorporation of an intermediate holding (joint-venture) for purpose of the entry of a third-party investor, may constitute an economic or commercial justification for the existence of respective intermediate holding. However, the business reasons for the existence should be distinguished from the business reasons for the (series of) transactions at stake, against which abuse of law was assessed. For the latter, no sufficient economic or commercial justification was provided in the underlying case according to the Court of Appeal of Ghent. This confirms that the respective assessment should be carried out in light of the specific, relevant facts and circumstances of the (series of) transaction(s), and that the mere fact that the entity(ies) involved have been incorporated for valid economic or commercial reasons and/or have (material) substance, does as such not imply that there is no abuse of law.  
3. The EU principle of prohibition of abuse of law can be applied irrespective of when the abuse took place: the Supreme Court confirms that the EU principle of prohibition of abuse of law is an inherent part of the interpretation of EU law and therefore taxpayers cannot invoke the principles of legal certainty or legitimate expectations. Consequently, no arguments can be drawn from the fact that the ‘new’ GAAR could not be applied to the underlying (series of) transaction(s).  
4. The EU principle of prohibition of abuse of law cannot be applied with respect to domestic provisions: the Supreme Court confirms that the EU principle of prohibition of abuse of law cannot be applied to requalify a (tax-exempt) capital reduction into a (taxable) dividend distribution, as the exemption from withholding tax of a capital reduction is based on domestic law and not on EU law.
    

How can we help you?

We advise clients with a cross-border investment structure to actively review their file(s). EY has strong competencies in the performance of internal reviews focusing on the relevant criteria for the entitlement of exemptions or reliefs and the potential application of anti-abuse provisions.

In case you should have any questions regarding the above matters, please do not hesitate to contact us.