EU: Prior Belgian CFC rules incompatible with ATAD (CJEU judgment)

The Court of Justice of the European Union (CJEU) on February 26, 2026, issued a judgment (C-524/23) that the prior Belgian controlled foreign company (CFC) rules were incompatible with the EU Anti-Tax Avoidance Directive (ATAD).

Contrary to the Advocate General’s (AG) recommendation, the court found that Belgium’s failure to transpose the deduction required under Article 8(7) of ATAD constituted a breach of its obligation to implement the directive. The judgment also clarified that the foreign tax credit (FTC) under Article 8(7) is mandatory for both situations covered by the CFC rules (i.e., both for model A and model B). 

Summary

Under Article 7(2) of ATAD, member states may choose between two approaches when implementing the CFC rules:

• Model A taxes non-distributed CFC income derived from specific categories of passive income
• Model B taxes non-distributed CFC income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage

At the time of the proceedings in case C-524/23, Belgium had transposed ATAD and had chosen model B for the application of the CFC rules. However, Belgium had not transposed Article 8(7)—which requires member states to allow a deduction for the foreign tax paid by a CFC against the domestic tax liability of the parent company resident in that member state—arguing that its domestic legal framework provided more robust safeguards against tax avoidance by disallowing such deductions.

The European Commission (EC) on July 2, 2020, sent a letter of formal notice to the Belgian authorities requesting them to amend their legislation and transpose Article 8(7) of the ATAD. Subsequently, on April 19, 2023, the EC referred Belgium to the CJEU for failing to correctly transpose the directive. The AG on May 22, 2025, recommended that the court reject the EC’s claim based on both a functional interpretation of the directive and the fact that the directive establishes only minimum harmonization. 

The CJEU decided—based on the wording, context, and objectives of Article 8(7) of ATAD—that member states are required to transpose that provision in all situations listed in Article 7(2) (i.e., under both model A and model B), and Article 8(7) introduces a mandatory obligation to grant taxpayers a deduction for the foreign taxes paid in the state of the CFC.

Note that Belgium modified its CFC rules in December 2023, shifting from model B to model A and implementing Article 8(7) of the directive.

KPMG observation

The CJEU decision confirms that, although a directive represents a minimum standard that member states can go beyond, there are nevertheless limitations to the flexibility afforded to member states upon implementation into domestic law. In the court’s view, when a directive exhaustively regulates a particular issue, member states retain no discretion to omit or neutralize that rule by introducing stricter domestic measures.

Read a March 2026 report prepared by KPMG’s EU Tax Centre