Parent-subsidiary Directive disallows the parent company being taxed directly or indirectly on distributions by its subsidiary
The Court of Justice of the European Union (CJEU) rules that making the deduction in respect of dividends as a priority over other deductions that have a time limit is contrary to the subsidiary-parent directive.
Belgian law contains a deduction system for dividends received by a parent company from its subsidiary based on including the amount received in the tax base and subsequently deducting up to 95% of the dividend. In other words, the parent company theoretically is only taxed directly on 5% of the distributed dividend.
Any income that cannot be deducted in one year may be carried forward to subsequent years without a time limit, although this deduction must be made as a priority in relation to any other national deductions, including deductions that have a time limit. In practice, this priority rule in relation to the surplus deduction may reduce or extinguish the tax base. And, in these cases, the taxpayer would be deprived of all or part of other tax credits. This means that the dividend is indirectly being taxed at above 5%.
For that reason, the CJEU was asked to rule whether a law such as the one described is precluded by the parent-subsidiary directive.
In a judgment rendered on December 19, 2019, in case C-389/18, the CJEU concluded that:
a. The combination (i) of the described tax scheme applicable to the dividends received from a subsidiary, and (ii) the order of deductions, together with (iii) the time limit on the ability to use other deductions, may mean that the receipt of dividends may make the parent company lose other tax credits allowed in the national legislation.
b. In these circumstances, the receipt of dividends is not neutral for the parent company, even if the dividends have not been taxed directly.
The court therefore concluded that the legislation is not compatible with the principle of neutrality set out in the parent-subsidiary directive.
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