On 5 January 2023, the Court of First Instance of Limburg (Hasselt division) made a ruling (n°21/480/A) concerning Dutch permanent establishment (“PE”) tax losses. The court clarified that the amount of tax losses re-incorporated in the Belgian taxable profits of the head office through the domestic recapture rule should be based on the actual amount deducted in Belgium in previous years instead of the amount of losses that the PE is permitted to deduct under Dutch tax legislation. This decision goes against the argument put forth by the taxpayer. This decision requires corporate taxpayers to keep track of the amount of PE losses previously deducted in Belgium to know which amount is to be recaptured when the PE starts to use its tax losses.
According to the Belgian tax legislation in force as of 1 January 2020, tax losses incurred by a PE of a Belgian taxpayer situated in a country where Belgium has a tax treaty granting an exclusive right to tax PE profits to the contracting state where the PE exists, also known as a “Treaty PE,” cannot be deducted from Belgian taxable profits. However, definitive losses incurred by a Treaty PE situated in an EEA Member State are an exception to this rule.
Nonetheless, the former regime still applies as it relates to pre-2020 Treaty PE tax losses: Belgian corporate taxpayers may still deduct them from their Belgian taxable profits provided they keep demonstrating that the concerned PE has not effectively used these losses yet. Should this Treaty PE become profitable in the future and use its tax losses, then the Belgian “recapture” rule will come into play, resulting in the re-incorporation of the said losses in the Belgian taxable profits. This domestic rule aims at preventing the double deduction of PE losses.
As part of the application of this former regime, a dispute arose between a taxpayer and the Belgian tax authorities as it relates to the amount of the Treaty PE tax losses to consider for the application of the Belgian recapture rule. In a nutshell, the taxpayer – a Belgian corporate resident taxpayer – carried out part of its activities through a PE in the Netherlands. This Dutch PE was in a tax loss position from financial year 2009 until financial year 2014 included (except for financial year 2010). Under the Belgian tax legislation, the Belgian company deducted the Dutch PE tax loss from its Belgian taxable profits for each of the concerned tax years. As of financial year 2015, the Dutch PE became profitable and, since then, effectively deducted the losses it generated between 2009 and 2014 from its taxable profits in the Netherlands. Accordingly, the Belgian recapture rule then came into play as of financial year 2015 (tax year 2016) to re-incorporate the Dutch PE tax losses previously deducted in Belgium in the Belgian taxable profits to the extent that the PE uses them to reduce its taxable profits in the Netherlands.
It appeared then that the amount of tax losses the Dutch PE claimed under the Dutch tax legislation was lower than the amount deducted from the Belgian taxable profits. Such discrepancy is not uncommon as the amount of the tax result/loss of a Treaty PE to be considered for Belgian corporate income tax purposes is determined following Belgian tax rules, not the laws of the State where the Treaty PE is located.
In this background, the question that the Court of First Instance of Limburg had to tackle is the amount to be considered for the application of the recapture rule: the amount of the tax losses effectively deducted from the Belgian taxable profits or the amount of the tax losses this PE carried forward according to the Dutch tax legislation?
To get the answer in the case at hand, the court had to determine the meaning to give to the terms “to the extent” (in Dutch: “in zoverre als”) mentioned in Article 23, 1. d) of the NL-BE tax treaty in force for the concerned years:
“Where, in accordance with Belgian law, losses incurred by an enterprise carried on by a resident of Belgium through a permanent establishment situated in the Netherlands have been effectively deducted from the profits of that enterprise for its taxation in Belgium, the exemption provided […] shall not apply in Belgium to the profits from other taxable periods attributable to that establishment, to the extent that those profits have also been exempted from tax in the Netherlands by reason of compensation for the said losses”.
In the taxpayer’s view, “to the extent” implies that the Belgian recapture rule may only come into play up to the amount of the taxable profits in the Netherlands on which the PE losses have been deducted. Under that interpretation, the NL-BE treaty would set a quantitative cap on the amount that may be recaptured in accordance with the Belgian tax provisions, and the Dutch tax legislation would determine this limitation.
Conversely, in the view of the Belgian tax authorities, “to the extent” only sets the conditions under which the Belgian recapture rule may fully apply, i.e., the Dutch PE must have generated taxable profits from which it effectively deducts tax losses which have been deducted previously from the Belgian taxable profits of the head office. Under that interpretation, the NL-BE treaty would only provide a derogation to the general rule according to which Dutch PE profits are only taxable in the Netherlands, with the sole purpose of permitting the recapture rule as set out by the Belgian tax legislation to apply. The words “to the extent” would thus only refer to the percentage of the losses to be recaptured for a given tax year. This stance is backed by the Belgian Minister of Finance (Parliamentary question n°245 of 23.03.2015).
In its decision, the court ruled in favour of the tax authorities. In its view, the amount to consider for the application of the recapture rule is undoubtedly the amount of the PE tax losses determined under the Belgian tax legislation. According to the court, by no means does the NL-BE tax treaty provide a rule specifying the amount of the taxable basis in Belgium. The court reiterated that the role of a tax treaty is, by principle, limited to settling the allocation of the right of taxation of certain types of income between the contracting States, which is what the NL-BE tax treaty does in its Article 23, 1., d) if we interpret this provision as only granting to Belgium the right to tax (and hence, to apply its recapture rule) the Dutch PE profits provided they have been compensated with losses previously deducted in Belgium.
The practical takeaway from this for the corporate taxpayers willing to follow the position of the tax authorities is the necessity to document the amount of Treaty PE losses deducted from the Belgian taxable profits over the years. When the time comes to recapture, it is not the amount of the tax losses carried forward mentioned in the current-year PE’s tax return that must be reported in the Belgian corporate income tax return, but the amount of the tax losses effectively deducted in Belgium, which is nearly impossible to reconcile in the absence of exhaustive fiscal documentation.
For further information, please contact:
Julien Colson, Bird & Bird
julien.colson@twobirds.com
