The EU Court of First Instance (General Court) recently decided that the Belgian excess profits regime does not constitute an “aid scheme”. In 2016, the European Commission found that the Belgian regime constituted an aid scheme and that all rulings granted under it amounted to unlawful state aid. The General Court annulled the Commission’s decision.
The General Court’s judgment indicates that there is a high threshold for the Commission in tackling ruling practices on a collective, rather than an individual, basis. The judgment, however, does not affect pending state aid cases on individual tax rulings, such as Apple, Fiat and Starbucks. Moreover, the judgment does not imply in any way that taxpayers which benefitted from the regime did not receive state aid. In addition, the judgment does not address any of the fundamental questions raised in the individual tax ruling cases, particularly on matters related to transfer pricing. It is not yet clear whether an appeal will be lodged with the European Court of Justice.
The excess profits regime
In the Belgian excess profits case, the Commission tackled an existing ruling practice: the excess profits regime. This ruling practice consists of advance rulings where a unilateral downward adjustment is accepted for the “excess profits” of Belgian resident entities of multinational groups. The amount of the adjustment is determined by comparing the profits earned by the Belgian resident entity forming part of a multinational group, with the profits that a comparable standalone entity would have earned. To the extent that the former profits exceed the latter, those profits are deemed “excess profits” resulting in a unilateral downward adjustment. According to the Commission, this excess profits ruling practice was an aid scheme because it allowed multinationals to obtain an advantage over standalone Belgian entities. Consequently, each ruling granted under this regime amounted to individual state aid and the benefits obtained should be recovered.
The General Court’s judgment
Contrary to the Commission’s arguments, the General Court held that the excess profits regime did not meet any of the criteria for qualifying as an aid scheme. According to the court, the provisions of the alleged aid scheme must contain all essential elements; that is, it must be apparent from the scheme itself that individual aid is granted. In that regard, the General Court found that not all essential elements were present in the provisions of the excess profits regime. For example, the methodology for calculating the amount of the excess profits – an essential element of the regime – did not follow, not even implicitly, from the provisions. The court also held that the role of the Belgian authorities was not limited to a mere technical application of the excess profits regime. Instead, it found that the Belgian tax authorities had a genuine margin of discretion in deciding whether it was appropriate to grant a downward adjustment. Finally, the court found that the provisions of the excess profits regime did not define the beneficiaries in a general and abstract manner. In practice, the category of beneficiaries was much more specific than the provisions constituting the excess profits regime suggested.
The judgment illustrates that the threshold for tackling ruling practices is high. If the authorities have discretion in applying the provisions when granting tax rulings, it seems unlikely that such ruling practices can qualify as aid schemes. In a Dutch context, the judgment may deter the Commission from collectively challenging informal capital contribution (“infocap”) rulings granted by the Netherlands, given the margin of discretion tax authorities have.
For individual cases, the General Court’s judgment has limited importance. The court was able to avoid ruling on the interpretation of the selectivity and advantage criteria, because it had already found that the excess profits regime did not qualify as an aid scheme. We expect, however, the court to rule on the Commission’s interpretation of these two criteria in the upcoming Apple, Fiat and Starbucks cases.
For now, clients should remember that the General Court’s decision – that this particular regime is not an aid scheme – does not preclude individual rulings granted under the excess profits regime from qualifying as state aid. In fact, the judgment in some ways suggests the opposite.
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