Contents
Judgment of the Court (Fifth Chamber)26 February 2026note(Failure of a Member State to fulfil its obligations — Article 258 TFEU — Directive (EU) 2016/1164 — Rules against tax avoidance practices that directly affect the functioning of the internal market — Article 8(7) — Computation of controlled foreign company income — Requirement to allow the taxpayer to deduct from his or her tax liability the tax paid by the controlled foreign company — Scope — Non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage — Failure to transpose)In Case C‑524/23,ACTION for failure to fulfil obligations under Article 258 TFEU, brought on 11 August 2023,European Commission, represented initially by A. Ferrand and W. Roels, and subsequently by W. Roels, acting as Agents,vKingdom of Belgium, represented initially by S. Baeyens, A. De Brouwer and C. Pochet, and subsequently by S. Baeyens, P. Cottin and C. Pochet, acting as Agents, and by M. Massart, expert,supported by:Kingdom of the Netherlands, represented by M.K. Bulterman, A. Hanje and C.S. Schillemans, acting as Agents,THE COURT (Fifth Chamber),composed of M.L. Arastey Sahún, President of the Chamber, J. Passer, E. Regan, D. Gratsias (Rapporteur) and B. Smulders, Judges,Advocate General: J. Kokott,Registrar: G. Chiapponi, Administrator,having regard to the written procedure and further to the hearing on 21 October 2024,after hearing the Opinion of the Advocate General at the sitting on 22 May 2025,gives the following
Judgment
1By its application, the European Commission seeks a declaration from the Court that, by failing to adopt the laws, regulations and administrative provisions necessary to comply with Article 8(7) of Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ 2016 L 193, p. 1), the Kingdom of Belgium has failed to fulfil its obligations under that directive.
Legal context
European Union law
2Recitals 1 to 5, 11, 12 and 16 of Directive 2016/1164 state:(1) The current political priorities in international taxation highlight the need for ensuring that tax is paid where profits and value are generated. It is thus imperative to restore trust in the fairness of tax systems and allow governments to effectively exercise their tax sovereignty. These new political objectives have been translated into concrete action recommendations in the context of the initiative against base erosion and profit shifting (BEPS) by the Organisation for Economic Cooperation and Development (OECD). …(2) The final reports on the 15 OECD Action Items against BEPS were released to the public on 5 October 2015. … EU Directives should be … the preferred vehicle for implementing OECD BEPS conclusions at the [European Union] level. It is essential for the good functioning of the internal market that, as a minimum, Member States implement their commitments under BEPS and more broadly, take action to discourage tax avoidance practices and ensure fair and effective taxation in the Union in a sufficiently coherent and coordinated fashion. In a market of highly integrated economies, there is a need for common strategic approaches and coordinated action, to improve the functioning of the internal market and maximise the positive effects of the initiative against BEPS. Furthermore, only a common framework could prevent a fragmentation of the market and put an end to currently existing mismatches and market distortions. Finally, national implementing measures which follow a common line across the Union would provide taxpayers with legal certainty in that those measures would be compatible with Union law.(3) It is necessary to lay down rules in order to strengthen the average level of protection against aggressive tax planning in the internal market. As these rules would have to fit in 28 separate corporate tax systems, they should be limited to general provisions and leave the implementation to Member States as they are better placed to shape the specific elements of those rules in a way that fits best their corporate tax systems. This objective could be achieved by creating a minimum level of protection for national corporate tax systems against tax avoidance practices across the Union. It is therefore necessary to coordinate the responses of Member States in implementing the outputs of the 15 OECD Action Items against BEPS with the aim to improve the effectiveness of the internal market as a whole in tackling tax avoidance practices. It is therefore necessary to set a common minimum level of protection for the internal market in specific fields.(4) It is necessary to establish rules applicable to all taxpayers that are subject to corporate tax in a Member State. … Those rules should also apply to permanent establishments of those corporate taxpayers which may be situated in other Member State(s). Corporate taxpayers may be resident for tax purposes in a Member State or be established under the laws of a Member State. Permanent establishments of entities resident for tax purposes in a third country should also be covered by those rules if they are situated in one or more Member State.(5) It is necessary to lay down rules against the erosion of tax bases in the internal market and the shifting of profits out of the internal market. Rules in the following areas are necessary in order to contribute to achieving that objective: limitations to the deductibility of interest, exit taxation, a general anti-abuse rule, controlled foreign company rules [(“CFC”)] and rules to tackle hybrid mismatches. Where the application of those rules gives rise to double taxation, taxpayers should receive relief through a deduction for the tax paid in another Member State or third country, as the case may be. Thus, the rules should not only aim to counter tax avoidance practices but also avoid creating other obstacles to the market, such as double taxation.…(11) General anti-abuse rules (GAARs) feature in tax systems to tackle abusive tax practices that have not yet been dealt with through specifically targeted provisions. GAARs have therefore a function aimed to fill in gaps, which should not affect the applicability of specific anti-abuse rules. Within the Union, GAARs should be applied to arrangements that are not genuine; otherwise, the taxpayer should have the right to choose the most tax efficient structure for its commercial affairs. … Member States should not be prevented from applying penalties where the GAAR is applicable. When evaluating whether an arrangement should be regarded as non-genuine, it could be possible for Member States to consider all valid economic reasons, including financial activities.(12) [CFC] rules have the effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company. Then, the parent company becomes taxable on this attributed income in the State where it is resident for tax purposes. Depending on the policy priorities of that State, CFC rules may target an entire low-taxed subsidiary, specific categories of income or be limited to income which has artificially been diverted to the subsidiary. In particular, in order to ensure that CFC rules are a proportionate response to BEPS concerns, it is critical that Member States that limit their CFC rules to income which has been artificially diverted to the subsidiary precisely target situations where most of the decision-making functions which generated diverted income at the level of the controlled subsidiary are carried out in the Member State of the taxpayer. … In order to ensure a higher level of protection, Member States could reduce the control threshold, or employ a higher threshold in comparing the actual corporate tax paid with the corporate tax that would have been charged in the Member State of the taxpayer. Member States could, in transposing CFC rules into their national law, use a sufficiently high tax rate fractional threshold.It is desirable to address situations both in third countries and within the Union. To comply with the fundamental freedoms, the income categories should be combined with a substance carve-out aimed to limit, within the Union, the impact of the rules to cases where the CFC does not carry on a substantive economic activity. ……(16) Considering that a key objective of this Directive is to improve the resilience of the internal market as a whole against cross-border tax avoidance practices, this cannot be sufficiently achieved by the Member States acting individually. National corporate tax systems are disparate and independent action by Member States would only replicate the existing fragmentation of the internal market in direct taxation. It would thus allow inefficiencies and distortions to persist in the interaction of distinct national measures. The result would be lack of coordination. Rather, by reason of the fact that much inefficiency in the internal market primarily gives rise to problems of a cross-border nature, remedial measures should be adopted at Union level. It is therefore critical to adopt solutions that function for the internal market as a whole and this can be better achieved at Union level. Thus, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 [TEU]. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective. By setting a minimum level of protection for the internal market, this Directive only aims to achieve the essential minimum degree of coordination within the Union for the purpose of materialising its objectives.’
3Article 1 of that directive, entitled ‘Scope’, provides:‘This Directive applies to all taxpayers that are subject to corporate tax in one or more Member States, including permanent establishments in one or more Member States of entities resident for tax purposes in a third country.’
4Article 3 of that directive, entitled ‘Minimum level of protection’, provides:‘This Directive shall not preclude the application of domestic or agreement-based provisions aimed at safeguarding a higher level of protection for domestic corporate tax bases.’
5Article 6 of that directive, entitled ‘General anti-abuse rule’, is worded as follows:1. For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.2. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.3. Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated in accordance with national law.’
6Article 7 of Directive 2016/1164, entitled ‘[CFC] rule’, provides, in paragraphs 1 and 2 thereof:1.The Member State of a taxpayer shall treat an entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax in that Member State, as a [CFC] where the following conditions are met:(a) in the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of capital or is entitled to receive more than 50 percent of the profits of that entity; and(b) the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.For the purposes of point (b) of the first subparagraph, the permanent establishment of a [CFC] that is not subject to tax or is exempt from tax in the jurisdiction of the [CFC] shall not be taken into account. Furthermore the corporate tax that would have been charged in the Member State of the taxpayer means as computed according to the rules of the Member State of the taxpayer.2.Where an entity or permanent establishment is treated as a [CFC] under paragraph 1, the Member State of the taxpayer shall include in the tax base:(a) the non-distributed income of the entity or the income of the permanent establishment which is derived from the following categories:…This point shall not apply where the [CFC] carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.Where the [CFC] is resident or situated in a third country that is not party to the EEA Agreement, Member States may decide to refrain from applying the preceding subparagraph.or(b) the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.For the purposes of this point, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company’s income.’
7Article 8 of that directive, entitled ‘Computation of [CFC] income’, provides:1. Where point (a) of Article 7(2) applies, the income to be included in the tax base of the taxpayer shall be calculated in accordance with the rules of the corporate tax law of the Member State where the taxpayer is resident for tax purposes or situated. …2. Where point (b) of Article 7(2) applies, the income to be included in the tax base of the taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company. The attribution of [CFC] income shall be calculated in accordance with the arm’s length principle.3. The income to be included in the tax base shall be calculated in proportion to the taxpayer’s participation in the entity as defined in point (a) of Article 7(1).4. The income shall be included in the tax period of the taxpayer in which the tax year of the entity ends.5. Where the entity distributes profits to the taxpayer, and those distributed profits are included in the taxable income of the taxpayer, the amounts of income previously included in the tax base pursuant to Article 7 shall be deducted from the tax base when calculating the amount of tax due on the distributed profits, in order to ensure there is no double taxation.6. Where the taxpayer disposes of its participation in the entity or of the business carried out by the permanent establishment, and any part of the proceeds from the disposal previously has been included in the tax base pursuant to Article 7, that amount shall be deducted from the tax base when calculating the amount of tax due on those proceeds, in order to ensure there is no double taxation.7. The Member State of the taxpayer shall allow a deduction of the tax paid by the entity or permanent establishment from the tax liability of the taxpayer in its state of tax residence or location. The deduction shall be calculated in accordance with national law.’
8Under Article 11 of that directive, entitled ‘Transposition’:1. Member States shall, by 31 December 2018, adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive. They shall communicate to the Commission the text of those provisions without delay.They shall apply those provisions from 1 January 2019.When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.2. Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by this Directive.…’
Belgian law
9Article 20 of the loi du 25 décembre 2017, portant réforme de l’impôt des sociétés (Law of 25 December 2017 on the reform of corporation tax) (Moniteur belge of 29 December 2017, p. 116422), which is intended to transpose Articles 7 and 8 of Directive 2016/1164 into Belgian law, inserted a new Article 185/2 into the code des impôts sur le revenu (1992) (Income Tax Code 1992), according to which:§ 1. Without prejudice to the application of Article 185(2)(a), profits shall also include the non-distributed profits of the foreign company defined in the first subparagraph of paragraph 2 arising from an arrangement or a series of non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.The profits of the foreign company referred to in the first subparagraph shall be taken into account, with the exception of the amounts which are not generated through assets and risks which are linked to key functions carried out by the taxpayer.For the purposes of this article, “non-distributed profits” means those which are acquired by a foreign company as defined in paragraph 2 in a tax period which closes during the tax period of the taxpayer and which are not distributed in that tax period to the taxpayer or to another resident company.§ 2.The non-distributed profits of a foreign company may be included in the profits of the taxpayer only if:– the taxpayer either holds, directly or indirectly, the majority of the voting rights relating to the total shares of that foreign company, or holds, directly or indirectly, a shareholding of at least 50% of the capital of that company or holds the rights to at least 50% of the profits of that company; and if– the foreign company under the provisions of the legislation of the State or of the jurisdiction in which it is established is either not subject to income tax there or is subject there to income tax which is less than half of the corporation tax which would be payable if that foreign company were established in Belgium.For the purpose of calculating the corporation tax referred to in the second indent of the first subparagraph, which would be payable if that foreign company were established in Belgium, no account shall be taken of the profit or loss of that foreign company made through one or more foreign establishments of that foreign company whose profits are exempt under an agreement for the avoidance of double taxation concluded between the country or jurisdiction in which that foreign company is established and the country or jurisdiction in which that foreign establishment is situated.§ 3. In the event that the taxpayer has a foreign establishment referred to in paragraph 2 whose profits are exempted in Belgium or reduced under a double taxation treaty, the profits arising from an arrangement or a series of non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage shall not be allocated to the foreign establishment.This paragraph shall apply only to the foreign establishments which, under the provisions of the legislation of the State or of the jurisdiction in which they are situated, are either not subject to income tax there or are subject there to income tax which is less than half of the additional corporation tax which would be payable by the taxpayer if those establishments were situated in Belgium.§ 4. For the purposes of this article, an arrangement or series of arrangements shall be regarded as non-genuine to the extent that the foreign company described in paragraph 2 or the foreign establishment described in paragraph 3 would not own the assets or would not have undertaken the risks which generate all or part of its income if that company or establishment were not controlled by the taxpayer where the significant people functions which are relevant to those assets and risks are carried out and are instrumental in generating the income of the foreign company or the foreign establishment concerned.’
The pre-litigation procedure and the proceedings before the Court
10Following the expiry of the period for transposition of Directive 2016/1164, the Belgian authorities informed the Commission of the adoption of national measures transposing that directive. Those authorities, inter alia, sent the Commission a correlation table, which included a reference corresponding to Article 8(7) of that directive, stating that that ‘option’ had not been ‘adopted pursuant to Article 3 of [that] directive’.
11After examining the notified measures, the Commission found that the notified measures did not ensure compliance with Directive 2016/1164, in particular with Article 4(4)(b), Article 4(7), and Article 8(7) thereof. The Commission therefore sent, on 2 July 2020, a letter of formal notice to the Kingdom of Belgium.
12By letter of 24 November 2020, the Belgian authorities replied to that letter of formal notice, stating that the necessary amendments to bring the national legislation into line with Article 4 of that directive were in progress. Furthermore, those authorities also set out, in that letter, the reasons why they considered that the Kingdom of Belgium had not incorrectly transposed Article 8(7) of that directive into the national legal order.
13On 9 March 2021, those authorities sent the Commission the text of the loi du 20 décembre 2020, portant des dispositions fiscales diverses et de lutte contre la fraude urgentes (Law of 20 December 2020 laying down various urgent tax provisions and the urgent prevention of fraud) (Moniteur belge of 30 December 2020, p. 97617), which sought to ensure that the Belgian legislation was brought into line with Article 4 of that directive, but did not, however, contain any provisions to ensure the transposition of Article 8(7) thereof.
14On 2 December 2021, the Commission issued a reasoned opinion in which it concluded that, by not transposing Article 8(7) of Directive 2016/1164 into the national legal order, the Kingdom of Belgium had failed to fulfil its obligations under that provision and requested that Member State to take the measures necessary to comply with that reasoned opinion within two months of its receipt.
15In their reply of 2 February 2022 to the reasoned opinion, the Belgian authorities informed the Commission that the Belgian legislation would be adapted to respond to the complaints of the Commission set out in that reasoned opinion.
16By email of 10 January 2023, the Belgian authorities informed the Commission that the Belgian Government had not reached a political consensus in respect of the adoption of those measures. In addition, in that letter, those authorities stated that that government maintained its position on the deduction of taxes paid by the CFCs. More specifically, the same authorities stated that, as had been set out in their letter of 24 November 2020, the provisions of the Belgian legislation transposing Directive 2016/1164 aimed to counter the abuse of rights and that its deterrent effect was important. Furthermore, given the imbalance between the profit and the functions assigned to an entity located in a tax haven, it would not seem appropriate to grant an additional allowance for the payment of foreign tax. In any event, in practice, no such income has yet been taxed, with the result that no undertaking has suffered disadvantages until now related to the application of that rule.
17Since it was not satisfied with the reply provided by the Belgian authorities to its reasoned opinion, the Commission decided, on 11 August 2023, to bring the present action before the Court.
18By decision of the President of the Court of 20 December 2023, the Kingdom of the Netherlands was granted leave to intervene in support of the form of order sought by the Kingdom of Belgium.
The action
Admissibility of the action
Arguments of the parties
19First, the Kingdom of Belgium contends that the present action is inadmissible on the ground that the application initiating proceedings does not satisfy the condition that the Commission must set out the complaints coherently and precisely so that the Member State concerned and the Court can know exactly the scope of the alleged infringement of EU law. More specifically, in its application, the Commission has merely repeated the arguments which it put forward against the explanations provided by the Kingdom of Belgium in its reply to the letter of formal notice, instead of setting out the complaints and pleas seeking to demonstrate that the interpretation of Article 8(7) of Directive 2016/1164 adopted by that Member State was incorrect.
20Second, the Kingdom of Belgium contends that the application initiating proceedings lacks clarity. The Commission asks the Court to declare that the Kingdom of Belgium has failed to fulfil its obligations under Directive 2016/1164 ‘by failing to transpose correctly’ Article 8(7) of that directive into the national legal order, even though that Member State cannot be criticised for having failed to transpose that provision and, at the same time, criticising that Member State for having incorrectly transposed it. The Commission thus refers to two separate complaints with different consequences, in particular in terms of the burden of proof.
21The Commission disputes the merits of that line of argument.
Findings of the Court
22In accordance with Article 120(c) of the Rules of Procedure of the Court of Justice and the case-law relating to that provision, an application initiating proceedings must state the subject matter of the proceedings, the pleas in law and arguments relied on and a summary of those pleas in law. Such a statement must be sufficiently clear and precise to enable the defendant to prepare his or her defence and the Court to rule on the application. It follows that the essential points of law and of fact on which such an action is based must be indicated coherently and intelligibly in the application itself and that the forms of order sought must be set out unambiguously so that the Court does not rule ultra petita or indeed fail to rule on one of the heads of claim (judgment of 19 November 2024, Commission v Poland (Ability to stand for election and membership of a political party), C‑814/21, EU:C:2024:963, paragraph 60 and the case-law cited).
23The Court has also held that, where an action is brought under Article 258 TFEU, the application must set out the complaints coherently and precisely, so that the Member State and the Court can know exactly the scope of the alleged infringement of EU law, a condition that must be satisfied if the Member State is to be able to present an effective defence and the Court to determine whether there has been a breach of obligations, as alleged (judgment of 19 November 2024, Commission v Poland (Ability to stand for election and membership of a political party), C‑814/21, EU:C:2024:963, paragraph 61 and the case-law cited).
24In particular, the Commission’s action must contain a coherent and detailed statement of the reasons which have led it to conclude that the Member State in question has failed to fulfil one of its obligations under EU law (judgment of 19 November 2024, Commission v Poland (Ability to stand for election and membership of a political party), C‑814/21, EU:C:2024:963, paragraph 62 and the case-law cited).
25In the present case, regarding the subject matter of the action, it must be stated that it is apparent from the form of order sought in the application initiating proceedings that the Commission criticises the Kingdom of Belgium for having failed to fulfil its obligations under Directive 2016/1164, namely not adopting national measures transposing Article 8(7) of that directive.
26Thus, notwithstanding the wording used on several occasions in the application initiating proceedings, according to which the Kingdom of Belgium ‘failed to transpose correctly [Article 8(7)]’ of the directive, it is nevertheless clear and unequivocal from that application that the Commission considers that full transposition of that directive entails measures to implement that provision and that, by failing to do so, the Kingdom of Belgium has failed to fulfil its obligations under that provision. The subject matter of the action and the scope of the single complaint are therefore identifiable by that Member State and by the Court.
27As regards the statement of complaints, it is apparent from the application that, although it reproduces the arguments put forward, in the reasoned opinion, against the explanations provided by the Belgian authorities in response to the letter of formal notice, the Commission’s position concerning the interpretation of Article 8(7) of Directive 2016/1164 and the obligation on the Member States to transpose that provision is apparent, in a sufficiently coherent and detailed manner, from that statement. That statement therefore enables the Kingdom of Belgium to present an effective defence and the Court to determine whether there has been a failure, as alleged, to fulfil obligations.
28Moreover, since the action had to be based on the same grounds and pleas as the reasoned opinion (see, to that effect, judgment of 30 November 2023, Commission v Slovenia (Urban waste water treatment), C‑328/22, EU:C:2023:939, paragraph 20), the Commission cannot be criticised for reproducing, in its application, the arguments set out in the reasoned opinion.
29It is apparent from the foregoing considerations that the present action is admissible.
Substance
Arguments of the parties
30In support of its action, the Commission raises a single complaint alleging failure to transpose Article 8(7) of Directive 2016/1164 into Belgian law.
31In its application, the Commission submits, in the first place, that the correct transposition of that directive into national law requires transposition of Article 8(7) thereof. It is clear from the replies provided by the Belgian authorities during the pre-litigation procedure that, more than one year after the expiry of the period laid down for the transposition of that directive under Article 11 thereof, the Kingdom of Belgium had still not adopted measures to implement that provision. In addition, the Commission does not have any other information demonstrating the full and effective transposition of that Article 8(7).
32In the second place, the Commission disputes the merits of the arguments put forward by the Belgian authorities in their reply to the letter of formal notice.
33First, as regards the Kingdom of Belgium’s argument that Article 8(7) of Directive 2016/1164 is applicable only where the Member State opts for the application of Article 7(2)(a) of that directive, the Commission submits that the wording of that Article 8(7), drafted in general terms, applies without a limit as regards the calculation of the taxable amount governed by Article 7, and therefore in all the cases provided for in paragraph 2 thereof.
34That interpretation is supported by the wording of the other paragraphs of Article 8 of that directive. As is apparent from the wording of paragraphs 1 and 2 thereof, that article clearly states the instances in which only one of the options for determining the tax base of a CFC, provided for in points (a) and (b), respectively, of Article 7(2) of that directive, is concerned. By contrast, other paragraphs of Article 8 of that directive, like paragraph 5 thereof, are general and are not exclusively focused on one or other of those options.
35Second, as regards the Kingdom of Belgium’s argument that the deterrent effect of double taxation would be lost if Article 8(7) of Directive 2016/1164 were applied, the Commission refers to recital 5 thereof, according to which the rules laid down by that directive aim to counter tax avoidance practices, but also avoid creating other obstacles to the internal market, such as double taxation. The Commission considers that the combined application of the rules laid down in Article 7(2) and Article 8(7) of that directive pursues that dual objective. The failure to transpose the latter provision thus affects the balance between those objectives by maintaining a situation of double taxation and a potential obstacle to the internal market.
36Third, in so far as the Kingdom of Belgium relies on an option which is left to the Member States, under Article 3 of that directive, not to apply Article 8(7) thereof, the Commission submits that the minimum harmonisation defined by that directive does not absolve the Member States from compliance with the obligations set out therein, such as the application of that provision.
37Fourth, as regards the reference made, in Article 8(7) of Directive 2016/1164, to national law for the calculation of the tax deduction, to which the Kingdom of Belgium refers, the Commission submits that that reference does not mean that the Member States have the option not to transpose that provision or to refuse to grant the tax deduction provided for therein. On the contrary, that tax deduction is enshrined therein with only the determination of the method of calculating that tax being left to the determination of the Member States.
38For its part, in its defence, the Kingdom of Belgium states, as a preliminary point, that although, in 2017, the Belgian legislature transposed into its legal order Article 7(2)(b) of that directive, thus limiting the application of the legislation relating to CFCs to cases of abuse, the law transposing Article 7(2)(a) of that directive and, therefore, Article 8(7) thereof, should enter into force on 1 January 2024.
39As to the substance, the Kingdom of Belgium contends that the Commission’s single complaint must be rejected and contends that its action should be dismissed.
40Principally, the Kingdom of Belgium contends that Article 2 of the Law of 25 December 2017 on the reform of corporation tax made an express reference to Directive 2016/1164 and constituted, therefore, a specific measure transposing that directive into the Belgian legal order. In addition, the correlation table which had been sent to the Commission stated that Article 8(7) of that directive did not apply in the present case, since it was a minimum harmonisation directive. The Commission therefore had clear and accurate information how the Kingdom of Belgium considered that it had fulfilled the various obligations imposed on it by that directive. The Commission is therefore wrong to maintain, in its action, that that Member State failed to fulfil its obligations by failing to correctly transpose that provision into the Belgian legal order.
41In the alternative, the Kingdom of Belgium claims that the Commission has not established the failure to fulfil obligations set out in its application. To do that, the Commission should demonstrate that the transposition, by that Member State, of that directive, and therefore its interpretation of Article 8(7) thereof, do not take account of the wording of that provision, its context and the objectives pursued by it.
42In support of that claim, first, that Member State submits that, as its title indicates, the main objective of Directive 2016/1164 aims to counter tax avoidance practices. Thus, the objective to avoid creating other obstacles to the internal market is linked to that aim and is not, in tax matters, an objective in itself.
43Second, the Kingdom of Belgium states that Directive 2016/1164 is a minimum harmonisation directive which leaves to the Member States the possibility of combating tax avoidance by establishing a higher level of protection for national corporate tax bases.
44In the present case, the Kingdom of Belgium made use of the possibility offered by that directive of establishing a tool to combat tax avoidance, while ensuring that the internal market was not jeopardised. More specifically, in its view, a situation in which a tax abuse has been demonstrated and a situation in which there has been no such tax abuse are not comparable. Similarly, a measure aimed at countering such abuse cannot be compared with a measure intended only to limit the opportunities for taxpayers to avoid corporation tax. Thus, having regard to the necessity to ensure the effectiveness of countering tax abuse and given that not all cases of tax abuse could be detected and combated at an early stage by the administration, the possibility of double taxation has a deterrent effect on the taxpayer by encouraging him or her to avoid resorting to an artificial construction, or to put an end to it.
45Third, the Kingdom of Belgium states that it considers that Article 8(7) of Directive 2016/1164 is applicable, irrespective of the option chosen by the Member State concerned under Article 7(2) of that directive, and not only in respect of the implementation of Article 7(2)(a) thereof.
46Fourth, the Kingdom of Belgium contends that, although its national legislation does not seek to avoid the double taxation of the income of CFCs, it fully complies with its obligations as regards the objective laid down by Directive 2016/1164, including that of avoiding the creation of obstacles to the internal market such as double taxation. According to that Member State, the application of Article 8(7) of that directive is not necessary, since, pursuant to the national legislation transposing Article 7(2)(b) thereof, any double taxation applies only to situations that are clearly abusive, and therefore quite rare. In addition, such double taxation cannot constitute an obstacle to the internal market in situations in which goods, services, capital and persons do not actually move within that market. In support of that argument, the Kingdom of Belgium relies on the case-law of the Court relating to Article 293 EC, which seeks to avoid double taxation. In particular, it could be inferred, by analogy, from the judgment of 14 November 2006, Kerckhaert and Morres (C‑513/04, EU:C:2006:713), that double taxation, which Article 8(7) of that directive seeks to avoid, does not infringe the freedom of establishment and, therefore, does not impede the internal market.
47Fifth, the Kingdom of Belgium contends that Article 3 of Directive 2016/1164 allows Member States not to implement Article 8(7) thereof. It is to be inferred from that article that that directive does not preclude the application of domestic or agreement-based provisions aimed at safeguarding a higher level of protection for domestic corporate tax bases. In addition, Article 3 must be read in the light of recitals 2, 3, 6 and 16 of that directive, which state that that directive seeks only to define a common minimum level of protection of the internal market. Thus, by not avoiding the double taxation of income generated by non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage that directly affects the functioning of the internal market, that Member State provides only for a higher level of protection than that minimum level.
48Sixth, the Kingdom of Belgium claims that, by preventing a tax deduction where a tax abuse is established and, therefore, by limiting the amount of the tax deduction, it correctly applies Article 8(7) of Directive 2016/1164, in so far as that provision provides that the deduction is to be calculated in accordance with national law.
49In its reply, the Commission submits, first, in response to the Kingdom of Belgium’s arguments relating to the minimum degree of harmonisation effected by Directive 2016/1164, that the examples of stricter measures set out in recital 12 of that directive refer to the measures which supplement those already provided for as a minimum by that directive and not to the measures replacing those measures, and in particular those laid down by Article 8(7) thereof.
50Furthermore, the tax deduction provided for by that provision is consistent with the OECD’s actions aiming to counter base erosion and profit shifting (BEPS). The adoption of Directive 2016/1164 is part of the implementation of those actions, as recitals 2 and 3 of that directive state, and in particular BEPS Action No 3, the final report of that action recommending the elimination of double taxation resulting from measures the taken in respect of CFCs.
51In that context, the adoption of stricter measures could consist in applying the CFC rules to entities or permanent establishments in which the taxpayer’s shareholding is below the 50% threshold laid down in Article 7(1)(a) of that directive or to such companies paying a higher tax rate than that provided for in Article 7(1)(b) of that directive.
52Second, the Commission submits that the case-law arising from the judgment of 14 November 2006, Kerckhaert and Morres (C‑513/04, EU:C:2006:713), relied on by the Kingdom of Belgium, is not relevant in the present case, since Article 8(7) of Directive 2016/1164 laid down general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation.
53In its rejoinder, the Kingdom of Belgium states, as a preliminary point, that it transposed that Article 8(7), by adopting new legislation, which entered into force on 1 January 2024. In response to the Commission’s reply, the Kingdom of Belgium contends that the minimum measures concerning the CFC rules are set out in Article 7 and Article 8(1) to (4) of Directive 2016/1164. Article 8(5) to (7) of that directive provides only for the derogations from those minimum measures, for the avoidance of double taxation, with the result that, by failing to transpose Article 8(7) of that directive into its national legal order, it applies a stricter measure supplementing those minimum measures.
54In addition, that Member State submits that, contrary to what the Commission maintains, that directive does not lay down general criteria for the allocation of taxation powers between the Member States, but rather provides that, by way of derogation from the usual rules on the allocation of taxation powers relating to subsidiaries and permanent establishments, the State in which the company has its registered office or the State of the parent company could recover such a power concerning income, in principle, taxable in the State in which the subsidiary or permanent establishment is resident.
55In its statement in intervention in support of the form of order sought by the Kingdom of Belgium, the Kingdom of the Netherlands submits, first, that the obligation, laid down in Article 11 of Directive 2016/1164, according to which the provisions transposing that directive must contain a reference to that directive or be accompanied by such a reference at the time of their official publication, merely constitutes a formal obligation to inform the public that EU law has been transposed into the national legal order. Consequently, in so far as the Commission criticises the Kingdom of Belgium for failing to fulfil its obligations under Article 11 in the context of a separate complaint, that complaint must be rejected.
56Second, the Kingdom of the Netherlands submits that the transposition of Article 8(7) of that directive is not necessary where a Member State applies Article 7(2)(b) thereof.
57In that regard, it submits that Article 7(2)(b) of Directive 2016/1164 is a provision which itself seeks to avoid double taxation, since, in accordance with Article 8(2) of that directive, the allocation of CFC income is calculated in accordance with the arm’s length principle. Thus, in accordance with that Article 8(2), where, on account of carrying out significant people functions, the controlling company receives the income generated by those functions, that income is taxed in the Member State in which that company is situated. The objective of the arm’s length principle is to ensure that each party concerned receives the income which reflects the functions which it carries on. The assets and risks are also taken into account, because they, taken together with the functions performed, determine the income for the parties concerned.
58According to that Member State, when applying Article 7(2)(b) of Directive 2016/1164, the implementation of the arm’s length principle ‘rectifies’ the situation in which the undistributed profits of a CFC arising from non-genuine arrangements are declared as profits of that company, by including those profits in the tax base of the controlling entity. That Member State concludes from this that that mechanism avoids double taxation and renders unnecessary the application of Article 8(7) of that directive.
59By contrast, in cases to which Article 7(2)(a) of that directive applies, the tax paid by the CFC is deductible, since that application is liable to result in double taxation. First, that company is liable, in its Member State of residence, to tax on the profits which have not actually been distributed. Second, under that provision, it is also liable to pay tax in the Member State of its controlling company. In those circumstances, Article 8(7) of that directive is applicable.
60In its observations on the statement in intervention of the Kingdom of the Netherlands, the Commission counters, in the first place, that the reference, in the application initiating proceedings, to Article 11 of Directive 2016/1164 seeks to emphasise the obligation incumbent on the Member States, including the Kingdom of Belgium, to transpose that directive, with the result that the argument of the Kingdom of the Netherlands relating to the scope of that provision is irrelevant.
61In the second place, the Commission states that Article 8(2) of that directive determines the allocation of income arising from non-genuine arrangements, as provided for in Article 7(2)(b) of that directive, to the controlling company. By contrast, that article does not govern the issue of the taxation of that income in the Member State of residence of the CFC, which is precisely the purpose of Article 8(7) of that directive.
62In addition, the Commission claims that the combined application of Article 7(2)(b) and Article 8(2) of Directive 2016/1164 does not render the rule laid down in Article 8(7) of that directive meaningless, in particular, where a CFC is situated in a third country, which is not bound by Article 8(2). Thus, that latter provision cannot be regarded as an independent measure aimed at eliminating any double taxation resulting from a reallocation of income under Article 7(2)(b) of that directive. It follows that only the transposition of Article 8(7) into the national legal systems ensures the possibility of exempting any potential double taxation in the Member State of residence of the controlling entity, both in situations internal to the European Union and in the situations involving third countries.
Findings of the Court
63In support of its single complaint, the Commission submits, in essence, that Article 8(7) of Directive 2016/1164 is applicable in all the situations provided for in Article 7(2) of that directive, in accordance with the objective referred to in recital 5 thereof of avoiding the creation of other obstacles to the internal market, such as double taxation. According to the Commission, the Member States are therefore under an obligation to comply with that provision in all situations, irrespective of the minimum degree of harmonisation effected by that directive and of their discretion in determining the method for calculating the deduction provided for by that Article 8(7).
64Under the third paragraph of Article 288 TFEU, a directive is binding, as to the result to be achieved, upon each Member State to which it is addressed, but will leave to the national authorities the choice of form and methods. Whilst that provision leaves Member States to choose the ways and means to ensure that a directive is implemented, that freedom does not affect the obligation on the Member States to which the directive is addressed to adopt, in their national legal systems, all of the measures necessary to ensure that the directive is fully effective, in accordance with the objectives pursued thereby (judgment of 15 December 2022, TimePartner Personalmanagement, C‑311/21, EU:C:2022:983, paragraph 59 and the case-law cited).
65The provisions of a directive must be implemented with unquestionable binding force, and with the specificity, precision and clarity necessary to satisfy the requirements of legal certainty, in particular in such a way as to enable the persons concerned by such measures to ascertain the scope of their rights and obligations in the particular area governed by EU law (see, to that effect, judgment of 11 June 2015, Commission v Poland, C‑29/14, EU:C:2015:379, paragraph 37 and the case-law cited).
66It is true that it is necessary, in every case, to determine the nature of the provisions of a directive to which infringement proceedings relate, in order to assess the extent of the obligation as to transposition which is imposed on the Member States (judgment of 11 June 2015, Commission v Poland, C‑29/14, EU:C:2015:379, paragraph 40 and the case-law cited), given that those provisions may confer on them a certain margin of discretion to ensure their implementation, in particular where the directive at issue does not seek to achieve complete harmonisation of the rules of the Member States within its area of application. (see, by analogy, judgment of 4 May 2016, Commission v Austria, C‑346/14, EU:C:2016:322, paragraph 70 and the case-law cited).
67However, the discretion granted to the Member States by the provisions of such a directive must be exercised, in accordance with the third paragraph of Article 288 TFEU, in full compliance with the objectives and obligations laid down by that directive (see, by analogy, judgment of 2 September 2021, Commission v Germany (Transposition of Directives 2009/72 and 2009/73), C‑718/18, EU:C:2021:662, paragraphs 118 and 119 and the case-law cited).
68In the present case, it should be noted that, in accordance with the first and third subparagraphs of Article 11(1) of Directive 2016/1164, the Member States are to adopt and publish, by 31 December 2018, the laws, regulations and administrative provisions necessary to comply with that directive and are to ensure that those provisions contain a reference to that directive or are accompanied by such a reference on the occasion of their official publication.
69It is apparent from the file submitted to the Court that, on the date of expiry of the period laid down in the reasoned opinion of 2 December 2021, the Kingdom of Belgium had still not adopted provisions to comply with Article 8(7) of Directive 2016/1164. In addition, given that, according to the settled case-law, the question whether a Member State has failed to fulfil its obligations must be determined by reference to the situation prevailing in that Member State at the end of the period laid down in the reasoned opinion, the Court being unable to take account of any subsequent changes (judgment of 16 July 2020, Commission v Romania (Anti-money laundering), C‑549/18, EU:C:2020:563, paragraph 19 and the case-law cited).
70In the context of the examination of this complaint, it is therefore for the Court to determine, in the light of the wording, the context and the objectives of Article 8(7) of Directive 2016/1164, whether that provision must be transposed by the Member States in all the situations provided for in Article 7(2) of that directive.
71In the first place, it should be noted that, under Article 8(7) of Directive 2016/1164, ‘the Member State of the taxpayer shall allow a deduction of the tax paid by the entity or permanent establishment from the tax liability of the taxpayer in its state of tax residence or location’, that deduction shall be calculated in accordance with national law.
72It must thus be stated, first, that, as the use of the present in the French-language version of that provision in the phrase ‘l’État membre du contribuable autorise ce dernier’ (‘the Member State of the taxpayer shall allow … the taxpayer’) emphasises, the wording of that provision is mandatory in nature vis-à-vis the Member States, by requiring them to provide, in their respective national law, for the possibility, in respect of the taxpayer who is resident for tax purposes or situated in that Member State, of benefiting from a deduction corresponding to the tax which the entity or permanent establishment controlled by that taxpayer has paid in the territory in which it is taxable.
73Second, it should be noted that the wording of Article 8(7) of Directive 2016/1164 is couched in general terms and does not mention any derogation from the obligation set out therein. In particular, although that provision refers to national law for the purposes of calculating the tax deduction, that reference does not mean that the Member States have the option not to transpose that provision into their respective legal systems. On the contrary, the fact that the detailed rules for calculating that tax deduction must be defined by the national law necessarily implies that the right, for the taxpayer, to benefit from such a deduction is provided for by that national law.
74In the second place, the context in which Article 8(7) of Directive 2016/1164 occurs bears out that literal interpretation.
75In that regard, first, it should be noted that Article 8 of that directive sets out, as its title states, the rules relating to the calculation of the income of CFCs which the Member States must lay down when they implement the rules on the taxation of that income pursuant to the provisions of Article 7 of that directive.
76More specifically, in accordance with Article 7(2) of Directive 2016/1164, where an entity or permanent establishment whose profits are not taxable or are exempt from tax in the Member State of the taxpayer is regarded by that Member State, in accordance with the criteria set out in Article 7(1) of that directive, as a CFC controlled by that taxpayer, that Member State has, for the purpose of taxing the income of that CFC, two options provided for, respectively, in points (a) and (b) of Article 7(2).
77Where the Member State of the taxpayer adopts the first of those options, referred to in Article 7(2)(a) of that directive, it includes in the tax base of that taxpayer the non-distributed income of the entity or the income of the permanent establishment listed in that provision, except where the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.
78Where the Member State adopts the second of those options, Article 7(2)(b) of that directive provides that the Member State concerned is to include in the tax base of the taxpayer only the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.
79However, while Article 8(1) of Directive 2016/1164 expressly refers to the application of Article 7(2)(a) thereof and that Article 8(2) of that directive expressly refers to instances where Article 7(2)(b) thereof is applicable, Article 8(3) to (7) of that directive does not contain any reference to one or other of the two options provided for by that Article 7(2). As the Commission rightly submits, it must therefore necessarily be inferred from that that, unlike the detailed rules for calculating the income of CFCs set out in Article 8(1) and (2), those found in Article 8(3) to (7), and in particular the possibility, for the taxpayer, under the latter paragraph, to benefit from a deduction corresponding to the tax paid by the CFC in the territory of the Member State in which it is taxable, must be implemented by the Member State of residence of that taxpayer, whichever option that that Member State has adopted for the purpose of taxing the income of CFCs under Article 7 of that directive.
80Second, it should be noted that Article 7(2)(b) of Directive 2016/1164 provides, as is apparent from paragraph 78 above, for a mechanism specific to CFCs, implemented by the Member State of the taxpayer, to include in the taxpayer’s tax base the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.
81That specific mechanism differs from the general anti-abuse rule referred to in Article 6 of that directive, paragraph 1 of which provides that, for the purpose of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. The relationship between that Article 6 and Article 7(2)(b) of that directive must be interpreted in the light of recital 11 thereof, which states that general anti-abuse rules feature in tax systems to fill in gaps by tackling abusive tax practices that have not been dealt with by specific provisions and should not therefore affect the applicability of specific anti-abuse rules. It must therefore be inferred that that specific mechanism constitutes, as opposed to the general anti-abuse rule referred to in Article 6, a lex specialis the application of which must prevail over that rule.
82Consequently, the Member States are not free to apply to CFC income arising from non-genuine arrangements which have been put in place essentially for the purpose of obtaining a tax advantage, within the meaning of Article 7(2)(b) of Directive 2016/1164, either that latter provision or a general anti-abuse rule meeting the criteria of Article 6 of that directive and which precludes the possibility, for the taxpayer, of being able to benefit from the deduction provided for in Article 8(7) of that directive.
83Third, it must also be stated that the option, for the Member States, provided for in Article 3 of Directive 2016/1164, to apply domestic or agreement-based provisions, aimed at safeguarding a higher level of protection for domestic corporate tax bases, likewise cannot relieve them of the obligation to transpose Article 8(7) of that directive into their respective legal systems.
84In that regard, it follows from settled case-law that, although minimum harmonisation does not prevent the Member States from retaining or adopting more stringent measures, those measures must not, however, be liable seriously to compromise achievement of the result prescribed by the directive in question and that they comply with the FEU Treaty (see, to that effect, judgment of 7 July 2016, Muladi, C‑447/15, EU:C:2016:533, paragraph 43 and the case-law cited).
85It is also apparent from the case-law of the Court that the Member States cannot, by definition, retain or adopt such more stringent measures concerning issues exhaustively governed by such a directive (see, to that effect, judgment of 18 January 2024, Regionalna direktsia ‘Avtomobilna administratsia’ Pleven, C‑227/22, EU:C:2024:57, paragraph 38 and the case-law cited). In addition, nor can such measures be contrary to the obligations of Member States under the provisions of a directive which carries out only a minimum harmonisation (see, to that effect, judgments of 22 May 2003, Commission v Netherlands, C‑441/01, EU:C:2003:308, paragraph 46, and of 17 October 2018, Commission v United Kingdom, C‑503/17, EU:C:2018:831, paragraph 55).
86In the present case, as is apparent from paragraphs 71 to 73 and 75 to 82 above, the wording of Article 8(7) of Directive 2016/1164, read in the light of the scheme of Articles 6 to 8 of that directive, of which it forms part, must be understood as meaning that Article 8(7) governs all aspects of the question whether, where the Member State of the taxpayer applies the CFC income rules laid down in Article 7 of that directive, it is required to provide, in its national law, for the possibility for that taxpayer to deduct from his or her tax burden the tax paid by the CFC in its State of residence and, in that regard, leaves no discretion to that Member State.
87In the third place, it should be noted that that interpretation of Article 8(7) of Directive 2016/1164 is consistent with the objectives of that directive.
88In that regard, it is apparent from recitals 1 and 2 of that directive that its adoption forms part of the current political priorities in the field of international taxation, which highlight the necessity to ensure that the tax is paid where the profits and value are generated, to restore confidence in the fairness of tax systems and to allow the Member States to effectively exercise their tax sovereignty, by implementing at EU level the OECD conclusions on combating base erosion and profit shifting.
89Thus, according to recitals 3 to 5 thereof, Directive 2016/1164 aims to lay down the rules designed to counter the erosion of tax bases in the internal market and the shifting of profits outside the internal market and to apply to all the taxpayers subject to corporation tax in a Member State.
90As stated, in essence, in recitals 2 and 16 of Directive 2016/1164, in order to ensure the proper functioning of the internal market and improve its resilience as a whole against cross-border tax avoidance practices, only a common framework and remedial measures at EU level are capable of achieving that objective in a sufficiently coherent and coordinated fashion, preventing a fragmentation of the market and putting an end to currently existing mismatches and market distortions, and in particular problems of a cross-border nature, while providing taxpayers with legal certainty. However, as that recital 16 states, in accordance with the principle of proportionality set out in Article 5 TEU, that directive seeks only to achieve the essential minimum degree of coordination in the European Union for the purpose of giving concrete expression to those objectives.
91In that context, it is apparent from recital 5 of that directive that, where the application of the rules laid down by that directive gives rise to double taxation, the taxpayers must receive tax relief through a deduction corresponding to the tax paid, the objective of those rules not only aiming to counter tax avoidance practices, but also to avoid creating other obstacles to the internal market, such as double taxation.
92Accordingly, first, Article 8(7) of Directive 2016/1164 seeks to implement the objective set out in recital 5, by avoiding the double taxation of the CFC’s income included in the tax base of the controlling taxpayer, in accordance with the rules laid down in Article 7 of that directive, in order to avoid creating a new obstacle to the internal market which could result from the application of those rules. In so doing, Article 8(7) of that directive fully contributes to the achievement of the more general objectives of that directive, recalled in paragraph 90 above.
93Second, it can be clearly inferred from the wording of that recital 5 that Directive 2016/1164 seeks to maintain a balance between the objective which aims to counter tax avoidance practices and the objective which aims to avoid creating other obstacles to the internal market, such as double taxation. That desire to strike a balance reflects the consideration, by the EU legislature, of the principle of proportionality, which requires that the means employed by EU law provisions be appropriate for achieving the legitimate objectives pursued by the legislation at issue and must not go beyond what is necessary to achieve them (see, to that effect, judgment of 3 December 2019, Czech Republic v Parliament and Council, C‑482/17, EU:C:2019:1035, paragraph 76 and the case-law cited).
94In particular, in accordance with settled case-law, restrictions on the freedom of establishment or the free movement of capital may be justified on grounds relating to the necessity to preserve the balanced allocation between the Member States of the power to impose taxes, on the one hand, and between the Member States and third countries, on the other, and on grounds relating to the necessity to prevent tax fraud and tax avoidance only if, in accordance with that principle, those restrictions are appropriate for ensuring the achievement of the objectives pursued and do not go beyond what is necessary in order to achieve those objectives (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraphs 55 to 57 and 60 and the case-law cited, and of 26 February 2019, X (Controlled companies established in third countries), C‑135/17, EU:C:2019:136, paragraphs 72, 73 and 75 and the case-law cited).
95In the context of the application of the rules laid down in Articles 7 and 8 of Directive 2016/1164 relating to the inclusion, by the Member State of residence of a taxpayer exercising control over a CFC, of the income of that CFC in that taxpayer’s tax base, the objectives of that directive of combating the erosion of tax bases in the internal market and against cross-border tax avoidance do not justify that some or all of that income is subject to double taxation, in economic terms, that is to say, they are taxed, first, at the level of the CFC, by the third country or the Member State of residence of that CFC, and, then, at the level of the taxpayer controlling that CFC, by the Member State of residence of that taxpayer (see, by analogy, judgment of 1 August 2025, Banca Mediolanum, C‑92/24 to C‑94/24, EU:C:2025:599, paragraph 40 and the case-law cited).
96Those objectives can be achieved where, as stated, in essence, in recital 12 of that directive, the income of a low-taxed CFC in the Member State or third country of residence of that CFC is, under the conditions laid down in Article 7 of that directive, reincorporated in the tax base of the taxpayer who exercises control over that CFC by the Member State in which that taxpayer is resident for tax purposes, the latter then becoming liable to tax on that income.
97As regards, more specifically, the option which, on the date of expiry of the period laid down in the reasoned opinion, the Kingdom of Belgium had implemented in its national law, namely that provided for in Article 7(2)(b) of Directive 2016/1164, it should be noted that those objectives are achieved where the incorporation of the CFC’s income into the taxpayer’s tax base is limited to the part of that income arising from an arrangement or a series of non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage and the additional amount of tax of that taxpayer which results therefrom is designed only to make up for the lower nominal rate of tax to which that income is subject in the Member State or third country in which the CFC is resident for tax purposes (see, by analogy, judgment of 13 November 2012, Test Claimants in the FII Group Litigation, C‑35/11, EU:C:2012:707, paragraphs 71 and 72).
98In the absence of such a limitation, that would mean that the overall tax burden, in economic terms, of the group of companies to which that taxpayer and the CFC belong would be greater than in the absence of that arrangement or that series of non-genuine arrangements.
99However, for the purposes of combating the erosion of the tax base within the internal market and cross-border tax avoidance, it is sufficient that the advantage which that arrangement or series of non-genuine arrangements had as a purpose is excluded from the scope of the national legislation of the Member State to which the taxpayer is subject (see, by analogy, judgment of 13 March 2007, Test Claimants in the Thin Cap Group Litigation, C‑524/04, EU:C:2007:161, paragraph 79 and the case-law cited).
100In addition, it is important to point out that, contrary to what the Kingdom of Belgium contended at the hearing, the case-law of the Court according to which the disadvantages that may result from the parallel exercise of the taxation powers of the various Member States, provided that such an exercise is not discriminatory, is not relevant in the present case, do not constitute restrictions prohibited by the FEU Treaty. That case-law is applicable where there are no unifying or harmonising measures limiting the power of the Member States to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation (see, to that effect, judgment of 16 July 2009, Damseaux, C‑128/08, EU:C:2009:471, paragraphs 27, 29 and 30 and the case-law cited).
101Articles 7 and 8 of Directive 2016/1164 constitute precisely such harmonisation measures limiting the power of the Member States, since they provide that, under certain conditions, the income of CFCs is taxable in the Member State in which the taxpayer controlling those CFCs is resident for tax purposes and, therefore, confers on that Member State a power to impose taxes on those CFCs (see, by analogy, judgment of 20 December 2017, Deister Holding and Juhler Holding, C‑504/16 and C‑613/16, EU:C:2017:1009, paragraph 51 and the case-law cited), whether the CFCs at issue are resident for tax purposes in another Member State or in a third country.
102In those circumstances, if Directive 2016/1164 were to be interpreted, as the Kingdom of Belgium contends, as authorising the Member States not to implement Article 8(7) of that directive, the taxpayers falling within the scope of Articles 7 and 8 of that directive would be liable to be subject, in the light of the rules laid down by those articles, to a difference in treatment, depending on whether the national tax legislation applicable to them or which is applicable to CFCs which they control or the treaty law binding the Member State in which they reside contains or does not contain provisions for the avoidance of double taxation of the income of those CFCs included in their tax base.
103However, in order to comply with the general principle of equality, which is one of the fundamental principles of EU law, such a difference in treatment should not concern comparable situations unless such treatment is objectively justified (see, to that effect, judgment of 29 July 2024, Belgian Association of Tax Lawyers and Others, C‑623/22, EU:C:2024:639, paragraph 24 and the case-law cited).
104In that regard, first, it should be noted that the taxpayers subject to corporation tax in the Member State in which they are resident for tax purposes and who control CFCs falling within the scope of Articles 7 and 8 of Directive 2016/1164, whether those CFCs are resident for tax purposes in another Member State or in a third country, are placed in comparable situations in the light of the criteria set out by those articles. Second, it is apparent from paragraphs 89 to 99 above that the difference in treatment between those taxpayers, which results from the possibility, for the Member States, not to implement Article 8(7) of that directive, cannot be justified by the objectives of that directive. Therefore, those taxpayers, regardless of the Member State whose tax legislation is applicable to them, must be able to benefit from the deduction of the tax paid by a CFC which they control, provided that the conditions laid down by that provision in respect of the benefit of that deduction are satisfied.
105It follows from all the foregoing considerations that, in order to comply with Article 8(7) of Directive 2016/1164, the Member State which submits a taxpayer to corporation tax must allow that taxpayer, in all the situations provided for in Article 7 of that directive, to deduct the tax paid by the CFC from the tax burden which it bears in that Member State.
106That conclusion is not called into question by the arguments put forward by the Kingdom of Belgium and the Kingdom of the Netherlands.
107First, in the light of what has been set out in paragraphs 91 to 104 above, the Kingdom of Belgium’s argument that the objective to avoid creating other obstacles to the internal market, such as double taxation, does not constitute an objective, in itself, of that directive must be rejected.
108Second, the fact relied on by that Member State, according to which Article 7(2)(b) of that directive targets situations of tax abuse, whereas Article 7(2)(a) thereof refers to situations of legal tax optimisation, cannot exempt the Member States from the obligation referred to in paragraph 105 above.
109First of all, as pointed out in paragraphs 73 and 79 above, it is apparent from the wording of Article 8(7) of that directive and from the scheme of Articles 7 and 8 thereof as a whole that the obligation set out in paragraph 105 above is not the subject of any derogation and is binding on the Member States, whichever option they have adopted for the purpose of taxing the income of CFCs.
110Next, the argument that the absence of a provision in respect of the avoidance of double taxation in the situation referred to in Article 7(2)(b) of Directive 2016/1164 has a deterrent role, such as to strengthen the effectiveness of combating tax abuse, cannot succeed either.
111As pointed out in paragraphs 95 to 99 above, for the purpose of combating the erosion of tax bases in the internal market and cross-border tax avoidance, it is not necessary that the CFC’s income arising from an arrangement or a series of non-genuine arrangements is subject to double taxation, but it is sufficient that the advantage which that arrangement or series of non-genuine arrangements had as a purpose is excluded from the scope of the national legislation of the Member State to which the taxpayer is subject.
112Moreover, the existence of a mechanism such as that provided for in Article 7(2)(b) of that directive, which makes it possible to exclude such an advantage, has, by itself, deterrent effect.
113Lastly, in so far as the Kingdom of Belgium claims that double taxation in a situation such as that referred to by that provision, in which the goods, services, capital and persons do not move in the internal market, does not actually constitute an obstacle to that market, it is sufficient to note that the continued double taxation of the CFC’s income, in the context of the application of that provision, on account of the refusal of certain Member States to implement Article 8(7) of Directive 2016/1164, would risk causing or retaining divergences and asymmetries in that market, which that directive is specifically intended to remedy. In addition, as is apparent from paragraphs 102 to 104 above, such a refusal would lead to a difference in treatment between the taxpayers, depending on the Member State whose legislation is applicable to them, which cannot be justified.
114Third, contrary to what the Kingdom of the Netherlands maintains and as the Commission has rightly pointed out, the implementation of Article 8(2) of Directive 2016/1164, which provides that, in the context of the application of Article 7(2)(b) thereof, the allocation of CFC income is to be calculated in accordance with the arm’s length principle, is not sufficient to avoid the situations of double taxation.
115First, that provision governs only the allocation of the CFC’s income arising from an arrangement or a series of non-genuine arrangements and their inclusion, by the Member State in which the controlling taxpayer is established, in the tax base of that taxpayer. By contrast, it does not govern the issue regarding the taxation of that income in the Member State in whose territory that CFC is resident for tax purposes and, in particular, does not oblige that Member State to refrain, in accordance with the arm’s length principle, from taxing that income, since it has been included in the tax base of the taxpayer controlling that CFC. Second, where the latter is governed by the tax legislation of a third country, that country cannot, in any event, be bound by Directive 2016/1164, and in particular by Article 8(2) thereof. Consequently, only the implementation of Article 8(7) thereof is capable of mitigating the risk of double taxation, in economic terms, both in situations internal to the European Union and in situations involving third countries.
116In the light of the above, it must be concluded that the Kingdom of Belgium was required, in order to ensure full transposition of Directive 2016/1164, to provide for the implementation, in its national legislation, of Article 8(7) of that directive. As stated in paragraph 69 above, on the date of expiry of the period laid down in the reasoned opinion, it had not fulfilled that obligation.
117Accordingly, the Commission’s single complaint must be upheld.
118Having regard to all the foregoing, it must be held that, by failing to adopt the laws, regulations and administrative provisions necessary to comply with Article 8(7) of Directive 2016/1164, the Kingdom of Belgium has failed to fulfil its obligations under that directive.
Costs
119Under Article 138(1) of the Rules of Procedure of the Court of Justice, the unsuccessful party must be ordered to pay the costs if they have been applied for in the other party’s pleadings.
120Since the Commission has applied for costs and the Kingdom of Belgium has been unsuccessful, the latter must be ordered to bear its own costs and to pay those incurred by the Commission.
121Under Article 140(1) of the Rules of Procedure, the Member States and institutions which have intervened in the proceedings are to bear their own costs.
122In accordance with that provision, the Kingdom of the Netherlands is to bear its own costs.
Operative part
On those grounds, the Court (Fifth Chamber) hereby:
1.Declares that, by failing to adopt the laws, regulations and administrative provisions necessary to comply with Article 8(7) of Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, the Kingdom of Belgium has failed to fulfil its obligations under that directive;
2.Orders the Kingdom of Belgium to bear its own costs and to pay those incurred by the European Commission;
3.Orders the Kingdom of the Netherlands to bear its own costs.
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