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					Belgian Inheritance Tax Rules for Family Companies Incompatible
with EC Treaty, ECJ Says

by Tom O'Shea

The European Court of Justice on October 25 issued its ruling in Geurts and Vogten
(C-464/05) (see Doc 2007-23781 [PDF] or 2007 WTD 208-13 ), finding that the
Belgian inheritance tax rules relating to the transfer of a family undertaking owned by
the deceased indirectly discriminate between taxpayers "on the basis of the place of
employment of a certain number of workers in a certain period," and that that
discrimination violates the EC Treaty principle of freedom of establishment.

The main issue in the case concerned an exemption from Belgian inheritance tax on
the transfer of shares in a family company in which at least 50 percent of the shares
were held by the deceased (or were held jointly, with his close family members). The
exemption applies only if, in the three years preceding the death of the deceased, the
undertaking or company employed at least five full-time workers in the Flemish
region of Belgium.

In the case of Dennis Vogten, the family companies employed more than five full-
time workers, but in the Netherlands, not in the Flemish region of Belgium.
Consequently, Vogten's heirs were denied the tax exemption.

                             Which Freedom Applied?

The ECJ, recalling its judgment in N (C-470/04) (see Doc 2006-18757 [PDF] or 2006
WTD 174-9 ), observed that article 43 of the EC Treaty (on the freedom of
establishment) applied to persons who transferred their residence from the
Netherlands to Belgium and continued to hold the majority of the shares in Dutch
companies. Therefore, the freedom of establishment also was the applicable freedom
in Geurts and Vogten. Any restrictive effects on the free movement of capital were
"an unavoidable consequence of any restriction on freedom of establishment and do
not justify an independent examination of that measure in the light of Articles 56 EC
to 58 EC," the ECJ said.

                           Discrimination or Restriction?

The ECJ found that the Belgian inheritance tax rules treat owners of family
companies (and their heirs) differently depending on whether the family undertakings
employed workers in Belgium or in another EU member state. The Court, recalling its
judgment in Baars (C-251/98), noted that "legislation of a Member State which
provides for a difference in treatment between taxpayers on the basis of the place
where the company of which those taxpayers are shareholders has its seat is in
principle contrary to Article 43 EC." The Court found that the same is true when the
tax rules provide for different treatment based on "the place where the company
owned by those taxpayers employs a certain number of workers for a certain period of

In the eyes of the ECJ, this is indirect discrimination on grounds of nationality,
because discrimination on the basis of a company's seat leads to a result similar to
overt discrimination on grounds of nationality. The Court explained that a company
established in Belgium can fulfill the condition in the Belgian inheritance tax rules
"more easily." Accordingly, the Court decided that the Belgian tax rules indirectly
discriminate between taxpayers "on the basis of the place of employment of a certain
number of workers in a certain period," and that that discrimination is "liable to
hinder the exercise of the freedom of establishment by those taxpayers."


The Belgian government put forward a number of justifications in support of its
discriminatory tax rules. It said that the legislation does not refer to the establishment
of an undertaking in Belgium, just to the employment of some workers there, and that
undertakings with seats in other EU member states can enjoy the tax advantage at
issue if they employ the specified number of workers in Belgium. The government
also argued that the rules are justified by the need for effective fiscal supervision and
the need to safeguard the survival of small and medium-size enterprises and to
maintain employment in SMEs in the event of the death of their owners.

The ECJ rejected all of those arguments. It accepted that safeguarding the survival of
SMEs and the employees of those enterprises might constitute an acceptable
justification for the Belgian rules. However, that justification has to be measured
against the principle of proportionality. Belgium did not demonstrate the need to limit
the inheritance tax advantage to enterprises that have the requisite number of
employees in Belgium, the Court said. It commented that "in relation to the objective
of preventing inheritance tax from jeopardizing the continuation of family
undertakings, and therefore the jobs which they bring, undertakings having their seat
in another Member State are in a situation comparable to that of undertakings
established" in Belgium.

The Court also observed, in relation to the effectiveness of fiscal supervision, that
even though the EU mutual assistance directive1 does not apply to inheritance tax
situations, "that difficulty cannot justify the categorical refusal to grant the tax
benefits in question since the tax authorities could request the taxpayers concerned to
provide . . . the evidence which the authorities consider necessary to be fully satisfied
that those benefits are granted only where the jobs in question fulfill the criteria set
out under national law."


The ECJ therefore held that the Belgian rules are incompatible with article 43 of the
EC Treaty because they exclude from the inheritance tax exemption family
undertakings that employ workers in other EU member states and grant the tax
exemption when comparable undertakings employ the relevant workers in Belgium.

The Geurts and Vogten decision is another significant ECJ judgment concerning the
compatibility of the member states' domestic inheritance tax rules with EU law. Those
rules remain within the competence of the member states but must comply with EU


In the ECJ's Barbier case (C-364/01), the free movement of capital was at stake. The
appellant had moved from the Netherlands to Belgium and had purchased some
properties in the Netherlands, from which he received rent. He then conducted a series
of transactions involving the transfer of the financial ownership of his properties to
private Dutch companies that he controlled. Dutch rules allowed the legal title to
immovable property to be split from its financial ownership. Consequently, the
transactions resulted in some tax advantages for the appellant and, after his death, for
his estate. The Dutch inheritance tax valuation rules treated the appellant differently
than a Dutch resident because he died while he was resident in another member state.
The ECJ found that those tax rules restricted the free movement of capital. More
significantly, it went on to point out that "a Community national cannot be deprived
of the right to rely on the provisions of the [EC] Treaty on the ground that he is
profiting from tax advantages which are legally provided by the rules in force in a
Member State other than his State of residence."

Free Movement of Capital or Freedom of Establishment?

In Geurts and Vogten, the Belgian tax rules clearly fall within the scope of the
freedom of establishment because they relate to the shareholdings of deceased persons
in family undertakings that give the shareholders definite control or influence over
those family businesses.

In Baars the ECJ determined that "a national of a Member State who has a holding in
the capital of a company established in another Member State which gives him a
definite influence over the company's decisions and allows him to determine its
activities is exercising his right of establishment." Applying that reasoning to Geurts
and Vogten, it is clear that the Belgian inheritance tax rules apply only to
shareholdings where a "definite influence" or "control" is at stake. Therefore, the ECJ
was entitled to select the freedom of establishment as the main fundamental freedom
at play, and also was entitled to find that any effects of the Belgian inheritance tax
rules on the free movement of capital are "an unavoidable consequence of any
restriction on the freedom of establishment." The Court was merely following its
now-established case law in that area when both the free movement of capital and the
freedom of establishment are potentially breached by the Belgian inheritance tax
rules. (For a related story, see Doc 2007-9386 [PDF] or 2007 WTD 83-9 .)

Extension of Tax Advantages Cross-Border

The ECJ judgment in Geurts and Vogten is also significant because of the Court's
reminder to the member states that their tax rules cannot discriminate, particularly in
an area without internal frontiers. The inheritance tax rules in question favored the
transfer of family undertakings that employed workers in Belgium, and not in other
member states. In other words, the Belgian rules are protectionist in nature, granting a
tax advantage to residents who employed residents through their family business. The
Belgian government's justification for maintaining those rules was the need to prevent
those inheritance tax rules from jeopardizing the continuation of family undertakings.
The Court pointed out that family undertakings employing workers in other member
states could be equally affected by those inheritance tax rules.

In an internal market comprising an "area without internal frontiers," the Court has
shown a reluctance to accept justifications offered by member states for limiting some
tax advantages to domestic situations and refusing to grant them to residents in cross-
border situations. This has become clear from the Court's decisions in cases such as
Manninen (C-319/02), Marks & Spencer (C-446/03), and Keller Holding (C-471/04).
(For the ECJ judgments in those cases, see Doc 2004-7814 [PDF] or 2004 WTD 174-
17 ; Doc 2005-25015 [PDF] or 2005 WTD 239-16 ; and Doc 2006-3710 [PDF] or
2006 WTD 38-7 , respectively.)


In Manninen, Finland failed to extend an imputation tax credit granted to its residents
when they received dividends from Finnish companies. When Finnish residents
received dividends from Swedish companies, no imputation tax credit was granted in
Finland. The consequence was (usually) additional taxation for Finnish residents who
invested their capital in Swedish companies. The ECJ found that those rules were a
restriction on the free movement of capital and rejected Finland's justifications that
their rules conformed to the principle of territoriality and were necessary to ensure the
cohesion of its tax system.

The Court noted that the purpose of the Finnish rules was to prevent economic double
taxation of a company's profits. This could be encountered by both Finnish investors
investing in Finland or elsewhere, if the state of investment did not provide some
form of relief for economic double taxation. This might occur in a situation when the
state of investment imposed corporation tax only on profits of the company that were
not distributed. In those circumstances, the Finnish investor investing in a Finnish
company and a Finnish investor investing in the nonresident company might not be in
the same situation (and hence are not comparable).

However, in other situations when the state of investment imposed corporation tax on
the company paying the dividend, the Finnish investor receiving dividends from such
a company suffered economic double taxation. Consequently, those Finnish resident
investors were comparable and were entitled to not less favorable treatment.

The Court went on to note, "Having regard to the objective pursued by the Finnish tax
legislation, the cohesion of the tax system is assured as long as the correlation
between the tax advantage granted in favor of the shareholder and the tax due by way
of corporation tax is maintained. . . . Therefore . . . the granting to a shareholder who
is fully taxable in Finland and who holds shares in a company established in Sweden
of a tax credit calculated by reference to the corporation tax owed by that company in
Sweden would not threaten the cohesion of the Finnish tax system and would
constitute a measure less restrictive of the free movement of capital than that laid
down by the Finnish tax legislation."

The Court used similar reasoning in Marks & Spencer in relation to the United
Kingdom's group relief rules and in Keller Holding in relation to German rules
concerning the financing of subsidiaries.

Marks & Spencer

In Marks & Spencer, the ECJ was faced with U.K. tax rules that granted loss (group)
relief when a U.K. parent company had established a subsidiary in the United
Kingdom that incurred losses, but not when the subsidiary was established in another
member state. The United Kingdom argued that those rules were justified because the
United Kingdom did not tax the subsidiary established in another member state. The
Court rejected that argument, saying, "In order to ascertain whether such a restriction
is justified, it is necessary to consider what the consequences would be if an
advantage such as that at issue in the main proceedings were to be extended
unconditionally." The outcome was that the United Kingdom's group relief rules had
to be extended cross-border in situations when the subsidiary was unable to obtain
loss relief in the member state of establishment. That ensured the equal treatment of
U.K.-resident parent companies.

Keller Holding

Similarly, in Keller Holding, German rules restricted the deduction of financing costs
for subsubsidiaries to companies resident in Germany; if the subsubsidiary was
resident in another member state, Germany denied the deduction (tax advantage). In
Keller Holding's situation, it was clear that the German parent company received
dividends from its Austrian subsubsidiary on a tax-free basis through a combination
of the Austria-Germany income tax treaty, which exempted taxation on those
dividends in Germany, and through German domestic rules, which exempted dividend
payments from a German resident subsidiary to a German resident parent company.

Consequently, Keller Holding was comparable to another German parent company
with a subsidiary in Germany that received dividends from its subsidiary also resident
in Germany. In both instances, the German parent companies received dividends on a
tax-free basis from their subsubsidiaries, but the German tax rules at issue allowed a
deduction for the financing costs related to the subsubsidiary only when it was
resident in Germany and not in another member state such as Austria. The Court
found that to be a restriction of the freedom of establishment.

Germany argued that its tax rules were necessary to ensure the coherence of the
German tax system. However, the Court disagreed and said, "The legislation at issue
in the main proceedings does not establish any relationship between the deductibility
of the financing costs relating to the shareholdings of the parent company and the
profits in respect of which the indirect subsidiary is liable to tax. Moreover, the profits
realized by that indirect subsidiary, which enabled it to distribute dividends, are
subject to corporation tax in Austria, just as the profits of an indirect subsidiary which
has its registered office in Germany are taxable in that Member State, since the place
of establishment of the parent company is of no importance in that regard."
Consequently, Germany was obliged to grant not less favorable treatment to German
parent companies such as Keller Holding whose subsubsidiaries were resident in

                                    Final Thoughts

The ECJ decision in Geurts and Vogten represents an application of the
migrant/nonmigrant test (see Doc 2006-3391 [PDF] or 2006 WTD 95-10 ), whereby
a resident of an origin member state who chooses to exercise a fundamental freedom
(in this case, the freedom of establishment) is disadvantaged by a tax rule of the origin
member state when compared with another resident of the origin member state who is
in a comparable situation. Those persons are entitled to not less favorable treatment
when they exercise their fundamental freedom rights.

The Belgian inheritance tax rules clearly do not guarantee that result and consequently
were found to be incompatible with the freedom of establishment.

Tom O'Shea, lecturer in tax law, Centre for Commercial Law Studies, Queen Mary,
University of London

 Council Directive 77/799/EEC of December 19,1977, concerning mutual assistance
by the member states in the field of direct taxation.