Legality of Pillar 2 Undertaxed Payment Rule challenged in Belgian Constitutional Court

Last week, a US organization filed a submission with the Belgian Constitutional Court to request the annulment of the Belgium Pillar 2 Undertaxed Payment Rule (UTPR), which was implemented into Belgium law following the adoption of the EU Pillar 2 Directive. This appears to be the first legal action of its kind challenging the legality of the Pillar 2 rules and serves as an interesting development in the continued OECD Pillar 2 implementation saga. This procedure does have the potential to be lengthy, ranging from anywhere between one and three years, or more. While a final judgment is not expected soon, the interim stages of the ruling (outlined below) can provide initial indications as to the direction the case might proceed.

The Plaintiff in this case has requested the Belgian Constitutional Court to rule that the request is (i) admissible, (ii) file for so-called preliminary ruling with the Court of Justice of the European Union, and (iii) annul the Belgian UTPR rules. The request to the Court to submit a preliminary ruling from the Court of Justice of the European Union with respect to the interpretation of EU rules and regulations in the context of domestic legislation is not uncommon.

According to the Plaintiff, the Belgian UTPR should be annulled because it violates the Belgian Constitution and similar rights as laid down in the European Convention on Human Rights and the EU Charter of Fundamental Rights. The substantive arguments of Plaintiff can be summarized as follows:

• The Belgian UTPR may impact the financial position, and even existence, of a Belgian company by subjecting the Belgian company to tax in relation to income earned by another company in another jurisdiction. It is in violation with the Belgian Constitution, the European Convention on Human Rights, and the EU Charter of Fundamental rights, because:

a. It violates the legal right of protection of property, whilst the UTPR does not provide for a mechanism to regulate the fundamental financial impact of the UTPR to Belgian companies and prohibits discrimination, and/or

b. It violates the freedom to do business and the general principles of legal certainty, whilst the UTPR does not provide for a mechanism to regulate the fundamental financial impact of the UTPR to Belgian companies and prohibits discrimination, and/or

c. It violates the principle of non-discrimination whereby the UTPR will treat companies that are objectively in a different position (eg, financial capacity wise) in the same way.

• The Belgian UTPR may subject a Belgian company to tax in relation to income earned by another company in another jurisdiction, which violates the general principles of territoriality of the Belgian Constitution, the European Convention on Human Rights, and the EU Charter of Fundamental rights, unless there is a true and reasonable connection to justify extraterritorial taxation.

The procedure before the Constitutional Court is expected to take approximately 12 months from the submission of the request for annulment. If the Constitutional Court agrees to refer the questions to the Court of Justice of the European Union, the procedure there takes approximately 18 months. Afterwards, the parties involved in the case before the Belgian Constitutional Court will have the opportunity to present their arguments again in response to the Court of Justice’s reply, which may delay the final decision from the Constitutional Court by another year.

We will continue to closely monitor the developments in this case. If you have any questions, please reach out to the authors or your DLA Piper contact.

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