In Societe de Gestion Industrielle (SGI) v Belgium (C-311/08) the ECJ found that Belgium’s different treatment of cross-border and domestic transactions where an unusual or gratuitous benefit is granted between interdependent companies was a restriction on the freedom of establishment, but could be justified. The treatment, it said, was merited to preserve a balanced allocation of member states’ taxing rights and to prevent tax avoidance.
The judgment came out on January 21. It followed the Advocate General’s opinion of September 2009, which is no surprise according to a local tax partner, but it goes against widely-accepted views among scholars on EU freedoms.
“The Court has finally realised it is being too strict in requiring the same treatment [in domestic and cross-border situations] and that it can end up with an overkill effect,” the lawyer said. “The judgment represents more restraint on the part of the Court. It was one of the first applications of that new doctrine,” he added.
The case concerned an interest-free loan in 2000 by SGI (a Belgian company) to French subsidiary Recydem. Belgian tax authorities saw this as an abnormal or gratuitous benefit to a company with which the taxpayer had an interdependent relationship and added a sum corresponding to notional interest on the loan to SGI’s profits.
Under article 26 of Belgium’s Income Tax Code, taxable profits of a resident company are increased by the amount of unusual or gratuitous advantages granted by it to an interdependent company in another member state, but not when advantages are extended to a resident interdependent company.
As a result of the loan and other deduction claims Belgian tax authorities issued SGI with revised tax assessments for 2001 and 2002, prompting a challenge by the company before the Tribunal de Première Instance de Mons. However, as SGI could have deducted the interest payment if the subsidiary was Belgian, the tribunal referred the case to the ECJ for a preliminary ruling on whether the national legislation infringed European laws of freedom of establishment and the free movement of capital.
“The ECJ judgment confirms that profit shifting between related companies established in different member states needs to have an economic or commercial justification,” said Niko Lenaerts, a partner of KPMG.
He noted that the decision that Belgium’s transfer pricing rule is a justified restriction on the freedom of establishment is not exceptional as such.
“What is important is that it considers the rule can be justified under a combination of two grounds (balanced allocation of taxing rights between member states and the need to prevent tax avoidance) rather than just one, “ said Lenaerts. “The justification only on the basis of whether the challenged provision aims at preventing “wholly artificial arrangements” (for example, Cadbury Schweppes, Test Claimants in the Thin Cap Group Litigation and Lankhorst-Hohorst) seems to have been abandoned. Also, the ECJ is clearly reluctant to use the justification of a balanced allocation of taxing rights on its own,” he added.
In its judgment, the ECJ acknowledged there is a risk of double taxation in a cross-border situation where related companies allocate their tax burden between them. And it echoed the Advocate General’s observation that invoking the EU Arbitration Convention in this situation would involve a lengthy procedure and financial disadvantage to the company.
Though the ECJ concluded the Belgian legislation was proportionate, it left it for the domestic courts to determine whether the provisions go beyond what is necessary to attain their objective.
Unlike most EU jurisdictions, Belgium does not have tax consolidation, which would allow a single tax return for a group of companies, in a domestic context and this is not expected to change in the near future. New transfer pricing rules were enacted in 2004 that were not discussed in the case.
