On 17 October 2019, the CJ issued its judgment in case Argenta Spaarbank (C-459/18). The case deals with the calculation of the notional interest deduction (deduction for capital risk) in the case of a Belgian company that has a Netherlands permanent establishment the income of which is exempt under the double tax treaty signed between those countries. The CJ concluded that there is no actual difference between how the deduction applies to domestic and foreign permanent establishments.
The Belgian notional interest deduction is calculated based on the amount of the company’s equity capital. For such a calculation, the net value of the assets of a permanent establishment (deemed as its equity capital) situated in another Member State was not taken into account if the profits of that permanent establishment were not taxable in Belgium by virtue of a double tax treaty. However, such a limitation was found in breach of the freedom of establishment by the CJ in the Argenta Spaarbank judgment (4 July 2013, C-350/11). Then, the Belgian legislation was amended so that the net value of the assets of such a permanent establishment is taken into account in the calculation of the deduction, but, subsequently, this amount is reduced by the lesser of the following amounts: the part of the deduction that relates to the permanent establishment’s equity capital or the positive result of the permanent establishment.
Given that such a reduction is not applied in the case of a permanent establishment situated in Belgium, the CJ was asked whether the freedom of establishment precludes this treatment. The CJ identified and analysed three situations, and concluded that under none of those situations is a company, with a foreign permanent establishment the income of which is exempt in Belgium under a double tax treaty, treated less favourably than a company with a domestic permanent establishment.
First, if the permanent establishment suffers losses, the notional interest deduction is not reduced, so there is no difference in treatment. Second, if the permanent establishment generates a positive result which is lower than the part of the deduction for risk capital which relates to that permanent establishment, the exceeding part of the deduction is taken into account to reduce the taxable 6 base of the company, as it were the overall outcome for a domestic permanent establishment the income of which is not exempt. And third, if the permanent establishment generates a positive result which exceeds the related part of the deduction for risk capital there is no disadvantage, given that the taxable base of a company with a domestic permanent establishment would be higher.
