On 17 October 2019, the Court of Justice of the European Union (ECJ) delivered the judgment between Argenta Spaarbank NV and Belgische Staat concerning the taxable profits, foreign PE, and notional interest deduction.
Summary of the facts
Argenta, a company established in Belgium, is subject to Belgian corporation tax, has carried out part of its activities through a permanent establishment situated in the Netherlands, the income from which is exempt in Belgium pursuant to Article 7(1) to (3) and Article 23 of the Belgian-Netherlands Convention. In its corporation tax declaration Argenta, pursuant to Article 205d of the Income Tax Code 1992, as amended, has reduced the deduction for risk capital by the part of the deduction that is calculated on the equity capital of its permanent establishment.
Consequently, Argenta has received the assessment notice with the different calculations stating that the deduction for risk capital relating to the Netherlands permanent establishment should be deducted in full from the total deduction for risk capital because the positive result of the Netherlands permanent establishment was higher than the deduction for risk capital relating to that establishment.
Argenta lodged an objection against this assessment alleging that Article 205d of the Income Tax Code 1992, as amended, is inconsistent with Article 49 TFEU; which was rejected. Argenta, then, lodged an application with the Court of First Instance (Rechtbank van eerste aanleg te Antwerpen, Belgium).
Questions referred to the ECJ
Does Article 49 [TFEU] preclude national tax legislation pursuant to which, for the purpose of calculating the taxable profits of a company subject to full tax liability in Belgium which has a permanent establishment in another Member State, the profits of which are wholly exempt in Belgium by virtue of the application of a double taxation convention between Belgium and the other Member State:
The deduction for risk capital is reduced by an amount in respect of deduction for risk capital calculated with reference to the positive difference between, on the one hand, the net book value of the assets of the permanent establishment, and, on the other hand, the total liabilities that do not form part of the company’s equity capital and that are attributable to the permanent establishment and
The aforementioned reduction is not applied in so far as the amount of the reduction is lower than the profits of that permanent establishment,
Whereas no reduction of the deduction for risk capital is applied if that positive difference can be attributed to a permanent establishment situated in Belgium?
Conclusion by the ECJ
The Court upheld that the Article 49 TFEU must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, under which, for the calculation of a deduction granted to a company subject to full tax liability in a Member State and having a permanent establishment in another Member State the income from which is exempt in the first Member State under a double taxation convention, the net value of the assets of such a permanent establishment is taken into account, initially, in the calculation of the deduction for risk capital granted to the resident company, but, subsequently, the amount of the deduction is reduced by the lesser of the following amounts, namely the part of the deduction for risk capital which relates to the permanent establishment or the positive result generated by that permanent establishment, whereas such a reduction is not applied in the case of a permanent establishment situated in the first Member State.
For more information on this case, please contact:
Franco Falzon C.P.A. LL.M
(Managing Partner)
E: franco@ffinternational.com.mt
T: +356 2010 7771 (office)
M: +356 9989 5679 (mobile)
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