EU judges oblige Tax Authorities to apply anti-abuse provisions

Engie case

In a ground-breaking decision of 12 May 2021 the General Court of the EU ruled that the deduction and non-inclusion tax effects of a hybrid financing structure as confirmed in tax rulings granted by the Luxembourg Tax Authorities to Engie qualify as illegal state aid. The tax rulings confirmed (i) the tax deductibility of accrued, but unpaid, interest on a convertible bond (so-called ZORA) in the hands of the issuer, (ii) the exemption of the gain upon conversion of the bond in shares in the hands of the bondholder, and (iii) the exemption of a capital gain upon a subsequent transfer of the shared pursuant to a prepaid forward. 

The General Court, among others, upheld the Commission’s decision that the failure by Luxembourg to apply its domestic law anti-abuse provision in this case amounted to a selective advantage and, therefore, to illegal State aid. This decision was based on an assessment by the Commission of the aforementioned transactions under the criteria for the relevant anti-abuse provision, as laid down in case law. The Commission, followed by the General Court, considered that all such criteria were met. 

Impact for Belgian taxpayers

Over the last 2 years we have seen an uptick in aggressive tax audits whereby the Belgian Tax Authorities invoke fiscal abuse. 

We expect that the Engie decision will further fuel the Belgian Tax Authorities’ efforts to attack transactions and structures generating a tax advantage on the basis of the general anti-abuse provision, specific anti-abuse provisions under Belgian or treaty law or the EU abuse of law principle.

It will also be of crucial importance to cover the relevant anti-abuse rules when applying for a tax ruling, based on a solid argumentation which takes into account recent case law. 

If you are occasionally lost in the maze of these anti-abuse measures, you can find enclosed a slide deck from one of our recent webinars. This provides you with an overview of the relevant measures, important case law and some recommendations. We would be obviously be pleased to schedule a (digital) meeting with you to guide you through!