Post by Sapphire Capital on Jul 12, 2008 20:54:55 GMT 4
A Belgian court in Belgische Staat v NV Cobelfret (C-138/07) recently held that the distributed profits of a member state subsidiary to its parent in another member state are indirectly taxed because the 95% deduction cannot be fully used in a loss situation. The Court observed that the offset of the losses from the distributed profits of the subsidiary company reduced the loss carry forward possibilities. On 27 February 2007, the Court requested a preliminary ruling from the ECJ as to whether this was compatible with the Art 4(2) EU Parent / Subsidiary Directive (the “Directive”).
The ECJ held that the current Belgian domestic rule that governs the tax treatment of dividends received by a parent company from its subsidiary situated in another member state is incompatible with Art. 4 of the Directive.
The background to the issue is as follows: Article 4 of the Directive provides that if a parent company has a participation of at least 15% in its subsidiary situated in another member state and receives distributed profits, the parent company member state must not tax those profits or must give a tax credit for the corporation tax paid by the subsidiary on such profits. However, Article 4(2) of the Directive allows member states to disallow a fixed amount of management expenses related to the distribution of up to 5% of the total amount of profits distributed.
Belgian domestic law allows for a 95% exemption of profits received provided the parent company holds at least 10% of the capital of its subsidiary and the subsidiary is subject to tax at a minimum rate of 15%. Dividends received are included in the company’s taxable profits which are then adjusted. The deduction of the exempt inter-company dividends can only be made after all other deductions, including loss deductions.
This means that the parent company can only deduct 95% of the qualifying dividends received if there are any remaining taxable profits. Therefore should the parent company have losses, the 95% deduction cannot be fully used, nor can it be carried forward against future profits. The deduction is also not available if the parent company’s profits are lower than that of its subsidiary. Further, the profits received from the subsidiary must be offset against the losses of the parent company before the parent company can carry forward its losses.
The Belgian Revenue authorities have not yet responded to the ECJ decision.
The ECJ held that the current Belgian domestic rule that governs the tax treatment of dividends received by a parent company from its subsidiary situated in another member state is incompatible with Art. 4 of the Directive.
The background to the issue is as follows: Article 4 of the Directive provides that if a parent company has a participation of at least 15% in its subsidiary situated in another member state and receives distributed profits, the parent company member state must not tax those profits or must give a tax credit for the corporation tax paid by the subsidiary on such profits. However, Article 4(2) of the Directive allows member states to disallow a fixed amount of management expenses related to the distribution of up to 5% of the total amount of profits distributed.
Belgian domestic law allows for a 95% exemption of profits received provided the parent company holds at least 10% of the capital of its subsidiary and the subsidiary is subject to tax at a minimum rate of 15%. Dividends received are included in the company’s taxable profits which are then adjusted. The deduction of the exempt inter-company dividends can only be made after all other deductions, including loss deductions.
This means that the parent company can only deduct 95% of the qualifying dividends received if there are any remaining taxable profits. Therefore should the parent company have losses, the 95% deduction cannot be fully used, nor can it be carried forward against future profits. The deduction is also not available if the parent company’s profits are lower than that of its subsidiary. Further, the profits received from the subsidiary must be offset against the losses of the parent company before the parent company can carry forward its losses.
The Belgian Revenue authorities have not yet responded to the ECJ decision.