Belgian DRD deduction disapproved by Court of Justice
On March 13, 2025, the European Court of Justice ruled that the Belgian ban on applying the dividend received deduction to group contributions received, is contrary to European law. The Court believes that the current regime does not lead to effective exemption.
DRD deduction ban on group contribution
In the Belgian corporate income tax return, dividends received are first included in the tax base and then deducted again if certain conditions are met (= the DRD regime).
The group contribution scheme implies that a company transfers (under certain conditions) its profits (via a group contribution) to an affiliated company in order to offset these profits against the latter company’s losses in the same year.
However, the group contribution scheme prohibits the application of other deductions (e.g., dividend received deduction) to the group contribution received. For example, a parent company has a loss of -200. The subsidiary has taxable profits in the amount of 300. The parent and subsidiary enter into a group contribution agreement pursuant to which the subsidiary will grant a group contribution to its parent company in the amount of 200. The parent company can offset the group contribution received (to be treated as taxable profit) against its tax loss for the fiscal year. Now suppose the parent company also receives a dividend of 500 that qualifies for DRD deduction. This makes the accounting and tax result after the first operation 300 (instead of -200 without this dividend received). Since the received group contribution of 200 is treated as taxable profit on the part of the parent company and an offset against that group contribution is not possible in the absence of a tax loss after the first operation, the taxable result of the parent company is equal to 200. The dividend received deduction (500) can only be applied in the amount of 300. Thus, the group contribution received constitutes a minimum taxable base. In the correct application of European law, namely an effective exemption, the group contribution would be offset against the loss (200-200=0) and there would be a DRD deduction of -500.
Thus, in Belgium, combining a DRD deduction with the group contribution scheme is not possible. The effect of the deduction prohibition is that a transferable DRD surplus that is available cannot be used. This carryover of DRD surplus to later taxable periods does not guarantee actual utilization. Indeed, there must be sufficient taxable gains in the later taxable periods. Thus, the DRD deduction depends on the tax situation of the company, thus indirectly taxing dividends.
Violation found by European Court of Justice
The Court ruled that the DRD deduction prohibition on the group contribution is incompatible with European law which opposes indirect taxation of dividends. The receipt of dividends must be tax neutral. This is currently not the case if a group contribution is received simultaneously: the parent company is somehow more heavily taxed as a result of receiving the exempted dividends compared to the situation where it had not received dividends or a real exemption had played a role.
Impact
The Court of Justice recent ruling provides additional support for companies that wish to apply (or have applied in the past) the group contribution in their returns while retaining the dividend received deduction. An ex officio waiver procedure based on this new ruling is possible, as Court jurisprudence is considered a new fact. Taxpayers can request the relief for assessments levied as of calendar year 2021.
Future legislative changes
As a result of this ruling, Belgium will have to amend its legislation. The January 31, 2025 federal coalition agreement provides for (i) the removal of the DRD deduction ban on group contributions (ii) the reform of the DRD deduction to a true exemption.
Lan Yi Verbauwhede and Evert Moonen
De Langhe Attorneys
