The Court Of Justice Of The European Union Strikes Again On The Dividend-Received Deduction

The distinctive nature of the Belgian Dividend-Received Deduction ("DRD") mechanism has led to various decisions from the Court of Justice of the European Union ("CJEU") confirming, in certain situations, its incompatibility with EU Parent-Subsidiary Directive("PSD"). In its recent judgment of 13 March 2025 (C-135/24), the CJEU once again confirmed the incompatibility of the DRD, this time in the context of its interaction with the Group Contribution Regime("GCR") regime.

Belgian DRD and GCR regimes

Belgium decided to implement the PSD's dividend received exemption through the DRD regime. Through this regime, qualifying dividends are successively included and deducted from the taxable base (following subsequent operations of the tax return). As the CJEU has already decided, the "inclusion-deduction" mechanism generates results that are not always compatible with the PSD (e.g., 19 December 2019, C-389/18, Brussels Securities; 4 June 2009, C-439/07 & C-499/07, KBC Bank; 12 February 2009, C-138/07, Cobelfret).

Belgian tax law however foresees a conditional GCR allowing a company to claim a tax deduction for current year taxable profits it has transferred to another qualifying company. The amount of transferred profits is added to the taxable profits of the recipient company, allowing it to offset its current year losses against the group contribution received.

If the group contribution transferred exceeds the recipient company's current year negative result (calculated before including the group contribution but after including the DRD qualifying dividends), then none of the tax deductions, including the DRD, can be applied.

This leads to complications for companies applying the DRD and receiving a group contribution the same tax year, as the inclusion of dividends reduces any negative result and prevents an offset of group contributions, creating a situation where loss-making companies that receive dividends are unable to fully utilize the GCR regime.

Context of the case

These complications have been addressed by the CJEU in the commented judgement. The factual background of this case can be summarized as follows. John Cockerill SA, a parent company, received from its subsidiaries DRD qualifying dividends amounting to approximately € 96 million and group contributions amounting to approximately € 44 million.

Even though John Cockerill SA was loss making, the inclusion of the dividends in its taxable basis combined with the deduction restriction on group contributions led to an effective taxation of approximately € 13 million.

If John Cockerill SA had not received DRD qualifying dividends, its tax basis would have been negative, resulting in no tax liability, as it would have been able to completely offset the group contributions. John Cockerill SA argued that the application of the Belgian DRD regime led to a difference in treatment contrary to the PSD.

Nevertheless, the Belgian State justified this specific restriction by invoking that the objective of the GCR is to prevent profit transfers exceeding current year losses and thereby prevent potential abuses. Furthermore, it argued that there was no issue in the situation at hand since the excess DRD could be carried forward to following years.

CJEU judgment

Despite the arguments of the Belgian State, the CJEU considered that under current Belgian rules, a parent company receiving a group contribution may be liable to a higher taxation when receiving a DRD qualifying dividend during the same taxable year. Hence, this situation results in an indirect taxation of dividends that would only be acceptable as a means to prevent tax evasion, fraud, or abuse, by targeting specifically "artificial arrangements".

In the absence of any "artificial arrangement", the CJEU ruled that the DRD "inclusion-deduction" mechanism contravenes the PSD in its interaction with the GCR.

Key takeaways

Since the current "inclusion-deduction" DRD regime has reached its (European) limits, it is thus becoming clear that it must be reformed to become a full-fledged exemption regime. Fortunately, the Arizona Coalition agreement indicates that, as of tax year 2026, the DRD should become a full-fledged exemption via an increase of the beginning situation of the reserves in the tax return.

Concerning previous taxable years, for taxpayers having received a group contribution and a dividend distribution during the same taxable year and applied the GCR restriction, there is an opportunity to challenge adverse consequences by (depending on the timeline) submitting a tax claim or an ex officio relief request to correct their tax position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.