Belgium: Ruling regarding the non-arm’s length principle

According Belgian law, irregular or gratuitous advantages granted by a Belgian resident company to a related non-resident company are imputed to the taxable base of that Belgian company. The taxable base, however, is not increased where such advantages are granted to a Belgian company.
In a case submitted to the European Court of Justice (ECJ), a Belgian company granted an interest-free loan to its French subsidiary and paid management fees to its Luxembourg parent. Consequently the Belgian tax authorities increased the company’s tax base by 5% deemed interest because the borrower was associated with the lender and did not allow the deduction of the remuneration. However, if the transaction had occurred between related Belgian companies, the situation would have been different.
The ECJ concluded that the Belgian measure constitutes a restriction on the freedom of establishment principle since abnormal or gratuitous advantages granted by a Belgian company are added to its taxable base when the advantages are granted to a related company located in another EU Member State, while this is not the case when the beneficiary of the advantages is located in Belgium.
As a result, a Belgian company could refrain from acquiring, creating or maintaining a subsidiary in another Member State or from acquiring or maintaining a substantial holding in a company established in that state because of the additional tax burden. Conversely, companies established in other EU Member States could be deterred from acquiring, creating or maintaining a subsidiary in Belgium or from acquiring or maintaining a substantial holding in a Belgian company because of the additional tax burden imposed by the Belgian legislation.
Although the ECJ concluded that the Belgian measure violates the freedom of establishment, the Court also said that the restriction can be justified by the need to ensure a balanced allocation of the power to tax between Member States and the prevention of tax avoidance. As a result, the restriction is considered to be justified if the Belgian measure does not go beyond what is necessary to achieve the objectives pursued.
The ECJ considers this to be the case where, in each situation in which there is a suspicion that a transaction is not at arm’s length, the taxpayer is given a chance to provide evidence of a commercial justification for the transaction and the corrective tax measure is confined to the amount that exceeds the amount that would have been agreed if the companies were not related.

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