Wallonia’s tax incentives attract overseas companies – but also regulatory attention
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For decades, regional authorities such as Wallonia have had to show great creativity in designing investor-friendly incentives – in no small part because of the EU’s restrictions on state aid.
Unlike the US or Asia, the EU seeks to stop unfair state support to companies, in order to prevent a damaging race of tax breaks and subsidies that end up hurting consumers and taxpayers.
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This has long been seen as a brake – and at times an unwelcome intrusion – on the freedom of regional leaders, who want to deploy what fiscal and policy powers they enjoy to attract businesses and investors.
From fees for operators at Charleroi Airport, to support for research and development or tax breaks for investors in small and medium-sized Wallonian enterprises, the state aid rules have defined regional business initiatives and infrastructure policies.
Indeed, a special tax scheme for Belgium established in 1983 – the so-called “co-ordination centres regime” that came to service up to 200 multinationals – became a test case for state aid and tax. While the method was used elsewhere, European Commission officials referred to Belgium’s system as “the mother of all co-ordination centres”.
The scheme was deemed illegal by the Commission in 2003 and, after almost a decade of wrangling, partly phased out. Belgium and other countries responded by offering advance tax rulings for corporations, sometimes referred to as “comfort letters”.
The government agency Invest in Wallonia claims that access to tax rulings and other incentives give the region one of the lowest effective corporate tax rates of any eurozone country.
In Belgium some rulings can exempt “excess profit”. Bertrand Vandepitte of PwC estimated in 2012 that the rulings can exempt up to 70 per cent of profit, with an effective tax rate of 8 per cent “typically achievable”. While the tax benefits of such rulings are a big draw for companies, they are also attracting the attention of regulators.
The stakes were raised recently when the Commission launched a series of investigations into tax rulings by several member states.
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Most prominent were the probes into arrangements between Ireland and Apple, the Netherlands with Starbucks, and Luxembourg’s deals with the likes of Fiat and Amazon.
A special tax scheme for Belgium, created in 1983, became a test case for state aid and was deemed illegal
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But Belgium has also faced questions over its tax rulings on “excess profits” – although a formal investigation has yet to be announced. The core allegation behind the various cases is that multinationals have been selectively favoured by the taxman.
The Charleroi Airport case – which started with a state aid complaint in 2001 – is a salutary lesson in the sometimes meandering pace of state aid probes; few places in Europe provide a better study of tax competition than Belgium. Last month, the Commission found the Wallonian airport offered a concession fee that was too low and amounted to a state subsidy for airlines. It was ordered to recover around €6m.
But individual deals with Ryanair, the airport’s main operator, were deemed compatible – a decision that reflected Wallonia and Ryanair’s victory in a 2004 court battle. The case was all the more tortuous for the fact that the EU’s executive arm was studying competition between Belgian regions; while the aid was seen by the Commission as having “a positive effect” on the Walloon region, it was deemed to be unfair to rivals such as Brussels National Airport.
While the federal government levies the lion’s share of taxes, there are five levels of fiscal authority, running through the country’s three communities, three regions, 30 provinces and 589 municipalities.
A Wallonian measure that has attracted regulators’ attention is a tax reduction for a public investment fund named “Caisse d’Investissement de Wallonie”, which aims to boost SMEs.
Conditions include requiring investors to be resident in Wallonia – a provision that the Commission is challenging in court as discriminatory. Changes have been made to allow non-residents to invest under certain conditions.
But Mélanie Staes, a tax adviser at Loyens & Loeff, argues that the scheme is also probably “incompatible” with state aid rules. For now, there is no sign of regulatory action on this front. And if past experience is any guide, the regime is probably safe for the next decade.
