The scheme reduced the corporate tax base of the companies by between 50% and 90% to discount for so-called ‘excess profits’ that allegedly resulted from being part of a multinational group.

The actual recorded profit of a multinational was compared to the hypothetical profit of a standalone company in a similar position. The difference was then deemed to be 'excess profit' and the tax base reduced accordingly.

The Commission held that the scheme contravened state aid rules since it overruled normal Belgian company tax rules and the arm's length principle. Around 55 multinationals, mostly from the EU, were found to have benefited with savings of €700m in total, including the company Magnetrol International.

But now the European Court of Justice’s general court has annulled the Commission’s decision, following an appeal brought by Belgium and Magnetrol International, and which was supported by Ireland.

This alleged firstly that the Commission had encroached upon Belgium’s exclusive tax jurisdiction in the field of direct taxation, and secondly that it had erred in finding an aid scheme.

The general court did not agree with the first argument about alleged encroachment. While direct taxation falls within the competence of the members states, they must nonetheless exercise that competence consistently with EU law. Accordingly, a measure by which the public authorities grant certain undertakings advantageous tax treatment which – although it does not involve the transfer of state resources – places the beneficiaries in a more favourable position than other taxpayers is capable of constituting state aid.

Since the Commission is competent to ensure compliance with the state aid rules, it could not be accused of having exceeded its powers in this case.

However, on the second point as regards the existence of an aid scheme, the general court ruled that the Commission erroneously considered that the excess profit exemption system constituted an aid scheme, within the meaning of Article 1(d) of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union.

First of all, the provisions identified by the Commission as the basis of the alleged aid scheme did not set out all the essential elements of that scheme. Accordingly, the implementation of those provisions and thus the grant of the alleged aid necessarily depended on the adoption of further implementing measures, which precludes the existence of an aid scheme.

Secondly, the Belgian tax authorities had a margin of discretion over all of the essential elements of the exemption system in question, allowing them to influence the amount and the characteristics of the exemption and the conditions under which it was granted, which also precludes the existence of an aid scheme.

Finally, the general court said it was not possible to show that the beneficiaries of the alleged aid scheme were defined in a general and abstract manner or that there was actually a systematic approach on the part of the Belgian tax authorities as regards all of the advance rulings concerned. The Commission was therefore wrong to consider that the Belgian system relating to the excess profit constituted an aid scheme.

It is open to Belgium to challenge the judgment, and it would also be possible for the tax authorities to take action against individual beneficiaries of the scheme on a case-by-case basis.

The General Court findings are here.

Report by Pat Sweet