European Court of Justice strikes down Belgium’s dividend deduction regime: Implications for Taxpayers

Key takeaways:

• The European Court of Justice declared Belgium's dividend deduction regime incompatible with EU law, impacting how companies handle tax losses and group contributions.
• Companies can now offset current year tax losses against received group contributions, rather than being limited to exempt dividend income.
• The Belgian government is considering replacing the current deduction system with a full exemption mechanism for dividends, which could further benefit companies.
   

On 13 March 2025, the European Court of Justice (“ECJ”) has rendered a judgement (C‑135/24 – John Cockerill) declaring that the Belgian dividend deduction regime, as laid down under articles 202 and 203 of the Belgian Income Tax Code 1992 (“BITC 92”), is incompatible with the Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (so-called “Parent-Subsidiary Directive). 

The direct consequence for taxpayers is that they may set off current year tax losses against a received group contribution instead of against principal “exempt” dividend income. Companies should review their position for future taxable periods and review their position for filed tax returns.
 

Belgian implementation of the Parent-Subsidiary Directive

In accordance with the provisions of the Parent-Subsidiary Directive, Member States shall not impose dividends and other profit distributions made by subsidiaries to their parent company. Article 4, (1) of the Directive stipulates that Member States can achieve this goal through an exemption or a deduction mechanism.

Belgium has opted for a deduction mechanism, as eligible dividends received by a Belgian-parent company are first included in its taxable income and are afterwards deducted according to the dividend received deduction (“DRD”).
 

DRD and group contribution regime

Belgian income tax law also provides for a group contribution regime allowing the transfer of profit between qualifying Belgian companies leading to a tax deduction in the hands of the contributor and a taxable profit for the receiving contribution.

The company receiving the contribution has the possibility to offset the profit with its current year tax losses, but, in accordance with article 206/3, §1 of the Belgian income tax code, no other tax deductions, including the dividend received deduction, can be used to offset the amount of received intra-group transfer.

If a company has current year losses and also dividend income, the losses are first used to offset the dividend income and the applicable DRD is not effectively used in the year and carried forward. As a result, the current DRD regime is penalizing taxpayers collecting dividend from their subsidiaries. In case an exemption mechanism would have been applied, the company would be able to use its current year tax losses to offset any received group contribution, which is not possible under the current deduction mechanism.

In this context, the Court of First Instance of Liège raised prejudicial questions to the ECJ on the compatibility of the Belgian national legislation with the Parent-Subsidiary Directive.
 

Decision on the ECJ

The Court, referring to a previous case law involving Belgium (judgment of 19 December 2019, Brussels Securities, C‑389/18), reminds that the intent of the Parent-Subsidiary Directive is “to ensure the neutrality, from the tax point of view, of the distribution of profits by a subsidiary established in one Member State to its parent company established in another Member State”.

The Court then states that if the combination of the DRD and group contribution regimes results “in a situation where the parent company receiving an intra-group transfer being taxed more heavily than it would have been in a situation where the latter have not received such dividends, or if those dividends had simply been excluded from its tax base” then, “the dividends received are not fiscally neutral for the parent company, which is contrary to the objective pursued by Article 4(1)(a) of Directive 2011/96”.
 

Consequences and perspectives 

The direct consequence of this judgment is giving grounds and arguments for the taxpayers to rely on the conclusion of the ECJ case for setting off current year tax loss against a received contribution while collecting exempt dividends from their subsidiary in their future corporate income tax returns.   

As the Court insists on the fact that article 4, (1) of the Directive has direct effect, companies should review their position for previous years as well.

This judgement could provide arguments, from our perspective, for filing an objection or an ex-officio relief request for situations where no (or lower) group contribution was implemented, following a strict implementation of the tax law.

An ex officio relief request can be filed within a period of 5 years starting from January 1 of the year in which the tax is established. Such an ex-officio relief request can be filed on the grounds of the existence of a new fact.

New documents or facts within the meaning of art. 376, § 1, BITC, are those that are of such a nature that they constitute proof of an over taxation that could not be provided earlier and that the taxpayer was unable to provide before the expiration of the period for an objection.

Prejudicial judgments of the Constitutional Court constitute a new fact within the meaning of Article 376, §1 WIB. Consequently, it can also be sustained those judgements of the European Court of Justice - which have a similar binding character - should be treated in the same way, and also constitute a new fact within the meaning of Article 376, §1 BITC.

For the future, and as mentioned in a previous tax alert dedicated to the corporate income tax measures of the new federal government agreement, the government intends to replace the current DRD by a full exemption mechanism and a broadening of the group contribution regime.
 

Action points:

• Companies should assess their current and past tax positions to understand how the ECJ ruling affects their tax liabilities and potential refunds.
• Businesses may need to amend filed tax returns to reflect the ability to offset tax losses against group contributions as per the new ruling.
• Keep an eye on upcoming changes to Belgian tax laws, particularly regarding the proposed shift from a deduction to an exemption system, to ensure compliance and optimize tax strategies.
• Contact your EY executive to know how this impacts your business and what we can do to help you.