2004/77/EC: Commission Decision of 24 June 2003 on the aid scheme implemented by Belgium — Tax ruling system for United States foreign sales corporations (notified under document number C(2003) 1868) (Text with EEA relevance)
Date: 2003-06-24
Institutions: European Commission
Subjects: Belgium, State aid, United States, corporation tax, exchange of information, organisation, sale, tax system

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Official Journal of the European Union

28.1.2004

COMMISSION DECISION

of 24 June 2003

on the aid scheme implemented by Belgium — Tax ruling system for United States foreign sales
corporations

(notified under document number C(2003) 1868)

(Only the French and Dutch texts are authentic)

(Text with EEA relevance)

(2004/77/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

Having regard to the Treaty establishing the European
Community, and in particular
subparagraph of
Article 88(2) thereof,

the first

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1),

Whereas:

I. PROCEDURE

(1)

In 1997 the Ecofin Council adopted a Code of Conduct
for business taxation (2) with the objective of tackling
harmful tax competition;
it subsequently established a
Group to assess tax measures that fall within the scope
of the Code. In line with the undertaking given in the
Code, the Commission published in 1998 a notice on
the State aid rules to measures
the application of
relating to direct business taxation (3)
(hereinafter the
Notice),
stressing its determination to apply them
rigorously and to respect the principle of equality of
treatment.
the
Commission undertook to examine or re-examine on a
case-by-case basis, and in the light of the guidelines set
out in the Notice, the tax arrangements in force in the
Member States.

It was within this

framework that

(1) OJ C 30, 8.2.2003, p. 21.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

In this connection,
the Commission, by letter dated
23 March 2001 (D/51238), asked the Belgian authorities
to provide information on the tax ruling system for
in
United States
Belgium. Belgium replied by letter dated 18 May 2001
(A/34107).

foreign sales

corporations

(FSCs)

(3)

(4)

(5)

(6)

By letter dated 12 April 2002 (SG 2002 D/229352), the
Commission informed Belgium that it had decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the Belgian tax ruling system for
FSCs. By letter dated 27 May 2002 (A/33959), Belgium
submitted its observations.

The Commission decision to initiate
formal
investigation procedure was published in the Official
the European Communities. The Commission
Journal of
invited interested parties to submit their comments (4).
No comments were received.

the

II. DESCRIPTION OF THE MEASURE

United States regime for FSCs

A brief description of United States regime for FSCs is
necessary in order to understand the operation of the
tax ruling system for FSCs in Belgium.

As background, the World Trade Organisation (WTO)
has, in a number of rulings, found that the legislation
on FSCs provided exporting firms in the United States
with a prohibited tax incentive. To be more precise, the

(4) See footnote 1.

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inter alia, an export
incentive has been found to be,
subsidy prohibited under Article 3 of the Agreement on
Subsidies and Countervailing Measures (ASCM) and has
thus been removed from the United States tax code.

(9)

subsidy in breach of,

the exempt
the United States regime,
Since, under
income was only the ‘foreign trade income' associated
with the exportation of United States products, in late
found the scheme to be a
1999 a WTO Panel
‘prohibited' export
inter alia,
Article 3 of the ASCM. In February 2000 an Appellate
Body of
the
United States
legislation violated the United States'
obligations under the WTO. The United States Congress
responded to subsequent international pressure and its
obligation to implement the WTO finding by repealing
the regime on 30 September 2000 (6).

the WTO definitively

ruled

that

(7)

(8)

if

it

is

the

even

taxable

normally

Under the United States regime, an FSC is a foreign
corporation — typically a fully owned subsidiary of a
United States domestic corporation — that elects to be
subject to the FSC rules contained in Sections 921 to
927 of the Internal Revenue Code of 1986 (IRC 1986).
The portion of
income deriving from
FSC's
exporting United States-produced goods is exempt from
under
taxation
United States tax law. In particular, under Section 882(a)
of the IRC 1986 the above income would be taxable as
‘income of a foreign corporation effectively connected
with a trade or business carried on in the United States'.
However, under the United States regime for FSCs this
income is non-taxable in the United States because it is
deemed not to be ‘effectively connected' to United States
trade or business. The United States
regime also
transfer pricing rules under
modifies the traditional
Section 482 of the IRC 1986 by artificially allocating a
significant proportion of the income of a United States
parent company trading with its FSC to the FSC. As a
result, both an FSC and its United States parent
company are exempted from United States corporation
tax that would be normally borne by companies
carrying on a trade or business in the United States.

shares

for dividends

in an FSC is

To complete the description of the relevant provisions
the United States regime, a domestic corporation
of
holding
allowed a 100 %
received
‘dividends-received deduction'
from an FSC, in lieu of the traditional ‘indirect foreign
tax credit' normally applicable under United States law.
Thus, a United States corporation holding shares in an
FSC does not pay any United States tax on the exempt
portion of
the
non-exempt portion is taxed only once (either in the
hands of the FSC or in the hands of the shareholder),
instead of being taxed twice under general United States
rules (5).

income, while

foreign trade

the

(5) In addition, under the United States regime,

the ‘foreign trade
income' of an FSC is excluded from the income of a United States
company controlling that FSC, otherwise considered as taxable
income under Subpart F of
the IRC 1986. More particularly,
pursuant to Section 954 (d)-(e) of the IRC 1986, the above income
would ordinarily be characterised as deemed dividend income of
the controlling United States company and would be subject to tax
as ‘foreign base company income' of a controlled foreign company
(CFC).

(10)

Following the repeal, no corporation may, with effect
from 30 September 2000, elect to be an FSC. For an
FSC in existence on that date, the FSC rules continue to
apply only for transactions in the ordinary course of
trade and business performed before 2002. However, an
existing FSC will continue to benefit from the regime
to transactions ongoing after 1 January
with respect
2002 pursuant to binding contracts between an FSC and
unrelated third parties applicable as at 30 September
2000 and still
it is only once
in force. Consequently,
such contracts have expired that the FSC regime will
definitely cease to operate.

Belgian scheme for FSCs

(11) Under

the United States

regime, an FSC must be
organised or have an office in a foreign country having
an agreement with the United States for sharing tax
in force with Belgium (7),
information such as that
where the FSC must keep a set of permanent accounts.
Also under United States law, a portion of the foreign
trade income earned by an FSC or its United States
parent is exempt only if certain economic processes take
place outside the United States. To provide a legal
framework for the activities of FSCs in Belgium,
in
December 1984, the year preceding the entry into force
of
tax
administration issued a circular concerning a special

the United

regime,

Belgian

States

the

(6) US Pub. L. No. 106-519 (2000). The scheme that replaced the FSC
scheme, the Extraterritorial Income Act, was subsequently found to
be incompatible with the WTO by the WTO Panel and Appellate
Body.

(7) See,

in particular, Article 26 of

the United States — Belgium
Income Tax Convention signed in Brussels on 9 July 1970, which
contains provisions on the ‘exchange of information'.

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ruling system for FSC activities in Belgium (hereinafter
the system).

(12) Under Belgian domestic and conventional

incurred.

law (8), a
Belgian subsidiary is taxed in Belgium on its worldwide
income while a permanent establishment in Belgium of
a foreign company is taxed solely on income earned in
Belgium. By way of derogation from the above rule, a
Belgian FSC or a Belgian permanent establishment of an
FSC is determined by applying a special method
that consists in applying an 8 %
(cost-plus method)
mark-up to certain costs
In particular, a
Belgian FSC or a Belgian permanent establishment of an
FSC or of its United States parent company can apply to
the Belgian tax administration for an individual ruling
with a view to determining the taxable profit of the
entity in Belgium on the basis of
this cost-plus
computation. This indirect method of determining the
taxable profit of certain taxable entities with respect to
certain transactions with associated entities within the
same group is designed to assess the correct profit
attributable
the
‘arm's-length standard', which is
international
standard that the OECD countries have agreed should
be used for determining the taxable profit of associated
enterprises in their business relations.

adopting

entities

such

the

by

to

(13)

Several provisions in Belgium's tax code concerned with
potentially abusive transactions apply the arm's-length
tax conventions concluded by
standard. The bilateral
Belgium with other
to the
countries also adhere
principles of Article 9 of
the OECD Model Tax
Convention concerning the tax administration's right to
adjust the profit allocation where transactions have been
conducted between associated enterprises on other than
arm's-length
the
arm's-length standard is therefore necessary in order to
understand the operation of the ruling system for FSCs
in Belgium.

terms. A brief

description

of

(14) When international transactions are carried out between
the OECD member countries
associated enterprises,
for corporation tax purposes, their
have agreed that,
profits may be
adjusted in accordance with the
arm's-length principle set out in Article 9 of the OECD
Model Tax Convention. The cost-plus method is a
transfer pricing method recommended by the OECD for
indirectly determining the arm's-length price of an

(8) See,

in particular, Articles 5 and 7,

establishments'
aforementioned United States–Belgium Income Tax Convention.

‘business

profits'

and

entitled
respectively,

‘permanent
the

of

that

international transaction between associated enterprises
operating within a single group, subject
to certain
conditions. When associated enterprises deal with one
other, their commercial relations may be affected by the
fact
they may try to manipulate their profit
determination for tax reasons. On the other hand, the
tax administrations of the different countries exercising
their jurisdiction to tax may disallow deductions of
certain costs for corporation tax purposes or may adjust
the profits deriving from such international transactions
between associated entities, thereby giving rise to double
taxation.

to

the

prices

between

applied
in
independent

the
between
transactions),

(15) Unlike other recommended transfer pricing methods,
which directly determine the arm's-length price by
comparable
reference
transactions
companies
(uncontrolled
cost-plus method
determines the arm's-length price by reference to the
cost incurred by the supplier of goods or services in a
transaction
enterprises
two
(controlled transaction). Under the cost-plus method, an
appropriate mark-up is added to such costs by reference
to the profit margin ordinarily charged by suppliers in
comparable uncontrolled transactions. Such indirect
the
profit determination is carried on in light of
functions performed by such a supplier,
taking into
account
the risks assumed and the
market conditions. The results of the computation after
adding this mark-up to the costs is regarded as the
arm's-length price of the original controlled transaction.

the assets used,

associated

(16)

(17)

Enterprises

In its 1995 Report on Transfer Pricing Guidelines for
and Tax Administration
Multinational
(hereinafter
the OECD
the 1995 OECD Report),
recommends the cost-plus transfer pricing method as an
alternative arrangement for computing the tax base for
transactions between related companies.
In particular,
this method is appropriate for suppliers of semi-finished
goods where the related parties participating in the
transactions have concluded joint facility agreements or
long-term buy-and-supply arrangements and where the
controlled transactions consist in the supply of services.

The tax scheme for FSCs in Belgium is a special scheme
applicable to branches and subsidiaries of FSCs that
differs from the general tax scheme applicable to other
Belgian subsidiaries or branches of foreign companies.
In principle, Belgian subsidiaries or branches determine
their
the general
accounting principles as corrected by Belgian tax rules.
Such rules are also applied to international intra-group
transactions carried out between a Belgian subsidiary or

taxable profits on the basis of

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branch and an associated entity within the same group.
However, Belgian corporate tax law contains special
anti-avoidance provisions that relate to certain specific
aspects of transfer pricing. Under the most significant of
these provisions (Article 26 of the Belgian Income Tax
‘abnormal and gratuitous
Code 1992 (CIR 1992)), all
advantages' granted by a Belgian enterprise within the
framework of a controlled transaction are added to the
taxable income of
the beneficiary is a
that entity if
foreign company enjoying a favourable tax status in its
country of residence. Belgian tax law also contains
anti-avoidance provisions concerning royalties,
interest
on loans and the income from the transfer of property
abroad. Under
the taxpayer must
demonstrate the bona fide nature of such controlled
transactions
to avoid arm's-length price
adjustments by the tax administration. Lastly, rulings
may be obtained as to whether or not certain controlled
transactions are conducted at arm's length or whether a
gratuitous
payment
advantage.

these provisions,

constitutes

abnormal

in order

an

or

an

via

ruling

individual

administration

taxable profits by means of

The rules whereby an FSC may obtain from the Belgian
on the
tax
the
determination of
cost-plus method differ according to whether
these
profits are generated in Belgium via an independent
company residing in Belgium (an FSC or a subsidiary of
a United States
a permanent
company) or
establishment in Belgium of an FSC or of a United States
company. If the profits are attributable to a permanent
establishment in Belgium (hereinafter the FSC branch),
the tax base for corporation tax purposes is determined
by using the cost-plus method consisting in applying a
mark-up to the costs incurred by the FSC branch.
However, these costs do not include direct costs relating
to advertising, sales promotion, carriage of goods and
credit risks as well as any income tax paid by the FSC
branch. Furthermore, the mark-up applied to the total
costs computed in this way is fixed at 8 %. Application
of the 8 % rate to the cost base yields the taxable profits
that
rate of
to Belgium's
are
corporation tax.

standard

subject

8 % of the eligible costs incurred by the FSC subsidiary,
the Belgian tax administration considers
the
operations between the FSC subsidiary and its associated
companies have been carried out at arm's length and
waives the right to make any adjustment to the value of
these controlled transactions. Again, the taxable profits
generated in this way are subject to the standard rate of
corporation tax in Belgium.

that

(20)

(21)

special

scheme

The
allowed by the Belgian tax
administration is valid for three years and is renewable
tacitly. Each party may give notice of termination six
months before the end of the three-year period.

the legal
The Belgian authorities have indicated that
basis for the ruling system is Article 182(1)(3) of the
Royal Decree implementing Article 342(2) of the CIR
1992. These provisions
the minimum taxable
set
amount for foreign commercial companies operating in
Belgium. Furthermore, an FSC established in Belgium
whose profits are determined under ordinary law rules
will go unchallenged by the tax authorities under the
‘gratuitous
presumption
contained in Article 26 of the CIR 1992 if its profits
account for at least 8 % of the costs attributable to the
FSC.

advantages'

anti-abuse

III. GROUNDS FOR INITIATING THE PROCEDURE

(22)

In its decision to initiate the formal
investigation
procedure, the Commission took the view that the FSC
scheme met all the four criteria under Article 87(1) of
the EC Treaty, in that it conferred an advantage leading
to a reduction in tax revenues for Belgium, affected
competition and trade, and was selective in nature. In
particular, it took the preliminary view that the regime
conferred an advantage on the beneficiaries because:

— the exclusion of certain costs from the cost basis
taken into account for the cost-plus method, and

— the application of the fixed 8 % mark-up

are

the profits

to an independent
attributable
If
company established in Belgium (the FSC subsidiary), its
taxable profits are, in principle, determined on the basis
of its accounting profits adjusted for tax purposes under
the ordinary tax law in Belgium. However, where the
profits determined in this way correspond to at least

could lead to the determination of an artificially lower
taxable income for FSC branches and subsidiaries than
the
that which would have been calculated under
controlled
pricing
ordinary
transactions in Belgium, without this difference being

transfer

rules

for

(18)

(19)

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justified by the nature or general scheme of the tax
system in Belgium.

The Commission also considered that none of
the
from the general prohibition on aid
derogations
provided for in Article 87(2) and (3) of the EC Treaty
applied
therefore
that
incompatible with the common market.

the measure was

and

this

the minimum taxable
scheme,
Belgium. Under
profit is set at 8 % of the eligible costs of such an
establishment. For Belgium, the 8 % minimum mark-up
fixed in advance
tax
administration of
the obligation to determine on a
case-by-case basis the arm's-length profit to be applied
to
permanent
establishment and its
foreign head office or other
associated companies within the group.

is designed to relieve

transactions

controlled

between

the

a

IV. COMMENTS FROM BELGIUM

Absence of reduction in tax revenue for the State

Preliminary observations

(27)

letter

In response to the assessment made by the Commission
the Belgian
initiating the procedure,
in its
authorities
preliminary
some
presented
have
observations, claiming that the Belgian scheme for FSC
branches remained largely theoretical, the large majority
of FSCs in Belgium being permanent establishments of
FSCs to which were applied the same rules as those
applicable to all other permanent establishments of
foreign companies in Belgium.

that,

since its

introduction,

Belgium considers
the
special scheme for FSCs has generated additional tax
revenue for the Belgian State with respect to certain
items of
income that would otherwise have escaped
taxation in Belgium. Therefore, the scheme in question
would not have led to any reduction in tax revenue for
the Belgian State.

Absence of effect on competition and trade
between Member States

(23)

(24)

(25)

had

FSCs,

In addition, Belgium took the view that on 10 June 1985,
in an answer to a Parliamentary question concerning
the need for harmonisation of Member States' tax rules
governing
implicitly
the Commission
considered the scheme to be compatible with the
common market (9). The measure in question should
therefore have been considered to constitute existing aid
as defined in Article 1(b) of Council Regulation (EC)
No 659/1999 laying down detailed rules
the
application of Article 93 of the EC Treaty (10). As a
committed a
result,
procedural error by pursuing Belgium for its failure to
notify in advance to the Commission the tax scheme
applicable to activities carried out by FSCs in Belgium.

the Commission would have

for

Absence of any advantages

(26) With respect to the alleged advantage for FSC branches,
Belgium maintains that the scheme corresponds to the
ordinary tax regime applicable to any foreign company
it,
operating
Article 182(1)(3)(e) of the Royal Decree implementing
the CIR 1992 reinstated an administrative presumption
originally enacted in 1964 regarding the minimum
taxable profits of a permanent establishment of a
in
foreign company carrying on business activities

According

Belgium.

to

in

(9) See the answer given on 10 June 1985 by Mr De Clerq on behalf of
the Commission to Written Question No 1664/84 by Mrs Marijke
Van Hemeldonck (OJ C 197, 5.8.1985, p. 6).

(10) OJ L 83, 27.3.1999, p. 1.

(28)

(29)

(30)

alleged

impact

carried on by FSCs under

the Commission has not
Belgium first observes that
identified
on
negative
the
intra-Community trade and on competition caused by
the scheme in question with regard to the actual
relevant
activities
the
United States
regime. According to Belgium,
Commission misconstrued legitimate international
tax
competition as illegitimate national measures in favour
of multinational
is
claimed that
the
effects of the non-harmonised tax regimes in force in
various Member
between
States
multinationals based there.

it
enterprises. More generally,
the Commission failed to consider

on competition

the

In addition, Belgium claims that the Commission did
not demonstrate how the fixed 8 % mark-up under the
cost-plus method and the exclusion of certain costs
from the computation under
that same method of
taxable profits in Belgium might have resulted in a
reduced tax base as compared with that resulting from
the
generally
applicable to controlled transactions.

transfer-pricing method

ordinary

Belgium also claims that
the objective of both the
Belgian and the United States arrangements for FSCs is
to confer an advantage on United States exporting
affect
companies. Thus,
competition and trade between Member States, but only

scheme

could

not

the

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competition and trade between the United States and
the Community. For this reason, according to Belgium
and as
the Commission has
explicitly excluded in the past any anti-competitive
effect of the scheme in question on intra-Community
trade and competition.

already mentioned,

(35)

Absence of selectivity

(31)

Lastly, Belgium considers that the scheme in question is
not selective because its special
legal basis formally
consisting in a 1984 circular became void when in
2000 the FSC regime was repealed by the United States
Congress.

(36)

have

rulings

(32) Although the scheme might still be applicable in a very
small number of cases concerning certain earlier rulings,
such
basis
Article 182(1)(3)(e) of the Royal Decree implementing
Article 342(2) of the CIR 1992. This is the ordinary tax
law to which all permanent establishments of foreign
companies in Belgium are subject and so the scheme
would not be selective.

their

legal

sole

as

Conclusion

The Belgian Government claims that, even if the tax
the
ruling system were to be regarded as state aid,
Commission could not order
the
repayment of
advantages that might have accrued to the beneficiaries
the principle of
by virtue of
legitimate expectation.
Furthermore,
it would be impossible to compute and
claim repayment of advantages allegedly enjoyed by
non-resident taxpayers, which fall outside the scope of
Belgian jurisdiction. Accordingly,
the
presumed aid should be forgone.

recovery of

V. ASSESSMENT OF THE MEASURE

letter opening

the
formal procedure,
In its
the
FSC
case of
in the
Commission indicated that,
subsidiaries,
the advantage conferred by the scheme
derives from the way in which the mark-up applied to
admissible costs is computed. These admissible costs
the
account,
subsidiaries.
transactions
carried
Furthermore,
the fixed 8 % mark-up appears to be
substantially lower than that normally generated by the
activities of FSC subsidiaries.

for only a small portion of

in fact,

FSC

out

by

(37) Having considered the

comments by the Belgian
authorities, the Commission maintains the position it
expressed in its letter of 12 April 2002 (11) opening the
scheme under
formal procedure, namely that
examination constitutes operating
aid within the
meaning of Article 87(1) of the EC Treaty.

the

(33)

(34)

Furthermore, according to Belgium, the application of a
special method for computing the tax base for FSC
branches is justified by the impossibility of determining
the
establishment
analytically because of the lack of adequate bookkeeping
by such branches.

taxable profits of

a permanent

advertising,

(concerning

the exclusion of certain
Still according to Belgium,
expenses
sales promotion,
transport and credit risk insurance) from the cost-plus
computation for FSC branches is justified by the limited
activities carried out by such branches. In fact, these
activities correspond to business transactions whose
economic benefit is attributable to the associated foreign
entities with which FSC branches deal. As this benefit is
attributable to the other party in the transaction, the
resulting profits should not be taxable in the hands of
the FSC branch in accordance with the arm's-length
principle. In this respect, Belgium maintains that the tax
scheme for the Belgian activities of FSC branches does
not differ from the standard tax arrangements for other
controlled cross-border transactions.

Preliminary observations

(38)

The Commission rejects Belgium's remarks that the tax
scheme for FSC activities in Belgium has little practical
relevance as there are no FSC subsidiaries in Belgium
and that the FSC branches were subjected to the same
tax treatment as all other permanent establishments of
foreign companies in Belgium. These remarks prompt
the following observations by the Commission.

(39)

Besides being governed by different
legal bases, FSC
subsidiaries and branches were treated in very similar
fashion for corporation tax purposes and, furthermore,
no conclusion as to the nature of the scheme can be
drawn from the absence of FSC subsidiaries in Belgium.

(11) See footnote 1.

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In fact,
exclusively on FSC branches and, as
constitute incompatible aid.

the scheme could actually confer advantages
could

such,

the United States general system for taxing the income
of foreign subsidiaries. Furthermore,
it concluded that
the GATT should forbid the subsidy because it was
linked to exports
since only foreign trade income
deriving from ‘export property' (14) qualified for the
measure.

(40)

that, by answering the

The Commission rejects the Belgian authorities' remark
concerning its supposed implicit approval of the tax
scheme for FSC activities in Belgium. In its view, the
argument
abovementioned
parliamentary question in 1985, it might have indirectly
acknowledged the existence of the Belgian scheme has
no bearing whatsoever on the classification of
the
measure. The Commission notes that it is settled case
law that the answer to the question as to whether aid is
illegal aid or existing aid cannot depend on a subjective
assessment by the Commission (12).

(45)

(41)

The scheme was introduced in 1984 and took effect in
1985 without having been previously notified to the
Commission and, as
the measure has been
implemented unlawfully. Accordingly, the scheme may
constitute unlawful aid if it fulfils all the four criteria
discussed below.

such,

tax

the

advantages

The Commission notes that, under the United States
regime,
FSCs
specifically concern their ‘exempt foreign trade income',
the gross foreign trade
which means the portion of
income of an FSC computed in accordance with one of
‘administrative pricing rules' (15). Such
the
special
income includes:

conferred

on

— the sale or lease of goods purchased by an FSC from
the FSC

a person under
(normally its controlling United States company),

the same control as

Advantage

— the agency services concerned with such sale or

lease of goods, and

(42)

First,
the measure must confer on beneficiaries an
advantage that relieves them of charges normally borne
by their budgets. According to point 9 of
the
Notice (13), a tax advantage may be provided through a
reduction in the company's tax burden in various ways,
including through a reduction in the tax base.

— all other services concerned with such sales and

lease transactions.

(43) However,

the Commission confirms

its assessment
according to which, by substantially deviating from the
profit determination standard used for comparable
taxpayers carrying on similar cross-border transactions,
the measure
and
subsidiaries an advantage consisting in a reduction in
their taxable profits as detailed below.

FSC branches

constitutes

for

(44) At the time the United States regime for FSCs was set
up, the United States took the view that the exemption
from United States corporation tax would be given the
the economic
go-ahead by the GATT provided that
activities yielding the exempt income took place outside
the United States. Thus,
the United States legislation
required FSCs to perform substantial economic activities
as independent foreign companies. However, the WTO
Panel found that the FSC regime constituted a subsidy
because it resulted in forgone revenue as compared with

(12) See Case C-295/97 Piaggio [1999] ECR I-3735.
(13) See footnote 3.

(46)

In connection with the United States
the
Commission observes that the activities of an FSC or of
its branch in Belgium correspond to the sale or lease of

regime,

(14) Under the regime for FSCs, ‘export property' means goods that are
1. manufactured, produced, grown or extracted in the United States
by a person other than the FSC, 2. held primarily for sale or lease
in the ordinary course of FSC business, and 3. sold or leased for
direct consumption, use or disposition outside of the United States
— Section 927(a)(1) of the IRC 1986. Furthermore, not more than
50 % of
the value of export property may be attributed to
materials or components imported into the United States —
Section 927(a)(1)(C) of
Section
1.927(a)-1T(e).

IRC 1986 and Reg.

the

(15) Under the United States legislation, the FSC's income from the
controlled sale, lease and service transactions is determined using
one of the following three inter-company pricing regimes: (a) the
combined taxable income method; (b) the gross receipt method; or
(c) the arm's-length pricing rule. Whichever method produces the
highest taxable income for the FSC is the one accepted. Under the
tax exemption, such ‘exempt foreign source income' is deemed to
be foreign-source income that is ‘not effectively connected' with
the conduct of an activity in the United States.

28.1.2004

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goods originating in the United States and purchased
from an associated company within the group and to
the supply of all the services related to those sales and
lease transactions.

(47) Under the regime in question, a fixed 8 % mark-up is
applied only to the eligible direct costs borne by an FSC
branch or subsidiary to give the amount of
taxable
profits. The eligible costs do not include the direct costs
relating to advertising, sales promotion, carriage of
goods and credit risk since, according to Belgium, these
expenses are directly imputed to the foreign controlled
entities with which the FSC branch or subsidiary is
dealing.

that are expressly attributed to an FSC on the basis of
costs incurred under Section 924(e) and the costs that
are expressly excluded from the profit computation of
FSC branches
the Belgian
and subsidiaries under
scheme. The Commission concludes that, by not taking
into account the above costs, the scheme has the effect
of exempting most of the income attributable to an FSC
branch or subsidiary in Belgium.

(50)

The Commission thus confirms its assessment according
to which the scheme confers on FSC branches and
subsidiaries an advantage in the form of a reduction in
taxable profits for Belgian corporation tax purposes.

(48)

(49)

the

understate

profitability

The Commission notes, first of all, that the 8 % fixed
mark-up may
level
attributable to the FSC branch or subsidiary relative to
the mark-up that would have been applied in a
comparable transaction by the same enterprise or by
another enterprise with an uncontrolled partner. Under
the OECD Report's guidelines on the cost-plus method,
an appropriate mark-up is added to the direct and
indirect costs incurred by a supplier of property or
services in a controlled transaction in order to generate
profit that is appropriate in the light of the functions
performed and taking into account the assets used, the
risks
conditions. The
Commission concludes that, by setting the mark-up at
8 %, the regime does not take into account all possible
factors to arrive to an appropriate profit determination
and that,
it may therefore understate
the taxable profits of an FSC branch or subsidiary.

in certain cases,

the market

assumed

and

The Commission also notes that
the United States
exemption of a portion of the foreign trade income of
an FSC is conditional on the fact that the ‘economic
process with respect to such transactions takes place
outside the United States'. Under Section 924(b)(1)(B) of
the IRC 1986, this requirement is met only if the FSC
participates in the solicitations or negotiations leading
to the sale of export property or in making the contract
of sale and if at least 50 % of its direct costs for the
transactions are incurred outside the United States.
Under Section 924(e), direct costs include costs of
1. advertising and sales promotion, 2. processing
customer orders
delivery, 3.
transporting the goods, 4.
invoicing customers and
receiving payment, and 5. assuming credit risks. The
could
that
Commission considers
generate
the
considerable
supplier. The exclusion of business activities from the
cost-plus computation method leads to an artificial
reduction in the taxable profit. More particularly, the
Commission stresses the similarity between the activities

these
streams of

arranging

activities

income

and

for

for

(51)

(52)

State resources

Second, the advantage must be granted by the State or
through State resources. A reduction in taxable profits,
such as that granted to companies under the fixed 8 %
cost-plus method applied to certain eligible costs,
is
such as to yield a tax reduction for the beneficiaries and
the Belgian
hence a reduction in tax revenue for
treasury.

that

the scheme has

the
The Commission cannot accept the argument of
Belgian authorities
led to an
increase in tax revenues as a result of the establishment
of FSC branches or subsidiaries in Belgium.
In its
analysis, it makes exclusive reference to the tax revenues
that would have accrued to the Belgian treasury if the
FSC subsidiaries and branches had been taxed under
ordinary Belgian tax law. By comparison with the tax
normally imposed on the business activities in Belgium
of branches and the subsidiaries of foreign companies,
the tax imposed on FSCs operating in Belgium is,
in
fact, reduced under the scheme. According to paragraph
10 of the Notice, this is equivalent to consumption of
state resources in the form of fiscal expenditure.

Effects on competition and trade

(53)

Third, the measure must affect competition and trade
between Member States. Belgium has criticised the
Commission for not having specified in its letter of

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28.1.2004

12 April 2002 (16) the negative effect that the scheme
would have had on competition in the light of
the
purpose of the United States regime for FSCs, which is
to confer an advantage on United States exporting
companies.

it

that

is clear

the United States

compared with other

(54) As explained in paragraph 11 of the Notice, competition
is affected if the position of a company benefiting from
the measure is strengthened compared with that of its
competitors. From the above analysis of the functioning
of
the
regime,
application by Belgium of the cost-plus method under
the scheme leads to the determination of lower taxable
profit
comparable controlled
transactions in Belgium.
It also appears that an FSC
branch or subsidiary may be active in sectors such as
advertising, sales promotion, carriage of goods and
credit
to strong
intra-Community competition. The advantage that the
special ruling system for the activities of United States
FSCs in Belgium confers on beneficiaries in the form of
a reduction in the tax base is such as to strengthen the
position of FSC branches and subsidiaries as well as the
position of
to the
detriment of competitors.

services, all of which are subject

the group to which they belong,

(55)

Furthermore, as explained in paragraph 11 of
the
Notice, the above criterion is also fulfilled if a company
benefiting from a measure carries on an economic
activity involving trade between Member States. The FSC
branches and subsidiaries that are granted a reduction in
their tax base under the special ruling system for the
activities of United States FSCs in Belgium necessarily
form part of
in
international groups that
international
including Community trade. The
Commission concludes that, by conferring an advantage
on certain group members, the scheme strengthens the
trading position of the group to which the beneficiaries
belong as compared with other groups that may also be
actively involved in Community trade.

take part

trade,

Selectivity

income

deriving

from the

not, therefore, be specific. Accordingly, the fixed 8 %
the minimum
cost-plus method would determine
taxable
of
exercise
commercial activities by a foreign company in Belgium
the Royal Decree
(under Article 182(1)(3)(e) of
the CIR 1992),
implementing Article 342(2) of
irrespective of whether such activities are exercised by
an FSC subsidiary, an FSC branch or any other
subsidiary or branch of a foreign company. The
exclusion of certain direct costs such as those relating to
advertising, sales promotion, carriage of goods and
credit risks from the basis for computing the taxable
profits of an FSC subsidiary or branch using the
cost-plus method would be justified by the fact that the
costs relating to such activities constitute the associated
company's revenues and, as such, are taxable in the
foreign jurisdiction where that associated company is
established. The Belgian activities of an FSC branch or
subsidiary are only administrative and ancillary in
nature, while advertising, sales promotion, carriage of
goods and credit-risk costs are attributable to the
foreign entities of the group.

(57) After

close

scrutiny of Belgium's

the
Commission confirms its opinion that the ruling system
for the Belgian activities of FSCs constitutes a specific
scheme applicable exclusively to FSC branches and
subsidiaries, and this for the following reasons.

arguments,

similar

turnover,

staff and other

taxpayers having

(58) Under ordinary Belgian law (Article 342(1) of the CIR
1992), if a taxpayer is unable to provide evidence of its
taxable profits to the tax administration, the latter is to
determine such profits by making a comparison with
comparable
three other
invested capital,
relevant
In such circumstances (taxpayer unable to
elements.
authorities),
substantiate
specific rules may be enacted by royal decree in order to
fix the minimum taxable profits of foreign companies
operating in Belgium (Article 342(2) of the CIR 1992).
Article 182(1)(3)(e) of the Royal Decree implementing
Article 342(2) sets the minimum taxable profits of
foreign companies
supplying services not otherwise
taxed at 10 % of the gross turnover deriving from such
supplies.

taxable profits

to the

its

(56)

Lastly, the measure must be specific or selective in that
it favours ‘certain undertakings or the production of
certain goods'. The Belgian authorities maintain that,
since the circular setting up the scheme has become
void, the ruling system for FSCs in Belgium does not
differ from the system applicable to any other Belgian
subsidiary or branch of a foreign company and would

(59)

(16) See footnote 1.

The Commission also observes that the arrangements
justify the
laid down in Article 182(1)(3)(e) do not
special
in
computation
the
Belgium.
provided for by that Article allows the minimum taxable

tax scheme applicable to FSC activities

Furthermore,

flat-rate

28.1.2004

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L 23/23

profits to be fixed at 10 % applying the ‘resale-minus
method', as opposed to the fixed 8 % under
the
cost-plus method.

(60) As indicated above, both under Belgian domestic law
and under the tax treaties concluded by Belgium, the tax
administration has the power to adjust the book profits
of a Belgian taxpayer, whether a separate company or a
permanent establishment of a foreign company,
that
derive from controlled transactions with foreign taxable
entities in cases where these profits do not comply with
the arm's-length principle.

(61)

(62)

that

The Commission recognises
the uncertainty
attaching to the determination of arm's-length profit has
contributed to the development of an advance ruling
practice in Belgium under Article 345(1) of the CIR
1992 designed to ascertain whether certain controlled
transactions are conducted at arm's length. Such a
general ruling practice is consistent with the principles
spelt out in the 1995 OECD Report, which authorises
cost-plus profit determination method
the
provided that
the functions
it
performed by the taxpayer and takes into account the
assets used, the risks assumed and the specific market
conditions.

is applied in light of

indirect

the relevant

The Commission finds that, by setting the appropriate
taxable profit level calculated using the method with a
fixed 8 % rate, the resulting profit does not take into
account
factors verified as part of an
arm's-length analysis, such as the functions performed
by the taxpayer, the assets used, the risks assumed and
the market conditions. It concludes that the scheme for
FSCs operating in Belgium is a specific tax scheme
which diverges from the ordinary tax arrangements
applicable to any other Belgian subsidiary or branch of
a foreign company.

(64) However,

the

impossibility of

determining profit
analytically is not a characteristic peculiar to an FSC
subsidiary or branch. The Commission observes that,
under the United States legislation, an FSC must be
organised or have an office in a foreign country that has
an agreement with the United States on sharing tax
information, as is the case with Belgium (17), where the
FSC must keep a set of permanent accounts. Thus, if to
benefit
the
activities of an FSC must be determined on the basis of
separate accounting records, the same records should be
taken into account
in substantiating before the tax
administration in Belgium the FSC's profit deriving from
the activities performed in Belgium.

from the United States

tax incentives,

(65)

(66)

as unjustified Belgium's
The Commission regards
exclusion of certain direct costs such as advertising,
sales promotion, carriage of goods and credit risks from
the cost-plus computation basis for taxable profit. As
indicated above, these costs relate to business activities
normally carried on by FSC branches and subsidiaries in
order for the FSC group to benefit from the partial
exemption of FSC income from United States tax.

Contrary to what was indicated by Belgium, the profits
deriving from such activities are not normally taxed by
the foreign jurisdictions in which the business partner
of the Belgian FSC is based. The Commission notes that
excluding the above-mentioned costs from the profit
computation would result in the non-taxation of the
corresponding profits both in Belgium and the
United States, which is not
the
international tax principles set out in Article 7(1) of the
OECD Model Tax Convention:

justified under

‘The profits of an enterprise of a Contracting State shall
be taxable only in that State, unless an enterprise carries
on a business in the other Contracting State through a
permanent
the
enterprise carries on business as aforesaid, the profits of
the enterprise may be taxed in the other State but only
so much of them as is attributable to that permanent
establishment.'

establishment

situated

therein.

If

Justification by the nature or general scheme of the
system

(63)

Belgium also maintains that the scheme applies to all
foreign enterprises operating in Belgium and not in a
position to determine their taxable profits analytically
and that this characteristic justifies the application of a
special profit computation method.

Furthermore, the Commission observes that the same
principles are applied under Belgian domestic law,
which stipulates that resident companies are subject to
income, while
Belgian
their worldwide
tax
non-resident
in Belgium are
subject to tax on the income arising in Belgium.

on
companies operating

(17) See footnote 7.

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Official Journal of the European Union

28.1.2004

the branch,

residence of

to the
The Commission concludes that, with respect
business profits of an FSC subsidiary, the right to tax
would arise in the State of
such a
subsidiary, namely Belgium, while in the case of the
profits of an FSC branch the right would arise in the
again Belgium. A different
State of
allocation of
taxation, as proposed by
Belgium, would be an exception under both Belgian tax
law and the
concluded by Belgium.
Accordingly,
the Commission rejects the justification
given by Belgium and based on the fact that it would
not have the right to tax FSC activities in Belgium. It
thus confirms the specificity of the scheme in question.

the rights of

tax treaties

(72)

Compatibility

economy of Belgium,

in
for
the
Article 87(3)(b). Nor does it have as its object
the
promotion of culture and heritage conservation as
provided for in Article 87(3)(d).

provided

as

Lastly, the scheme must be examined in the light of
Article 87(3)(c), which authorises aid to facilitate the
development of certain economic activities or of certain
economic areas, where such aid does not adversely
affect trading conditions to an extent contrary to the
common interest. The tax advantages granted under the
job creation or
scheme are not related to investment,
specific projects. They
firms
concerned of charges normally borne by their budgets
and must therefore be considered as operating aid the
benefits of which cease as soon as the aid is withdrawn.
In line with the standard practice of the Commission,
such aid could not be considered to facilitate the
development of certain activities or of certain economic
areas.

simply

relieve

the

(67)

(68)

(69)

in its

The Belgian authorities have not
challenged the
letter of 12 April
Commission's assessment
2002 (18) that none of the derogations provided for in
Article 87(2) and (3) of the EC Treaty, under which
State aid may be considered compatible with the
case.
common market,
Accordingly, the Commission confirms its assessment,
which can be summed up as follows.

present

applies

the

in

Final observations on classification as State aid

In so far as the Belgian scheme for FSCs constitutes state
aid within the meaning of Article 87(1) of
the EC
Treaty, its compatibility must be evaluated in the light of
the derogations provided for in Article 87(2) and (3) of
the EC Treaty.

(73)

FSC

activities

The Commission confirms the assessment made in its
letter of 12 April 2002 (19) to the effect that the scheme
for
aid
incompatible with the single market. As indicated above,
the scheme entered into force in 1984 without prior
notification to the Commission and is
therefore
considered to be unlawful State aid.

Belgium constitutes

in

The derogations in Article 87(2), which concern aid of a
social character granted to individual consumers, aid to
make good the damage caused by natural disasters or
exceptional occurrences and aid granted to certain areas
of the Federal Republic of Germany, do not apply in
this case.

Legitimate expectation

(70) Nor does the exception provided for in Article 87(3)(a)
apply, which authorises aid to promote the economic
living is
development of areas where the standard of
serious
is
low or where
abnormally
underemployment.

there

(71)

In the same way, the scheme cannot be regarded as
promoting the execution of a project of common
European interest or remedying a serious disturbance in

(74) Where unlawfully granted State aid is found to be
incompatible with the common market,
it must be
recovered from the beneficiary. Through recovery of the
aid, the competitive position that existed before it was
granted is restored as far as is possible. However,
Article 14(1) of Regulation (EC) No 659/1999 of 22
March 1999 states that
‘the Commission shall not
require the recovery of the aid if this would be contrary
to a general principle of Community law'. The case-law
of
Justice and the Commission's own
decision-making practice have established that, where,
as a result of the Commission's actions, a legitimate

the Court of

(18) See footnote 1.

(19) See footnote 1.

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expectation exists on the part of the beneficiary of a
measure that the aid has been granted in accordance
with Community law, then an order to recover the aid
would infringe a general principle of Community law.

(78)

(75)

In the judgment in Van den Bergh en Jurgens (20), the
Court ruled:

In this context, the Commission notes that its decision
on the Belgian coordination centres scheme was taken
the scheme for FSC
before the entry into force of
activities
the
considers
thus
in Belgium.
beneficiaries of the scheme had a legitimate expectation
that, at the time they benefited from the scheme, it did
not constitute aid, thereby preventing the Commission
from ordering the recovery of any aid granted.

that

It

(76)

(77)

‘The Court has consistently held that any trader in
regard to whom an institution has given rise to justified
hopes may rely on the principle of protection of
legitimate expectation. On the other hand, if a prudent
and discriminating trader could have foreseen the
adoption of a Community measure likely to affect his
interests, he cannot plead that principle if the measure
is adopted.'

Belgium has invoked the legitimate expectation of the
beneficiaries with respect to a tax scheme in existence
since 1984 and which in 1985 the Commission had
considered to have a minimal effect on employment in
the Community and thus, according to Belgium, on
competition in general (21). In any event, Belgium has
announced its willingness to dismantle the scheme as
soon as the United States definitively complies with the
WTO rulings and by 31 December 2003 at the latest.

for

respect

law such

Pursuant to Article 14(1) of Council Regulation (EC)
No 659/1999, the Commission takes into account the
exceptional circumstances justifying non-recovery of aid
unlawfully granted to the beneficiary of a scheme where
this would be contrary to a general principle of
Community
legitimate
as
expectation. In the present case, it notes that the scheme
for FSC activities in Belgium bears a close resemblance
in many respects to the scheme introduced in Belgium
by Royal Decree No 187 of 30 December 1982 on the
tax treatment of coordination centres. Both schemes
concern intra-group activities and both use the cost-plus
method to determine the tax base. In its decision of 2
May 1984, the Commission considered the scheme not
to be aid within the meaning of Article 92(1) of the
Treaty (now Article 87(1)). Even if this decision was not
published, the fact that the Commission did not raise
any objections
to the Belgian coordination centres
scheme was mentioned both in the Fourteenth Report
on Competition Policy and in an answer
to a
parliamentary question (22).

(79) With reference to Belgium's willingness to dismantle the
the
scheme
by December 2003 at
Commission considers that the principle of
legitimate
expectation would cover enterprises approved under the
scheme before the opening of the formal investigation
procedure in respect of any aid granted up to the end of
the tax year in which the procedure is closed.

latest,

the

(80)

(81)

VI. CONCLUSIONS

in breach of
The Commission finds that Belgium has,
Article 88(3) of the Treaty, unlawfully implemented the
tax ruling system for the business activities of FSCs as
applied by the Belgian tax administration since January
1985. It concludes that the tax reliefs accorded under
the scheme constitute State aid that is not covered by
any of the derogations from the prohibition of such aid
and is therefore incompatible with the common market.

The Commission also finds
enterprises
approved under the scheme had a legitimate expectation
that, at the time they benefited from such a scheme, it
did not constitute aid. Accordingly, it will not require
recovery of the aid,

that

the

HAS ADOPTED THIS DECISION:

Article 1

(20) Case C-265/85 Van den Bergh en Jurgens BV v Commission

[1987] ECR 1155, paragraph 44.

(21) See footnote 9.
(22) Written Question No 1735/90 (OJ C 63, 11.3.1991).

special

The State aid scheme implemented by Belgium in the form of
the business activities of
the
in Belgium is
United States
incompatible with the common market.

ruling system for
foreign sales

corporations

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Article 2

Article 4

Belgium shall abolish the aid scheme referred to in Article 1
with effect
following the date of
notification of the present decision.

from the first

tax year

This decision is addressed to the Kingdom of Belgium.

Article 3

Done at Brussels, 24 June 2003.

Belgium shall inform the Commission, within two months of
the date of notification of this decision, of the measures taken
to comply with it.

For the Commission

Mario MONTI

Member of the Commission