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Court of Justice of the European Union: Decision on Taxation of Non-Resident Companies

(Nov. 7, 2012) The European Court of Justice decided in favor of the European Commission on October 25, 2012, in a case involving a dispute over the way <?Belgium has taxed corporations. (Case No. C-387/11, European Commission v. Kingdom of Belgium (Oct. 25, 2012), EURLEX.)

The Court agreed with the Commission that the treatment of non-resident companies that lacked permanent establishments in Belgium was unfair and inconsistent with two treaties to which Belgium is a party. It determined that Belgium, by “maintaining different rules for the taxation of income from capital and movable property according to whether it is earned by resident investment companies or non-resident investment companies with no permanent establishment in Belgium,” failed to live up to its obligations under articles 49 and 63 of the Treaty on the Functioning of the EU (TFEU) and articles 31 and 40 of the May 1992 European Economic Agreement (EEA). The Court further ordered Belgium to pay the court costs. (Id. ¶ 93.)

Article 49 of the TFEU specifies that “restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited,” and that this freedom of establishment “shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms … .” (Consolidated Version of the Treaty on the Functioning of the European Union (TFEU), 2010 O.J. (C83) 47.) Article 63 prohibits restrictions on movement of capital between member states or between member states and third countries. (Id.)

Article 31 of the EEA echoes article 49 of the TFEU, and article 40 of the EEA has language parallel to that of the TFEU’s article 63, requiring no restrictions “between the Contracting Parties on the movement of capital belonging to persons resident in EC [European Community] Member States or EFTA States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested.” (Agreement on the European Economic Area Between the European Communities, Their Member States and the Republic of Austria, the Republic of Finland, the Republic of Iceland, the Principality of Liechtenstein, the Kingdom of Norway, the Kingdom of Sweden and the Swiss Confederation, 1994 O.J. (L1) 3, full text available from International Bureau of Fiscal Documentation (IBFD); the term “EFTA” refers to the European Free Trade Association.)

The heart of the decision was the finding that Belgium, by not allowing non-resident companies to recover the amount of withholding tax they paid on income from capital and moveable property, had imposed unequal treatment on companies based on whether or not they had permanent offices in Belgium. This was considered to be a violation of the two treaties. (Roberto Bernales, ECJ: Belgium Legislation on Taxation of Non-Resident Investment Companies Incompatible with EU Law, TAX NEWS SERVICE (Oct. 25, 2012), IBFD online subscription database.)