Fairness tax annulled by the Belgian Constitutional Court, but limitation on reclaim of unduly paid tax

Following the judgment by the Court of Justice of the EU (ECJ) on 17 May 2017, there is now certainty on the fate of the Fairness Tax. Today, the Constitutional Court ruled that the Fairness Tax is unconstitutional and is therefore annulled. However, the Court limits which companies can recover the unduly paid tax from the Belgian State on the basis of the Constitutional Court’s decision.

Violation of the principle of legality

The Constitutional Court decided that the Fairness Tax violates the principle of legality (Article 170, §1 Constitution) because its terms are too vague and obscure for taxpayers. Pursuant to the fiscal principle of legality, the criteria in a tax law should be precise, clear and unambiguously so the taxpayer understands the effective impact of the tax on its financial position. However, the Fairness Tax does not clearly state its taxable basis, since it is not expressed whether “dividends paid” by a foreign company should be interpreted in accordance with the Belgian or foreign qualification of dividends. Furthermore, this is also true in order to determine the accounting result of the foreign company: both Belgian and foreign law could be applicable.

For these reasons, the Constitutional Court annuls the Fairness Tax. This annulment renders it unnecessary for the Court to determine whether the Fairness tax also constitutes a violation of the freedom of establishment (Article 49 TFEU). This latter question, which was referred to the Constitutional Court by the European Court of Justice, remains hence unanswered.

Violation of Article 4 Parent-Subsidiary directive

Following the ECJ’s earlier judgment, the Constitutional Court also confirmed that the Fairness Tax violates Article 4 of the Parent-Subsidiary Directive, according to which Belgium must refrain from taxing dividends received by a Belgian parent company and originating from a subsidiary in another member state. In general, these dividends are in Belgium exempt for 95% by means of the DTI-deduction.

However, in certain cases, the Fairness Tax results in a taxation of dividends received by a parent company for more than 5%. Indeed, if a parent company redistributes the received dividends in a later year than the one in which it received the dividends, these dividends are included in the taxable basis of the Fairness Tax.

Such taxation of more than 5% of the dividend received, cannot be accepted and therefore results, once again, in the annulment of the Fairness Tax.

Violations of the principle of equality and non-discrimination

Furthermore, the Court considers that the fairness tax violates the constitutional principles of equality and non-discrimination.

The fairness tax was intended to counter the excesses resulting from the unlimited deduction of carried forward of losses and the notional interest deduction. Other tax deductibles, such as the patent deduction, investment deduction and the DTI-deduction would, according to the legislator, not be affected by the new measure.

However, the Court determined that taxpayers who applied tax deductibles not targeted by the fairness tax (e.g. patent deduction), are potentially subject to higher fairness tax than taxpayers who did not apply these tax deductibles, notwithstanding both categories made identical use of the deduction of carried forward losses and/or the notional interest deduction.

This unequal and discriminatory treatment results from the very specific and complex calculation method of the fairness tax’ taxable base and is, in light of the fairness tax’ purpose, unacceptable according to the Court.

Limitation to reclaim fairness tax

The Court annulled the fairness tax from assessment year 2019 onwards. Surprisingly, the Constitutional Court thus decided to limit the retroactive effect of the annulment.

Hence, not all taxpayers can file a reclaim of the illicit Fairness Tax. Only Belgian companies that redistributed dividends received from a subsidiary in another member state, can file a reclaim during a new 6 month term (Article 18 of the Special Law on the Constitutional Court[1]).

Taxpayers who do not meet the abovementioned requirements, but who have already filed an (administrative) appeal, can now reactivate their case in order to get a decision, taking into account the judgment of the Constitutional Court.

EY Law advocaten-avocats represented the taxpayer in the litigation before both the ECJ and the  Constitutional Court. In case you would like any assistance with the recovery of the Fairness Tax, EY Law advocaten-avocats is happy to assist you.

[1] Special Law of 6 January 1989 on the Constitutional Court, BOG 7 January 1989.