Milestone judgment of the Belgian Supreme Court on the EU principle of prohibition of abuse

The Belgian Supreme Court ruled on 30 November 2023 that the Court of Appeal of Ghent has rightfully applied the EU principle of prohibition of abuse to deny a withholding tax exemption on a dividend distribution by a Belgian company (“BelCo”) to an intermediate Luxembourg holding company (“LuxCo”) on the basis of the EU Parent-Subsidiary Directive. 

The dividend distribution was part of a series of transactions (including various mergers, capital reductions, sale of shares, dividend distributions and amendment of the legal form of a Dutch company) the overall objective of which was to upstream cash by operational group entities including BelCo to the shareholders (including Belgian individuals) of a Dutch company (“DutchCo”) without triggering any Belgian and foreign income and withholding taxes. The cash pay-out took place on the entry of a new third party investor in the group via a newly established LuxCo. The latter company had bought the shares in BelCo and used the cash of the dividend distribution by BelCo to pay the purchase price. The upstreaming of the cash in the form of a sales price was needed to comply with a ruling obtained in the Netherlands which only allowed tax-free distributions by DutchCo to its shareholders provided that no dividend would be distributed by BelCo to DutchCo. The Belgian tax authorities denied, amongst other things, the withholding tax exemption on the dividend distribution by BelCo to LuxCo.

The Court of Appeal of Ghent ruled on 1 December 2020 ex officio that the dividend withholding tax exemption should be denied on the basis of the EU principle of prohibition of abuse. The Court had to rely on this EU principle as the “new” version of the Belgian domestic general anti-abuse rule under Article 344, §1 of the Belgian Income Tax Code could not be applied ratione temporis (as it applied only as of 2012 and the facts of the case pre-dated this). The Supreme Court has now confirmed the Ghent decision on this point. 

The key take-aways of the Supreme Court case are the following:

• Objective and subjective element of the abuse test to be assessed taking into account wider context and intentions: in assessing the objective and subjective element of the abuse test, the tax authorities can take into account all transactions that are being carried out within the group and not only those carried out by the Belgian taxpayer making the payments (i.e. the dividend distribution by BelCo).

In practice, this means that the tax authorities can deny a withholding tax exemption if the distribution is part of a wider scheme, the objective of which is to circumvent a tax obligation elsewhere in the structure. In the case at hand, one should note that DutchCo could in principle also benefit from the same withholding tax exemption as LuxCo (an element which was not explicitly rebutted by the Court of Appeal of Ghent). Hence, in fact, whereas LuxCo arguably provided for a tax advantage from a Dutch tax perspective, it did not provide for a Belgian withholding tax exemption that would not have been available otherwise. This being said, the wider context involving a tax-free upstreaming of proceeds to Belgian tax resident individuals was also taken into account.

• “Use” of an intermediate holding can be abusive even if the holding as such has been established for genuine business reasons: even if an intermediate holding company is created for a genuine business purpose (i.e., a joint venture with a third party investor), there can still be abuse if the intermediate holding company is “used” to upstream profits to the ultimate shareholders in the structure in a tax-free way. To be noted that the joint venture was established in Luxembourg where the group had no prior presence.
• EU principle of prohibition of abuse can be applied regardless of when the abuse occurred: the reasoning of the Supreme Court is that the EU principle is merely a part of the interpretation of EU law (the way it always should have been) and the taxpayer can thus not rely on the principle of legal certainty or legitimate expectations.

Needless to say that this Supreme Court decision will be used by the Belgian tax authorities to attack structures involving intermediate holding companies. 

It is an important point to note that abuse should always be assessed based on the specific facts and circumstances of each case and one should be careful when extrapolating a particular decision to a different set of facts. And as said, the facts of the 30 November 2023 case were very complex.

Please do not hesitate to contact us, should you wish to dive deeper into your own holding structures.