OREANDA-NEWS. February 04, 2015. The Commission has opened an in-depth investigation into a Belgian tax provision, which allows group companies to substantially reduce their corporation tax liability in Belgium on the basis of so-called "excess profit" tax rulings. In essence, the rulings allow multinational entities in Belgium to reduce their corporate tax liability by "excess profits" that allegedly result from the advantage of being part of a multinational group. At this stage, the Commission has doubts if the tax provision complies with EU state aid rules, which prohibit the granting to certain companies of selective advantages that distort competition in the Single Market. The opening of an in-depth investigation gives interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

Commissioner Margrethe Vestager in charge of competition policy said: "The Belgian "excess profit" tax system appears to grant substantial tax reductions only to certain multinational companies that would not be available to stand-alone companies. If our concerns are confirmed, this generalised scheme would be a serious distortion of competition unduly benefitting a selected number of multinationals. As part of our efforts to ensure that all companies pay their fair share of tax, we have to investigate this further."

According to the Belgian tax provision under investigation (Article 185§2, b) Code des Imp?ts sur les Revenus / Wetboek Inkomstenbelastingen), a company's tax can be reduced by so-called "excess profits". These are profits registered in the accounts of the Belgian entity that allegedly result from the advantage of being part of a multinational group. In order for the deductions to apply, a company needs prior confirmation by the Belgian tax administration through a tax ruling. This scheme appears to only benefit multinational groups, whilst Belgian companies only active in Belgium cannot claim similar benefits.

According to the Belgian authorities, this tax provision only implements the general OECD "arm's length" principle. However, at this stage the Commission has doubts that this interpretation of the OECD principle is valid.

The Commission has concerns that the "excess profit" alleged under the tax rulings, i.e. the deductions that a company can claim for e.g. intra-group synergies or economies of scale, significantly overestimate the actual benefits of being in a multinational group. The deductions granted through the excess profit ruling system usually amount to more than 50% of the profits covered by the tax ruling and can sometimes reach 90%.

Moreover, the Commission's assessment so far concludes that the Belgian "excess profit" tax system cannot be justified by the objective to prevent double taxation. This is because the deductions in Belgium do not correspond to a claim from another country to tax the same profits.

Having examined past administrative practice, the Commission notes that these tax rulings are often granted to companies that have relocated a substantial part of their activities to Belgium or that have made significant investments in Belgium.

The Commission will now investigate further to conclude if its doubts are justified.