Belgium Coordination Centres - they are gone but discussion continues coming back

“The problem with practicing tax law is that the general rule never seems to apply to anything”

The European Commission, as the (legal) guardian of the EC Treaty, has the daunting task of monitoring the application of EU law. This includes assessing the lawfulness of fiscal state aid, whether notified or not, that is granted by any of the 25 EU Member States. We already talked, in previous posts, about the EU commitment to “fight” harmful tax competition in the Code of conduct on business taxation. Today we focus a bit on State aid through fiscal measures!

In the EU, tax systems have to be in line with EU State aid rules, which deems incompatible with the common market any aid, granted through fiscal measures, that distorts or threatens to distort competition, provided it affects trade between Member States. But no rule comes without exceptions and in State Aid Rules the maze of exceptions, regulations, notices, block exemptions, guidelines, action plans is so immense that even specialists have difficulty in keeping with the pace! In fact, even if a measure fulfils the criteria for being State aid there are a number of situations where an aid can be deemed as compatible State aid. The challenge then is to pass an elephant through a key hole!

As you can imagine, sometimes that task of assessing the lawfulness of fiscal state aid can be said to be easy, but most of the times it can become a very complex analysis where substantial and procedural issues interrelate. This introduction serves to frame a recent decision from the ECJ on the famous Belgium coordination centres. Belgium, which brought to the spotlight of tax planning the Coordination Centres, hosts by coincidence the capital of Europe and therefore what better forum to evaluate and discuss whether such beneficial regime falls within the scrutiny of EU rules.

Belgium was and is keen in attracting foreign investment. Its governmental site (invest.be) even talks about how Belgium has become one of the most profitable countries for US companies to do business in the world. This was in part achieved sby using the Coordination Centres regime as a flag to attract large MNE.

Nevertheless, the Belgian coordination centres have figured first on the EU harmful tax competition list of 66 six harmful measures. In addition, the EU changed its focus to the State Aid, reassessing the regime under the new guidelines issued in 1998. So there was considerable pressure from the European Commission to abolish coordination centre legislation but as always when the lobbies are also large and strong the pressure for an arrangement that satisfies all parties is also considerable. No wonder that Belgium amended, as of 1 January 2006, its tax law to provide Belgian companies and Belgian branches of foreign companies a (notional) tax deduction based on their equity. This new regime, which applies off the board, substitutes in practice the Coordination Centres scheme.

If the regime was so important, no wonder that there is litigation still going on within the European Courts. On the 9 February 2006, the Advocate General of the European Court of Justice (ECJ) gave his opinion in the joined cases of Kingdom of Belgium v. Commission (C-182/03), Forum 187 v. Commission (C-217/03) and Commission v. Council (C-399/03). Unfortunately this decision is still not available in English so you will have to stick with my summary.

The Belgium Coordination Centres are basically undertakings belonging to MNE providing services to other members of the group. By way of derogation from the ordinary tax system, the taxable revenue of the Belgium Coordination Centres was, under a 10-year licence, basically determined as a fixed amount on the basis of costs incurred (cost-plus method). This beneficial regime, which dated back to 1984, played a crucial role in attracting MNE performing financial schemes, such as centralized borrowing, intragroup cash and treasury management.

Although initially the Commission initially did not consider the Belgian Coordination Centres regime scheme to constitute State aid, subsequent to the Code of Conduct initiative to tackle harmful tax competition (1997) and the Commission notice on the application of the State aid rules to measures relating to direct business taxation (1998), the Commission reviewed the system again.
Upon decision of 17 February 2003, the Belgian Coordination Centres regime was considered by the Commission to constitute state aid incompatible with the Common Market. The decision was determined by the deviation from the OECD guidelines on the cost-plus method (i.e. use of a default mark-up rate of 8% without verifying if this reflects the underlying economic reality and exclusion of certain operating costs from the tax base).

The Commission therefore ordered Belgium to discontinue the scheme and refrain from new admissions and renewals of existing approvals. Nevertheless, recognising legitimate expectations on the part of beneficiaries of the scheme, the Commission allowed the Coordination Centres that hold an approval as from the date of notification of the Decision, to continue to enjoy the benefits of the scheme until 31 December 2010.

Following this decision, the Kingdom of Belgium and Forum 187 (Belgium association of Coordination Centres) brought an action under Article 230 EC for the suspension and partial or full annulment of the decision of the Commission (C-182/03 and C-217/03). On 26 June 2003, the President of the ECJ preliminarily agreed with the applicants and ordered that the ban on renewals be lifted.

In parallel, Belgium requested to the Council, in accordance with Article 88(3) of the EC Treaty, to renew licences until 31 December 2005 to certain undertakings authorised to act as Coordination Centres and whose authorisations were due to expire between 17 February 2003 and 31 December 2005. This application would partly overrule the Commission decision of 17 February 2003. The Council decision of 16 July 2003 concluded that exceptional circumstances existed, making it possible to extend the scheme until 31 December 2005, to Coordination Centres authorised as at 31 December 2000 and whose authorisations would expire before 1 January 2006. Following this decision, the Commission brought an action against the Council (C-399/03).

- Case C-399/03: The Commission filed an appeal to the ECJ on the following grounds: (i) Lack of competence of the Council, since its decision-making power, under the third paragraph of Art. 88(3), is an exceptional power, which must be strictly interpreted; (ii) Misuse of powers and procedure by the Council on the basis that the power of the Council was used to neutralise the Commission's Decision and thereby produce the same effects as an annulment judgment by the ECJ; (iii) Infringement of the institutional equilibrium established by the EC Treaty and of the general principles of Community law; (iv) Infringement of the State Aid Rules and Directive 69/335/EEC (concerning indirect taxes on the raising of capital); (v) manifest error of assessment and misuse of powers as to the existence of exceptional circumstances.

- Cases C-182/03 and C-217/03: The subject matter of the actions brought by the Kingdom of Belgium and by Forum 187 are not exactly the same. Whereas Forum 187 seeks the annulment of the whole decision, Belgium seeks the annulment of the decision only in so far as it does not authorise it to grant, even temporarily, renewal of authorisation to Coordination Centres, which benefited from the regime at issue as at 31 December 2000.
In summary, the Kingdom of Belgium grounds of appeal were: (i) Firstly, it maintains that the Commission infringed Art. 88(2) and the principles of legal certainty, protection of legitimate expectations and proportionality, by not granting a reasonable period following notification of the contested decision; (ii) Secondly, it claims that the Coordination Centres had acquired legitimate expectations that their authorisations would be renewed; (iii) Thirdly, it alleges infringement of the principle of equality, since Coordination Centres whose authorisations expired in the months following notification of the decision were placed in a different situation than others which benefited from a reasonable period; (iv) Fourthly, it holds insufficient grounds of the decision as to the reasons which led the Commission, after acknowledging the need for a reasonable transitional period, to prohibit indiscriminately any renewal of authorisations after the date of notification of the decision; (v) Finally, it is argued that the corrigendum made to the decision made its interpretation extremely uncertain.
In its pleading, Forum 187 raised four pleas: (i) In first place it maintains that the decision has no legal basis and infringes the principle of legal certainty; (ii) Secondly, it claims that the substantial analysis made in the decision contains several errors; (iii) In third place, it alleges infringement of the legitimate expectations, which the Commission had created for the Coordination Centres; (iv) The fourth and final plea relies on insufficient grounds to reverse previous commission decisions of 1984 and 1987 and the lack of justification for the transitional period granted.

Given the juridical connection between the various cases the ECJ decided to join them for procedural purposes.

The Advocate General suggests that in the action against the Council (C-399/03), the ECJ should declare admissible the appeal brought by the Commission and therefore annul Council Decision 2003/531/EC.

The Advocate General referring to Commission v Council (Case C-110/02), pointed out that the power conferred upon the Council by the third subparagraph of Art. 88(2) EC is clearly exceptional in character. In that case, the court ruled that if no application to the Council was made before the Commission declared the aid incompatible with the common market, the Council was no longer authorised to exercise the exceptional power conferred upon it by the said third subparagraph. The court noted that such interpretation avoids situations where the same State aid is subject of contrary decisions taken successively by the Commission and the Council and contributes to legal certainty. The advocate General therefore suggests the ECJ to annul the Council Decision on the basis of the lack of competence of the Council to adopt such decision.
With regards to the actions brought by the Kingdom of Belgium and by Forum 187 (C-182/03 and C-217/03), the Advocate General suggests that the ECJ should uphold the action for annulment and therefore partially annul the decision of the Commission C 564 (2003) of 17 February 2003, in so far as it does not authorise Belgium to grant, even temporarily, renewal of authorisation to Coordination Centres which benefited from the regime until the date of the decision and whose authorisations expire before 31 December 2010.

In a long and complex opinion, the Advocate General started by suggesting that the ECJ should reject the pleas for the annulment of the whole decision. Nevertheless, the Advocate General stated that the principle of equality, whereby comparable situations may not be treated differently unless difference of treatment is objectively justified, warrants that the Commission decision should be partially annulled. Accordingly the Advocate General pointed out that a prohibition to renew licences gives rise to an unjustified difference in treatment, since the Coordination Centres whose authorisations expire in the months following notification are not able to enjoy the scheme until 31 December 2010, while Coordination Centres whose licences were renewed between 2001 and 2002 may benefit for such reasonable period. As such, the Advocate General concluded that the ECJ should partially annul the decision of the Commission, in so far as it does not authorise Belgium to grant, even temporarily, renewal of authorisations in place at the date of the notification and whose authorisations expire before 31 December 2010.