The European Court of Justice has sided with the Belgian Government in its ruling against the European Commission over whether its tax system constituted state aid.

For over a decade, Belgium has applied a system of exemptions for the excess profit of Belgian entities which form part of multinational corporate groups.

In 2016, the European Commission declared this system constituted a State aid scheme that was incompatible with the internal market and therefore unlawful. It ordered the recovered of this aid – which amounted to €700m from 35 companies.

Belgium challenged this decision, arguing that the EC encroached upon its exclusive tax jurisdiction in the field of direct taxation, and that the EC was incorrect in assessing its excess profit exemptions as a form of state aid.

While the ECJ ruled with the EC on the issue of encroachment, it ultimately ruled that the commission was incorrect in viewing the tax system as state aid.

In its ruling, the ECJ said: “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.

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“Next, the General Court finds that 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.

“Lastly, the General Court holds that it cannot be concluded that the beneficiaries of the alleged aid scheme are 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.”

Although the EC has the right to appeal within the next two months, MEP Sven Giegold has already described the decision as a ‘bitter setback in the fight against tax avoidance in Europe.’

He said: “The ruling shows that state aid law alone cannot put an end to tax dumping in Europe. We need binding transparency in company taxes. The German Federal Government's blockade of public tax transparency for large companies must be ended. In order to be able to adopt effective measures against tax dumping, the unanimity principle in tax matters must be lifted in the European Council. The unanimity principle is the brake for more tax justice in Europe."