14 March 2025

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      The CJEU rules that Belgium's restriction on using the dividend received deduction on intra-group transfers breaches EU law

      CJEU – Belgium – Parent-Subsidiary Directive - Prohibition on taxing profits received – Dividend Received Deduction – Tax consolidation – Prevention of fraud and abuse 

      On March 13, 2025, the Court of Justice of the European Union (CJEU or the Court) rendered its decision in case C-135/24. The case examines whether the combined application of Belgium's Dividend Received Deduction regime (DRD) and the Belgian tax consolidation system is compatible with the EU Parent-Subsidiary Directive (PSD).

      The Court found that Belgian rules preventing the use of the DRD on ‘intra-group transfers’ – transfers received based on the Belgian tax consolidation system, breaches EU law.

      Background

      Case C-135/234 concerns a Belgian company (the Plaintiff) that received dividends from its subsidiaries in 2019. The Plaintiff was part of a Belgian tax consolidated group, and it also received an intra-group transfer, which was added to its tax base.

      Under the Belgian rules implementing the Parent-Subsidiary Directive (PSD) applicable at that time, dividends that were eligible for the tax benefits prescribed by the PSD were initially included in the tax base of the recipient company, followed by a 100 percent deduction – the so-called dividend received deduction regime (DRD). If the DRD exceeded the company's taxable base, the excess could be carried forward to future financial years.

      Furthermore, the Belgian tax consolidation rules allowed in-scope Belgian companies to transfer part or all of their taxable profits to a group company that had incurred losses during the same tax period, under certain conditions. The transferred amount was included in the tax base of the recipient company. However, the Belgian law explicitly prohibited certain deductions, including the DRD, from being applied to intra-group transfers included in the tax base.

      Due to the limitation described above, the Plaintiff was unable to fully deduct the dividends that would have otherwise been eligible for the PSD exemption. If the Plaintiff had not received any dividends that satisfied the conditions for benefiting from the PSD participation exemption during the relevant tax year, its tax base would have been negative, resulting in no tax liability. The Plaintiff argued that the Belgian legislation was incompatible with EU law and initiated legal proceedings in Belgian courts. The Court of First Instance of Liège, sharing concerns about the compatibility of the rules with EU law, referred the case to the CJEU.

      The referring court seeks clarification on whether:

      • the PSD provisions on the participation exemption preclude national tax legislation that limits the benefit of tax-exempt dividends for companies receiving intra-group transfers under a local tax consolidation regime; and
      • such legislation can be justified under Article 1(4) of the PSD, which allows measures to prevent fraud and abuse. 

      CJEU decision 

      The CJEU recalled that the aim of the PSD is to ensure tax neutrality for profit distributions between subsidiaries and parent companies within the EU, by eliminating economic double taxation, whereby two different taxpayers are taxed with respect to the same income. Quoting its settled case-law, particularly case C‑389/18 concerning the Belgian DRD regime and notional interest deductions, the Court emphasized that Member States cannot impose additional conditions on the participation exemption prescribed by Article 4(1)(a) of the PSD beyond those explicitly stated in the Directive. In the Court’s view, any national measure that, whilst not directly taxing dividends received by a parent company, nevertheless results in their indirect taxation falls under this prohibition. The CJEU noted that such measures are incompatible with the wording and objective of the PSD, as they fail to fully prevent economic double taxation.

      The Court then examined whether the disputed Belgian rules led to the indirect taxation of dividends received. Consistent with its settled case-law, the CJEU held that the appropriate comparison in this context is with a Member State that has implemented a straightforward exemption system, in which dividends are entirely excluded from the recipient’s tax base. The Court noted that the interaction between the Belgian DRD regime and the tax consolidation regime could lead to higher taxation for parent companies that receive intra-group transfers, compared to a scenario where those companies did not receive such dividends or where the dividends were fully excluded from their tax base. Consequently, in the Court’s view, the regime under dispute does not ensure the tax neutrality of dividends. Moreover, the CJEU held that the voluntary nature of the intra-group transfers under the tax consolidation regime or the ability to carry forward the DRD does not alter this conclusion.

      The Court also rejected Belgium’s plea that the dispute rules were permissible under Article 1(4) of the PSD, which allows Member States to introduce national provisions necessary to prevent tax evasion or abuse. Belgium had argued that the intra-group transfer regime was designed to ensure fair compensation between profits and losses within a corporate group and that the disputed rules aimed to counteract any intention to abuse this regime by neutralizing the advantages that would arise from an excessively high intra-group transfer. However, the CJEU reiterated that such national tax measures must specifically target wholly artificial arrangements which do not reflect economic reality, the aim of which is unduly to obtain a tax advantage. Under the Court’s settled case-law, a general presumption of abuse is not allowed. The Court then noted that the Belgian rules under dispute prevented the use of the DRD on intra-group transfers regardless of whether tax abuse was present.

      Based on these considerations, the Court concluded that the Belgian legislation was in breach of EU law.

      ETC Comment

      The case follows previous decisions of the CJEU with regards to the Belgian DRD regime, and reiterates the principles that indirect taxation of dividends received breaches the objectives of the PSD and is not compatible with EU law.

      Based on the Federal Coalition Agreement 2025-2029 published in January 31, 2025, the new Belgian federal government aims to change the current DRD regime into a participation exemption. The exact details of the proposed participation exemption regime are not clarified yet, but it is stated that the minimum participation condition of 10 percent remains unchanged under the new exemption regime. Moreover, the alternative participation condition on the minimum acquisition value of EUR 2.5 million is increased to EUR 4 million and will be accompanied by a requirement that the participation must constitute a financial fixed asset (this is not expected to apply to SMEs). 

      Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre, Kris Lievens, Wolfgang Oepen or Ilke Vandenbroeck (KPMG in Belgium) or, as appropriate, your local KPMG tax advisor.


      Raluca Enache

      Head of KPMG’s EU Tax Centre

      KPMG in Romania

      Ana Puscas

      Senior Manager, KPMG's EU Tax Centre

      KPMG in Romania

      Kris Lievens

      Partner, Head of Corporate Tax | Tax, Legal & Accountancy

      KPMG in Belgium

      Wolfgang Oepen

      Executive Director

      KPMG in Belgium

      Ilke Vandenbroeck
      Ilke Vandenbroeck

      Senior Counsel

      KPMG in Belgium

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