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ECJ Cracks Down on Preferential Withholding Tax Treatment in Belgium

On 25 October 2012, the European Court of Justice ruled that the Belgian tax law provisions whereby Belgian investment companies can benefit from a more favourable withholding tax regime than non-Belgian resident investment companies, breaches the ground principles of the EU.

Taxand Belgium details the impact that this ruling will have on multinationals with operations in Belgium, and the advantages of acting now.

Like many other countries, Belgium's tax legislation provides for a withholding tax on dividends distributed by Belgian companies.

However, for Belgian investment companies, the levied withholding tax can be credited with any corporate income tax due and, if there is insufficient corporate income tax due, a refund of excess withholding tax is possible. This will often be the case as a result of the limited scope of taxation of such investment companies. As a result, this credit system in practice leads to an actual "tax exemption".

Foreign investment companies, however, cannot benefit from such a refund or "exemption" and thus will effectively bear the cost of the withholding taxes levied. Many tax advisors and their clients argued that such legislation is in breach of the European freedom of establishment (art. 49 TFEU) and free movement of capital (art. 63 TFEU).

In June 2010, the European Commission also indicated that they shared this point of view and sent a reasoned response to Belgium. As Belgium did not respond adequately to this, the Commission referred Belgium to the European Court of Justice (ECJ) for its discriminatory tax treatment of foreign investment companies. On 25 October 2012, the ECJ rendered its decision and condemned Belgium for breaching the ground principles of the EU.

The ECJ ruled that: "by maintaining different taxation of income rules from capital and movable property according to whether it is earned by resident investment companies or by non-resident investment companies with no permanent establishment in the country, Belgium has failed to fulfill its obligations under Articles 49 TFEU and 63 TFEU, and Articles 31 and 40 of the Agreement on the European Economic Area of 2 May 1992.

The Belgian Minister of Finance has already accepted this defeat in recent press articles, and the Belgian Government will now start working on amending its legislation

Your Taxand contact for further queries is:
Geert De Neef
T. +32 2 787 91 12

Taxand's Take

The ECJ judgment is obviously not only good news for the future, but also for the various withholding tax reclaim procedures that are currently pending before the Belgian tax administration and courts.

Taxand recommends that investment companies who have been waiting to file reclaim procedures, should consider doing so now to recover as much withholding tax as possible.

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