In a recently published ruling dated 25 November 2021, Belgium’s highest court in tax matters denied the applicability of the EU-law based General Anti-Abuse Rule (“GAAR”) to a case where the taxpayer had neither relied on nor invoked any of the so-called fundamental freedoms that are guaranteed by EU law. Because the facts at issue predated the EU’s ATAD I Directive, the Court of Cassation stopped short of testing the contested transaction against the GAAR laid down in Article 6 of ATAD I.
ICL Belgium (Sales) N.V. (“ICL” or the “Taxpayer”) has been involved in a long-lasting dispute with the Belgian Revenue Service (the “Service”) about the right to apply the Notional Interest Deduction (the “NID”) in an arrangement whereby ICL had been funded by the ICL Group with substantial amounts of equity, which it used to extend a loan to a related non-Belgian entity. The NID is a tax incentive in the form of a deduction for a notional (or: fictitious) amount of interest that would have been tax deductible in Belgium if the Belgian taxpayer had been funded with interest-bearing debt instead of equity. The NID was introduced in Belgium in 2005 with a view to, inter alia, eliminating or at least reducing what is known as the debt bias. Simply stated, the debt bias results from the fact that arm’s-length interest is, subject to certain conditions and limitations, a tax deductible cost for the taxpayer, whereas dividends paid to equity providers or shareholders are part of the taxpayer’s Corporate Income Tax (“CIT”) base, and, therefore, at least in principle, subject to CIT at the regular rates (currently 25 per cent, but, in the case of ICL, at the then applicable rate of 33.99 per cent).
After lengthy trials – including before the Court of Cassation – the Court of Appeals in Antwerp ruled on 17 March 2020 that ICL had been entitled to deduct the NID in 2014 and that such deduction was not prohibited on the basis of the rule that says that certain tax attributes, such as the NID, cannot be utilised to reduce taxable income deriving from something called abnormal or gratuitous advantages. “Abnormal or gratuitous advantages” is the Belgian term of art for income that is artificially shifted between related parties by making use of non-at-arm’s-length transactions or agreements. In summary, the Service had claimed all along that the ICL Group had created the Belgian entity (ICL) and funded it with equity with the only or principal purpose of making use of the NID, thereby mitigating to a large extent the tax on the interest it received from the related non-Belgian borrower. The Court of Appeals in Antwerp had rejected the Service’s claim and sided with the Taxpayer, confirming that the arrangement with the Belgian entity claiming the NID had not led to any abnormal or gratuitous advantage that would prevent ICL from applying the NID on the interest income earned on the intercompany loan.
The Service then changed course and claimed that the arrangement set up by the ICL Group was abusive within the meaning of EU law, as it was interpreted by the European Court of Justice (“ECJ”) in a series of cases known as the Danish Cases. The Danish Cases are a set of cases decided by the ECJ on 26 February 2019, in which the ECJ ruled that there is a general – unwritten – anti-abuse rule embedded in EU law denying the benefits of the EU’s fundamental freedoms, including the freedom of establishment and the freedom of capital and investments, for a taxpayer who (i) puts itself formally in a position allowing it to make use of one of these freedoms but, by doing do, (ii) frustrates the legitimate purpose of the rule it invokes.
The position of the Service in the ICL Case was that, even though the Belgian courts had found that ICL had not abused the Belgian rules by setting up the above described arrangement (no abnormal or gratuitous advantages), it had frustrated the GAAR enunciated by the ECJ in the Danish Cases. ICL took the position that, because it had not invoked or relied on any of the EU freedoms, the EU GAAR and the Danish Cases were irrelevant. In its ruling of 25 November 2021, the Court of Cassation sided with the Taxpayer, stating (paragraph 10 of the ruling): “[…] the Court of Justice of the European Union does not find that under European law there is a general principle of prohibition of tax abuse that would be applicable both in a European and in a purely national context.”
This is the first ruling from the highest Belgian court in tax matters on the scope of the European GAAR as it was enunciated by the ECJ in the Danish Cases. Belgian tax practitioners had been looking forward to this decision since the February 2019 judgment in the Danish Cases.
However, in its ruling of 25 November 2021, the Court of Cassation stopped short of ruling on the question whether Article 6 of the first EU Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 of 12 July 2016, usually referred to as “ATAD I”) could be applied to the ICL case. Article 6 of ATAD I contains a GAAR in its own right and in the ICL case, the Service had argued that this GAAR also precluded ICL from taking advantage of the NID in order to mitigate the tax on the interest it had received from the non-Belgian related borrower. The Court of Cassation, however, dismissed the claim from the Service by simply stating that the facts in ICL occurred in 2014 and ATAD I did not enter into effect until 31 December 2018, i.e., the ultimate date for Member States to transpose ATAD I into their national legislation. Belgium transposed ATAD I into its national legislation by the Act of 25 December 2017, gazetted on 29 December 2017.
Article 6 of ATAD I reads as follows:
“ Article 6 General anti-abuse rule
- For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.
- For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
- Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated in accordance with national law.”
It may be worthwhile considering what the Court of Cassation might have decided if the facts in the ICL case had occurred after 31 December 2018. One significant issue that the Court would have had to deal with – and may have to deal with in the future – is that back in 2017 the Belgian legislator had found that there was no need for transposing Article 6 of ATAD I into Belgian national legislation. The legislative history that lead up to the Act of 25 December 2017 shows that several MPs submitted an amendment to the initial bill introduced by the then Minister of Finance, Johan Van Overtveldt, proposing to bring the Belgian GAAR (Article 344 of the Belgian Income Tax Code, “BITC”) in line with Article 6 of ATAD I. The Minister, with the support of the majority of the House, rejected that amendment arguing that Article 344 BITC was perfectly in line with Article 6 of ATAD 1, because the latter had been re-written in 2012 and, since then, in fact encapsulated the EU anti-abuse doctrine as it was developed and enunciated by the ECJ in, inter alia, the Cadbury Schweppes case (case C-196/04 of 12 September 2006).
It should be noted, though, that a significant part of Belgian legal doctrine is of the view that the 2012 revision of Article 344 BITC is not fully compliant with Article 6 of ATAD I. Hence, it will be interesting to see what the Court of Cassation will find when it will be called to rule on a case dealing with facts that occurred after the effective date of ATAD I.