On 14 February 2019, the General Court of the European Union (GCEU) annulled the decision of the European Commission (Commission) on the Belgian excess profit exemption system (SA.37667) in its entirety on the ground that the Commission erroneously categorized the system as an “aid scheme” (T‑131/16 and T‑263/16).
Since June 2013, the Commission has been investigating the tax practices of Member States. In the context of this investigation, on 11 January 2016, the Commission found that the so-called Belgian excess profit exemption system constituted an aid scheme that is incompatible with the internal market and that it had been implemented in breach of Article 108(3) of the Treaty on the Functioning of the European Union (TFEU). By the same decision, the Commission ordered that the Kingdom of Belgium recover the aid from the beneficiaries.
The excess profit exemption system allows Belgian entities of multinational companies to reduce their tax base in Belgium by deducting from their actually recorded profit so-called “excess profit”. That excess profit is determined by estimating the hypothetical average profit that a standalone company carrying out comparable activities could be expected to make in comparable circumstances and subtracting that amount from the profit actually recorded by the Belgian group entity concerned (the two-step methodology). To benefit from the excess profit system, multinational groups were required to obtain advance rulings from the Ruling Commission in respect of new situations (substantial investments and/or the creation of employment and/or the relocation of activities to Belgium) (the new-situation requirement).
The Kingdom of Belgium and Magnetrol International (one of the 55 beneficiaries listed in Annex to the decision) brought appeals against the decision.
The Commission Did Not Encroach Upon the Tax Jurisdiction of the Kingdom of Belgium
The GCEU first flatly rejected the appellants’ claim that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium by examining the compliance of the excess profit exemption system with State aid rules. According to settled case-law, “while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law” (paragraph 62). Since the Commission is competent to ensure compliance with Article 107 TFEU, it cannot be accused of having exceeded its powers by examining the compliance of the excess profit exemption system with State aid rules.
The System Concerned Did Not Constitute an Aid Scheme
The GCEU agreed with the appellants that the Belgian excess profit exemption system did not constitute an “aid scheme” within the meaning of Article 1(d) of Regulation 2015/1589.
According to Article 1(d) of Regulation 2015/1589, an “aid scheme” means “any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner […]”.
However, the GCEU found that the Belgian excess profit exemption system did require further implementing measures for the following reasons. First, some of the essential elements of the excess profit exemption system, including the above-mentioned two-step methodology and the new situation requirement, did not emerge from the acts on the basis of which the excess profit exemption is granted. They therefore must necessarily be the object of further implementing measures. Second, for the existence of further implementing measures to be precluded, the national authorities that apply the aid scheme cannot have any margin of discretion as regards the determination of the essential elements of the aid concerned and whether it should be awarded. However, the Belgian Ruling Commission enjoyed a margin of discretion over all of the essential elements of the excess profit exemption system. The Ruling Commission carried out a qualitative and quantitative assessment of each requests on a case-by-case basis, in the light of the reports and evidence provided by the taxpayer. In the GCEU’s view, this assessment was not a mere technical application of the system.
Moreover, the GCEU ruled that the beneficiaries are not defined in a general and abstract manner by the acts on the basis of which the excess profit exemption is granted. In its decision, the Commission found that the beneficiaries are companies forming part of a multinational group in the context of their reciprocal cross-border relationships. However, the GCEU found that the beneficiaries corresponded to a much more specific category, i.e. companies forming part of a multinational group which seek the exemption by a request for an advance ruling and which make investments, create jobs or centralize activities in Belgium.
Consequently, the GCEU concluded that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and annulled the decision in its entirety.
This judgment represents a major setback in the Commission’s ardent campaign against alleged anti-competitive tax practices of Member States. The Commission will need to be more careful when collectively challenging individual rulings in one decision relying on the concept of an aid scheme.
On the other hand, the judgment backed the Commission by confirming that it is the Commission’s responsibility to examine whether national tax measures comply with EU State aid rules. Also, it did not rule on any substantive aspects, notably the issue of a selective advantage. The judgment thus has no direct implications on other State-aid tax cases concerning individual tax rulings for individual companies.
The Commission may appeal against the judgment before the Court of Justice of the European Union. Alternatively, it may start challenging individual tax rulings issued under the Belgian excess profit exemption system.