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ECJ: Cobelfret extended to domestic situations and potentially to dividends received from third countries

On 4 June 2009, the European Court of Justice (ECJ) gave its order in the joined cases Belgische Staat v. KBC Bank NV and Beleggen, Risicokapitaal, Beheer NV v. Belgian state (C-439/07 and C-499/07). References for a preliminary ruling were made by Brussels Court of Appeal (Hof van Beroep Brussel) on13 September 2007 and by the Court of First Instance Bruges (Gerecht van eerste aanleg Brugge) on 16 November 2007.

The ECJ held that the first indent of Art. 4(1) of the Parent-Subsidiary Directive 90/435/EEC (Directive) must be interpreted as precluding legislation of a Member State which provides that dividends received by a parent company established in that state from a subsidiary established in another Member State first have to be included in the tax base of the parent company, whereafter 95% of those dividends are deducted so far as, for the tax period in question, the parent company has a positive profit balance after deduction of other exempted profits.

As a result, the parent company in a later taxable period will be taxed on those dividends when it made no or insufficient taxable profits during the taxable period in which the dividends were received; or the loss of that taxable period is offset by the profits and to an amount equal to those profits the loss carry forward is lost.

In addition, the ECJ decided that the first indent of Art. 4(1) of the Directive, read in conjunction with Para. 2 of that Article, must be interpreted as meaning that the Member States are not obliged to allow a full deduction of dividends received from a foreign subsidiary from the taxable profits of the parent company established in that State and that any resulting loss can be carried forward. The Member States are free to determine how to the reach the result of Art. 4(1) of the Directive having regard to the needs of their national law as well as to the option granted under Art. 4(2).
Where a Member State has opted to apply the exemption method of the first indent of Art. 4(1) of the Directive and losses under the rules of that State can be freely carried forward to later assessment years, this rule precludes a provision of a Member State which reduces the loss carry forward of the parent company with the dividends received from a foreign subsidiary.

Furthermore, the ECJ considered that when domestic legislation for its solutions in purely internal situations follows the Community solutions, it is for the national judge to decide on the exact scope of this reference to Community law, in the context of the division of power between the national judge and the Court based on Art. 234 of the EC Treaty. The question to what extent the application of the Community law for internal situations is limited by domestic law, must be assessed by the Courts of that State.

Where, under the national legislation of a Member State, dividends from a company established in a third country are treated less favourably than dividends from a company which has its seat in this State, the national court, in light of the subject of national scheme and taking into account the facts of the case before it, must decide whether Art. 56 of the EC Treaty is applicable and, where appropriate, precludes such different treatment.

Finally, the ECJ judged that Art. 43 of EC Treaty does not preclude legislation of a Member State according to which a parent company established in a Member State that receives profit distributions from its subsidiary established in another Member State, under which those profit distributions are only deductible from its taxable profits up to an amount equal to the profit of the taxable period, while those profit distributions would be fully exempt if the company had established a permanent establishment in that other Member State. However, this different treatment is only allowed if the profits received from an entity established in another Member State are not discriminatorily treated compared with profits received from domestic entities.

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