The Court of Justice of the European Union has ruled that Belgium unlawfully failed to transpose a key provision of the Anti-Tax Avoidance Directive, finding that Member States are unconditionally required to allow taxpayers to deduct taxes paid by a CFC from their domestic tax liability.
The Court of Justice of the European Union (CJEU) delivered a judgment on 26 February 2026, examining how Belgium has transposed the Controlled Foreign Company (CFC) rules under the Anti-Tax Avoidance Directive (ATAD).
The case centred on whether Belgium was required to allow taxpayers to deduct taxes paid by a CFC from their domestic tax liability when those CFC profits were included in the Belgian parent company’s tax base. The Court ruled that Belgium failed to fulfil its obligations by not properly transposing Article 8(7) of Directive (UE) 2016/1164, which targets tax evasion practices.
Article 8(7) of Directive (EU) 2016/1164 (ATAD) requires Member States to allow a taxpayer to deduct the tax paid by an entity or permanent establishment (the CFC) from the tax liability they incur in their state of residence. This provision is designed to prevent double taxation when income is reattributed from a low-tax subsidiary to its parent company.
Belgium’s position and arguments
Belgium argued that it was not required to transpose this specific deduction rule for several reasons:
- Deterrence of abuse: Belgium contended that since its national rules targeted “non-genuine arrangements” (under Article 7(2)(b) of the Directive) set up for tax advantages, the potential for double taxation served as a deterrent against tax abuse.
- Minimum harmonisation: It argued that because the ATAD is a minimum harmonisation directive, Member States have the right to maintain a higher level of protection for their national tax bases by opting not to allow this deduction.
- Limited scope: Belgium (supported by the Netherlands) suggested that Article 8(7) only applied to specific categories of passive income (Article 7(2)(a)) and was not necessary for non-genuine arrangements where profit allocation is governed by the arm’s length principle.
CJEU’s decision
The Court rejected Belgium’s arguments and found the following:
- Mandatory nature: The Court emphasised that the wording of Article 8(7) is imperative (“the Member State of the taxpayer shall allow…”) and does not offer Member States the option to refuse the deduction.
- Broad applicability: The provision applies to all CFC scenarios under the Directive, regardless of whether a Member State targets passive income categories or non-genuine arrangements.
- Balancing objectives: The Court clarified that while the Directive aims to fight tax avoidance, it also aims to prevent obstacles to the internal market, such as double taxation.
- Proportionality: To fight tax evasion, it is sufficient to eliminate the tax advantage gained from a non-genuine arrangement; it is not necessary to impose double taxation, which would go beyond what is required to achieve the Directive’s goals.
The CJEU concluded that by failing to adopt the legislative and administrative provisions necessary to comply with Article 8(7), Belgium failed to fulfil its obligations under the ATAD.
