On May 8 2008 Advocate General (AG) Sharpston issued her opinion in the Cobelfret case. This is one of the three pending cases regarding the compatibility of the Belgian participation exemption regime with the EU parent subsidiary directive (90/435/CEE). The present case only concerns dividends received from subsidiaries established in other EU member states, while the other cases also concern dividends received from Belgian subsidiaries and non-EU subsidiaries and the question whether the Belgian regime is compliant with respectively the directive and the free movement of capital.
According to Belgian legislation, dividends received in a given year which qualify for participation exemption are first included in the company's taxable basis of that year. In a subsequent step, 95 % of their amount is deductible. This means that no deduction is made when this company has no or insufficient taxable profits in that year, because it has suffered losses in this or in previous years. Such (forwarded) losses are offset against the dividends. The dividends are therefore de facto taxed.
In the present case, the ECJ will have to examine whether this regime is compatible with article 4, par. 1 of the parent subsidiary directive. According to that provision, the residence state of a dividend-receiving parent company or permanent establishment shall either refrain from taxing the dividends or subject them to taxation while providing a credit for the foreign underlying corporate income tax.
The AG considers that the Belgian regime is not compliant with the directive as none of the methods provided by article 4, par. 1 have been correctly implemented. On the one hand, the Belgian regime does not entail a systematic exemption. Dividends are only exempt if other taxable profits are available. The exemption is therefore subject to a condition which is not provided by the directive. On the other hand, the Belgian regime is not an imputation regime either. The Belgian government's argument that the regime would at least lead to the same result as an imputation regime is not convincing to the AG.
The AG also considers as not relevant the other arguments submitted by the Belgian government, based on the fact that dividends from Belgian and from EU sources are treated in the same way, and on the fact that the OECD model treaty does not include precise rules on how to exercise the exemption method.
Furthermore, according to the AG, in case the ECJ considers the Belgian regime incompatible with the directive, the ruling should not be subject to a temporal limitation as requested by the Belgian government.(...)
According to Belgian legislation, dividends received in a given year which qualify for participation exemption are first included in the company's taxable basis of that year. In a subsequent step, 95 % of their amount is deductible. This means that no deduction is made when this company has no or insufficient taxable profits in that year, because it has suffered losses in this or in previous years. Such (forwarded) losses are offset against the dividends. The dividends are therefore de facto taxed.
In the present case, the ECJ will have to examine whether this regime is compatible with article 4, par. 1 of the parent subsidiary directive. According to that provision, the residence state of a dividend-receiving parent company or permanent establishment shall either refrain from taxing the dividends or subject them to taxation while providing a credit for the foreign underlying corporate income tax.
The AG considers that the Belgian regime is not compliant with the directive as none of the methods provided by article 4, par. 1 have been correctly implemented. On the one hand, the Belgian regime does not entail a systematic exemption. Dividends are only exempt if other taxable profits are available. The exemption is therefore subject to a condition which is not provided by the directive. On the other hand, the Belgian regime is not an imputation regime either. The Belgian government's argument that the regime would at least lead to the same result as an imputation regime is not convincing to the AG.
The AG also considers as not relevant the other arguments submitted by the Belgian government, based on the fact that dividends from Belgian and from EU sources are treated in the same way, and on the fact that the OECD model treaty does not include precise rules on how to exercise the exemption method.
Furthermore, according to the AG, in case the ECJ considers the Belgian regime incompatible with the directive, the ruling should not be subject to a temporal limitation as requested by the Belgian government.(...)
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