European Court of Justice rules Belgian fairness tax in breach of the Parent Subsidiary Directive


The European Court of Justice (ECJ) has ruled that the Belgian fairness tax violates the Parent-Subsidiary Directive in certain specific circumstances. This decision may be the latest step leading to the annulment of the tax, which is currently being considered by the Belgian Constitutional Court. If the Belgian Constitutional Court is to annul the tax, all taxpayers should in principle have the right to reclaim fairness tax they have paid in the past.

The ECJ's decision should in the meantime already allow Belgian companies and Belgian branches of non-resident companies that meet specific conditions set out in the ECJ's decision to reclaim fairness tax they have already paid.


Belgian companies and Belgian branches of non-resident companies have, since 2013, been subject to a separate 5,15% tax on (part of) the dividends that they distribute. The mechanism of the tax is complex. In short, the tax is due to the extent that, in a given taxable period, a company (or a Belgian branch of a foreign company) (i) distributes a dividend for an amount that exceeds its own final taxable base for corporate income tax purposes, and (ii) that taxable base has been reduced because of the Belgian notional interest deduction and/or tax losses carried forward from previous years.

The use of the latter deductions in combination with an "excessive" dividend distribution in one and the same taxable period was deemed to be "unfair" and had to be remedied (hence the "fairness tax").

From the onset, the fairness tax was very much criticized for its highly complex mechanism, which would often lead to results that were not intended by the legislator. Also, many questioned whether the tax was compliant with EU law and with double taxation treaties concluded by Belgium.

A petition for the annulment of the fairness tax was lodged in front of the Constitutional Court in January 2014. The latter Court referred to the ECJ (by decision of 28 January 2015) with a request for a preliminary ruling.

ECJ's Ruling

The ECJ considered in its decision published on 17 May (C-68/15) that the fairness tax violates the Directive, but only in specific circumstances. Art. 4 of the Directive provides that member states should refrain from taxing profits received by a parent company which originate from a subsidiary in another member state. The ECJ found that the fairness tax is in breach of that provision when a resident parent company receives a dividend from a non-resident subsidiary, and redistributes (part of) that dividend in a subsequent year.

The ECJ further considered that the fairness tax does not constitute a (prohibited) withholding tax in the sense of art. 5 of the Directive, because it is formally due by the distributing company and not by the shareholder. Referring to its Burda judgment (C-284/06), the ECJ maintained its legalistic approach, which requires that the taxable person of a withholding tax must be the holder of the shares, not the distributing company. The ECJ thus again rejects adopting an economic approach to the notion of withholding tax.

Finally, the ECJ also stated that the fairness tax may potentially violate the freedom of establishment. (art. 49 of the European Treaty, TFEU). A resident company is subject to corporation tax on the basis of its worldwide income. A non-resident company conducting an economic activity in Belgium through a permanent establishment is subject to tax in Belgium solely on the basis of the profits made by that permanent establishment. Therefore, insofar the fairness tax computation rules lead to the taxation of profits over which Belgium has no taxing authority, the tax would constitute a violation of the freedom of establishment. The ECJ did not rule on this point as it is up to the Belgian national court to rule on whether the fairness tax provisions may lead to a permanent establishment of a non-resident company to be treated in a less advantageous manner than a resident company.

What's next?

The ECJ's decision should already offer sufficient basis for taxpayers to apply with the tax authorities for a refund of fairness tax they have already paid. This possibility is for now limited to the specific cases where the tax was paid on distributed dividends that (i) stemmed from dividends received in a previous year from a subsidiary in another EU member state and (ii) qualified to benefit from the Parent-Subsidiary Directive as implemented in Belgium. Other taxpayers may soon also have grounds to claim a remission of already paid fairness tax. Indeed, the Belgian Constitutional Court will now have to deliver a ruling on the request for annulment of the fairness tax, which in addition to the elements above, also encompasses Belgian constitutional law elements. If the Constitutional Court decides to annul the tax, other taxpayers should in principle also be allowed to reclaim fairness tax they have paid.

To find out more about the implications of this development for your business, please contact the author.