Euro Tax Flash from KPMG's EU Tax Centre

On February 26, 2026, the Court of Justice of the European Union (CJEU or the Court) rendered its decision in the case C‑524/23.

The case concerns the compatibility of the old Belgian controlled foreign company (CFC) rules with the EU Anti-Tax Avoidance Directive (ATAD or the Directive). Contrary to the Advocate General (AG)’s recommendation, the Court found that Belgium’s failure to transpose the deduction required under Article 8(7) of the ATAD constitute a breach of its obligation to implement the Directive. The ruling also clarified that the foreign tax credit under this Article is mandatory for both situations covered by the CFC rules – namely both for Model A and Model B. 

Article 7 of the ATAD sets out the CFC rule, which requires Member States to tax the income of low-taxed controlled subsidiaries or permanent establishments (PEs) as if it were earned by the parent company or head office. The rule applies when the tax paid by the CFC or the PE is substantially lower than the corporate tax that would have been due on the same income in the Member State of the parent. In such cases, the income is attributed to the parent company and taxed in its jurisdiction.

Member States may choose between two approaches when implementing the CFC rules:

• Model A: applies the charge to non-distributed income of the CFC derived from specific categories of passive income – Article 7(2)(a).
• Model B: applies the charge to non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage – Article 7(2)(b).

Under Article 8(7) of the ATAD, Member States are required 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. At the time of the proceedings in case C-524/23, Belgium had transposed the ATAD and had chosen Model B for the application of the CFC rules. However, Belgium had not transposed Article 8(7), arguing that its domestic legal framework provided more robust safeguards against tax avoidance by disallowing such deductions.

On July 2, 2020, the European Commission (the Commission or the EC) sent a letter of formal notice to the Belgian authorities, followed by a reasoned opinion on December 2, 2021, requesting them to amend their legislation and transpose Article 8(7) of the ATAD. Subsequently, on April 19, 2023, the EC decided to refer Belgium to the CJEU for failing to correctly transpose the Directive (for more details, please refer to the European Commission’s press release).

On May 22, 2025, AG Juliane Kokott recommended that the Court find that the claim that Belgium failed to meet its obligations by not transposing Article 8(7) of the ATAD when applying the CFC rules under Model B is unfounded. In the AG’s view, this position was justified both by a teleological interpretation of the Directive and by the fact that the Directive establishes only minimum harmonization – see E-News Issue 213. 

The CJEU recalled that under the Treaty on the Functioning of the European Union (TFEU) Directives are binding as to the result to be achieved, whilst allowing Member States discretion in the choice of form and methods. Nevertheless, this freedom does not reduce their obligation to fully comply with the objectives and obligations and within the deadline set out by the Directives.

The Court then noted that the key issue in the case at hand was whether – based on the wording, context, and objectives of Article 8(7) of the ATAD, Member States are required to transpose that provision in all situations listed in Article 7(2) of the same Directive. In this context, the CJEU noted that a literal interpretation of Article 8(7) introduces a mandatory obligation to grant taxpayers a deduction for the foreign taxes paid in the state of the CFC. Furthermore, the Court took the view that the context of Article 8(7) confirms its literal interpretation. The CJEU based this conclusion on several grounds, as follows:

• Applicability of Article 8(7): the Court upheld the EC’s plea that the text of the Directive extends the obligation to allow a deduction for taxes paid in the CFC’s jurisdiction to both Model A and Model B.
• Relationship between Model B and the GAAR: the CJEU noted that Model B is a lex specialis that takes precedence over Article 6 of the ATAD on the general anti-abuse rule (GAAR). As a result, Member States cannot choose to deny the deduction of foreign taxes required by Article 8(7) on the grounds of the GAAR.
• Minimum harmonization: the Court held that although Article 3 of the ATAD allows Member States to adopt stricter measures to better protect their tax base, this does not relieve them of the obligation to implement Article 8(7). In that regard, the CJEU recalled its settled case-law under which, in the context of minimum harmonization Directives, stricter national measures are permissible only insofar as they do not seriously compromise the result prescribed by the Directive and are compliant with the TFEU. Moreover, under the same case-law, where a minimum harmonization Directive exhaustively regulates a specific issue, Member States have no discretion to introduce stricter rules in that area. Additionally, Member States are not allowed to adopt measures that are contrary to the obligations imposed by such a Directive. In the case at hand, the Court found that Article 8(7) comprehensively governs the taxpayer’s right to deduct taxes paid by the CFC and leaves no margin of discretion to Member States to refuse or limit its implementation.

The CJEU further held that the above interpretation of Article 8(7) is consistent with the objectives of the ATAD. Referring to the Directive’s Recitals, the Court noted its dual objective: not only to combat tax avoidance and base erosion, but also to prevent the creation of new obstacles to the internal market, including double taxation. In the Court’s view, Article 8(7) contributes to the achievement of these objectives, by eliminating the double taxation that would arise otherwise due to the fact that the CFC income is included in the taxpayer’s corporate income tax base. In the specific case of Model B, the CJEU further noted that, without a credit for foreign taxes, the resulting additional taxation would cause the group’s overall tax burden to exceed the level it would have reached if the artificial arrangement had not been put in place. Under settled case-law, for the purposes of combating base erosion, it is sufficient to neutralize the tax advantage derived from the non-genuine arrangement.

The Court also rejected Belgium’s plea that its failure to implement a credit for foreign taxes paid by the CFC could be justified on the basis that any resulting disadvantages arose merely from the parallel exercise of taxing powers by different Member States – which is allowed under settled CJEU case-law provided it is non-discriminatory. In this context, the Court noted that the case-law invoked by Belgium applies only in the absence of EU unification or harmonization measures limiting Member States’ competence to allocate taxing powers, whether by treaty or unilaterally, particularly with a view to eliminating double taxation. By contrast, in the case at hand, Articles 7 and 8 of the ATAD constitute harmonization measures that expressly limit Member States’ discretion in this area.

The Court also noted that if Member States were allowed not to implement Article 8(7), taxpayers could face a difference in treatment depending on whether the national legislation applicable to them includes mechanisms to prevent double taxation of CFC income. The CJEU held that such differences would breach the general principle of equality as it would concern comparable situations and it couldn’t be justified by the Directive’s objectives.

In light of the above, the Court concluded that, in order to comply with Article 8(7), Member States are required to grant taxpayers a deduction for the tax paid by a CFC in all cases falling within the scope of Article 7 – namely, under both Model A and Model B.

Please note that Belgium had already modified its CFC rules in December 2023, shifting from model B to model A and implementing article 8(7) of the Directive.

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, where the Directive exhaustively regulates a particular issue – in this case, the prevention of double taxation through Article 8(7) - Member States retain no discretion to omit or neutralize that rule by introducing stricter domestic measures. The judgment departs from the Opinion of AG Kokott, who advocated for a more nuanced reading of minimum harmonization. In the AG’s view, Member States could be allowed to not transpose exceptions or derogations contained in such Directive where doing so would compromise the Directive’s core objectives.

The CJEU also reiterated that – in order to comply with the principle of legal certainty, the provisions of a Directive must be transposed into national law with clear binding force and sufficient specificity, precision, and clarity. Additionally, the transposition should be done in a way that would enable individuals and entities concerned to ascertain the scope of their rights and obligations under EU law.

The Commission response to Belgium’s pleas also clarifies their views on the type of stricter measures that could be introduced by Member States in the context of minimum harmonization. As such, the EC takes the view that such stricter measures are meant to supplement, not replace, the minimum rules already set. In the context of the ATAD, stricter measures could involve applying the rules to entities with less than 50 percent participation or to companies taxed at higher rates than the Directive specifies.

Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre, KPMG in Belgium (Silvie Broekx), or, as appropriate, your local KPMG tax advisor.