Constitutional Court refers validity of Belgian UTPR-rules to the European Court of Justice

On July 17th, the Belgian Constitutional Court ('BCC") decided to refer a preliminary question to the Court of Justice of the European Union ("CJEU") on the validity of the UTPR rules implemented in Belgium through the transposition of the Pillar 2 Directive.

Within the Pillar 2 legislative framework, the UTPR functions as a backstop, in accordance with which a constituent entity of an MNE group has an additional cash tax expense equal to its share of top-up tax that was not charged under the IIR in respect of the low-taxed constituent entities of the group. This rule is especially relevant for MNE groups which are headquartered in a country that has not (yet) adopted Pillar 2 (e.g. The United States), as it shifts the top-up tax liability to group entities located in a country that has adopted Pillar 2.

The court case was initiated one year ago, in July 2024, by the American Free Enterprise Chamber of Commerce, a U.S. non-profit organization, aimed at defending collective interest of U.S. corporations and government agencies. In the run-up to the proceedings, the organization was also supported by several other, state-oriented non-profit organizations (such as the California Business Roundtable and the Arkansas State Chamber of Commerce).

Arguments for UTPR annulment

In essence, the applicants argue that the Belgian UTPR rules impose a disproportionate burden on Belgian entities of multinational groups by requiring them to pay a tax on profits of entities outside Belgium (i.e. even when those profits have no direct connection to Belgium), and should therefore be annulled.

To substantiate this position, the applicants refer to several fundamental rights included in (i) the Belgian Constitution, (ii) The Treaty on the Functioning of the European Union and (iii) the Charter of Fundamental Rights of the European Union:

• The right of protection of property: Payment of the UTPR top-up tax may result in the Belgian entity (i) not be able to achieve (minimal) profits or (ii) be forced to discontinue its activities.
• The freedom of establishment and provision of services within the EU and the principles of legal certainty: Payment of the UTPR top-up tax (i) disproportionally affects the free disposal of economic, technical and financial resources by the Belgian entities and (ii) limits the ability for third parties to assess in advance the financial position and creditworthiness of the Belgian entities.
• The principle of equality and non-discrimination: the UTPR rules are inherently discriminatory to the extent that they do not take into account the financial position of the Belgian entity responsible for paying the UTPR top-up tax.
• The legality and tax territoriality principle: The UTPR is calculated on under-taxed profits realized in another jurisdiction by other entities and has no connection with the activities of the Belgian entity responsible for paying the UTPR top-up tax.

In response, the Belgian government reiterates that the UTPR fulfils a legitimate aim (i.e. a measure necessary to combat tax avoidance and profit shifting by multinational groups) and is proportionate (by emphasizing that the UTPR functions as a backstop rule).

Decision of the BCC

In its reasoning, the BCC recognized that the contested rules (i.e. the BE UTPR rules) are based on the Pillar 2 Directive. Considering that the applicants challenged not only the domestic transpositions, but also raised doubts about the validity of the underlying EU directive itself (and its compatibility with EU legal principles and EU primary law), the BCC referred a preliminary ruling request to the CJEU. More specifically, the preliminary ruling request seeks the position of the CJEU on the compatibility of the European UTPR-rules (Articles 12 to 14 of the Pillar 2 Directive) with the EU fundamental rights and principles raised by the applicants.

What's next?

The BCC has suspended its proceedings, pending the outcome of the CJEU’s decision. However, a decision from the CJEU should not be expected anytime soon, with procedures taking approximately 18 months. After the CJEU has rendered a decision, any party can ask the BCC to present its arguments on this judgment, only after which the BCC will render its final judgment.

The BCC did not immediately annul or suspend the contested BE UTPR-rules. Therefore, the UTPR-rules remain applicable, next to the other Pillar 2 rules (such as the IIR and the QDMTT). Since Belgium will be the first country where a return must be filed (i.e. the QDMTT return by the end of November), groups should start preparing in order to meet this compliance deadline.