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23 February 2010

 

Why foreign dividends paid out to a Belgian shareholder are taxed twice ? 

 

 

Scope :  income tax - individual taxpayers - residents - foreign dividend - cross-border payment - double taxation

 

 

Introductory

 

Dividends distributed by a Belgian company to a Belgian resident are subject to a withholding tax deducted at source. The rate of this tax is set at 25 pct. (Article 269, §1, 2° of the Belgian Income Tax Code of 1992 – BITC92). Under certain conditions, this withholding tax rate can be reduced to 15 pct. (Article 269, §2 BITC92).

 

For Belgian residents, the withholding tax of 25 pct. (or 15 pct.) is the final levy and, in principle, constitutes a full discharge of personal income tax (Article 313 BITC92). So the dividend payment does no longer need to be reported in the income tax return.

 

However, the situation is different when a Belgian resident receives a dividend from a company that is resident in another EU Member State (i.e. the source State). In that case the tax authorities of the country where the company is located, will tax such (gross) dividend according to the internal tax laws of that State.

 

This taxation, however, does not avoid the (net) dividends being subject to the Belgian Income Tax. The double tax treaty between Belgium and that other country (often stipulated in its Article 10, §1 and §2) provide a legal basis for such a double taxation and only stipulate that the withholding tax rate so charged shall not exceed a certain limit (e.g. 15 pct. whereas national tax law provides 25 pct.).

 

 

Hereafter, we will assume that a dividend is paid out by a French company to a Belgian shareholder. Although what is stated below is, in principle, applicable to every situation in which an EU Member State pays out a dividend to a Belgian resident.

 

 

Example

 

Let’s say a Belgian resident owns 1,000 shares in SAINT-GOBAIN and a gross dividend of EUR 1 per share was paid out :

 

French withholding tax (25 pct.)

-250,00 EUR

Net dividend

750,00 EUR

Belgian income tax (25 pct.)

-187.50 EUR

Net dividend

562.50 EUR

 

The Belgian resident will receive a net dividend, after being subject to French and Belgian taxation, of EUR 562.50. The Belgian-French Double Tax Treaty provides that in the event of a cross-border dividend payment, the French tax authorities are only allowed to withhold 15 pct. and not (the internal rate of) 25 pct. So France will need to refund the 10 pct. (or EUR 100) previously withheld, at the request of the Belgian resident.

 

Hereby the question rises whether an EU Member State is obliged, under the provisions of the EC Treaty, to eliminate any double taxation that arises from the taxation of cross-border dividend payments in both the source State and the State of residence of the shareholder.

 

In the past the European Court of Justice (ECJ) was asked, more than once, to take position in this.

 

 

European jurisprudence

 

In July 2009, the ECJ issued its decision in the case between Mr Damseaux and the Belgian Tax Administration (Case Nr. C-128/08, DAMSEAUX, dd. 16 July 2009).

 

The ECJ concluded that EU Law, as it currently stands, does not include the obligation for those countries to take legal measures to avoid any double taxation in this respect. We will discuss this point of view and its consequences hereafter.

 

This decision is in line with the previous ECJ case law, and in particular with the decision in the «KERCKHAERT-MORRES-case» (Case Nr. C-513/04, KERCKHAERT-MORRES, dd. 14 November 2006).

 

 

Facts and legislative background

 

Mr Damseaux, a Belgian resident, received dividends from TOTAL, a French company, from 2005 through 2007. Those dividends were subject to the French withholding tax at a rate of 25 pct. The double tax treaty between Belgium and France limits the withholding tax to 15 pct. (Article 15, § 2 of the treaty), so the French tax was partially refunded at the taxpayers request. The amount remaining after taxation was then subject a final income taxation in Belgium at a rate of 15 pct. (Article 171, 2° bis b) BITC92).

 

As Mr Damseaux considered that his French dividends were taxed at a higher rate than Belgian dividends and that, as Belgium had accepted that France would impose a withholding tax, it should, as the State of residence, allow the French tax to be credited against the Belgian withholding tax (or at least waive the withholding tax so as to avoid the double taxation), he lodged objections against the assessments issued by the Belgian Tax Administration concerning the dividends received.

 

The Court of First Instance of Liège that referred the case to the ECJ, asked whether the double taxation, permitted under the tax treaty, constituted a restriction on the free movement of capital. The court also raised the question whether Belgium was obliged, pursuant to Article 293 of the EC Treaty, to renegotiate the tax treaty in order to effectively eliminate double taxation. The double tax treaty does indeed provide for a credit of the French withholding tax in Belgium, although the Belgian credit mechanism has been withdrawn (Article 19A, 1 of the treaty).

 

 

No jurisdiction to interpret tax treaties

 

Mr Damseaux expressed the view that the double taxation of the inbound dividends would have been prevented if Belgium had correctly implemented the relevant provisions of its tax treaty with France. The treaty stipulates that the French withholding tax due is to be credited against the Belgian tax (see Article 19A, 1 of the treaty), whereas the Belgian legislation only allows the deduction of the French withholding tax from the gross tax base.

 

The ECJ emphasized, once again, that it had no jurisdiction over questions of interpretation of tax treaties entered into by EU Member States or the possible infringement of such treaties by a contracting EU Member State. The ECJ does not have jurisdiction to rule on a possible infringement of provisions of bilateral conventions entered into by the EU Member States designed to eliminate or to mitigate the negative effects of the coexistence of national tax regimes (Case Nr. C-298/05, COLUMBUS CONTAINER SERVICES, dd. 6 December 2007).

 

 

No restriction of the EU freedoms

 

By referring to its decisions in the «KERCKHAERT-MORRES-case» and the «ORANGE EUROPEAN SMALLCAP FUND-case» (Case Nr. C-194/06, ORANGE EUROPEAN SMALLCAP FUND, dd. 20 May 2008), the ECJ repeated that any disadvantages that arise from the parallel exercise of tax competences by different EU Member States, do not constitute a restriction prohibited by the EC Treaty as long as the national rules are not discriminatory by themselves.

 

Therefore, according to the ECJ, EU Member States retain the power to determine the criteria for allocating their powers of taxation with the view of eliminating double taxation. The EU Member States should achieve that objective themselves, in particular by applying the criteria followed in international practice to avoid double taxation.

 

 

Avoidance of double taxation: a national issue

 

In this respect, the ECJ pointed out that, if the State of residence were required to grant a double taxation relief (i.e. Belgium), this would result in granting an overriding right of taxation to the source State (i.e. France).

 

The ECJ concluded that EU Law, in its current state, does not establish any criteria for the attribution of areas of competence between EU Member States in relation to the elimination of double taxation within the EU and, at this moment, the EU Member States are under no legal obligation to renegotiate the existing tax treaties that do no effectively eliminate double taxation.

 

As there may be a legal ground for the ECJ not to intervene with the exercise of tax competences by the different EU Member States, it is not a secret that the European Commission considers the double taxation of cross-border dividend payments as an infringement on the right of free movement of capital as stipulated under Article 56 EC Treaty.

 

No doubt that more ECJ decisions in this matter are on their way… and hopefully to the benefit of the taxpayer.

 

 

 

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