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News

The European Court of Justice does not oblige Belgium to give credit for foreign withholding tax

Date:
15 November 2006

Yesterday, the Court of Justice of the European Communities has decided that Belgium does not have to give taxpayers a tax credit in respect of inbound dividends to set off the withholding tax levied by France on outbound dividends.

Belgium taxes dividends separately from the other income received by a resident taxpayer. Dividends are only subject to (Belgian) withholding tax at the rate of 25 percent. This withholding tax is the final tax for the taxpayer, which means that a Belgian taxpayer does not even have an obligation to declare the dividend in his tax return.

The same tax regime applies to foreign-source dividends. However, inbound dividends are generally subject to a withholding tax in the state of the company paying the dividend. Belgium does not grant any relief to prevent double taxation apart from allowing the taxpayer to deduct the foreign withholding tax before calculating the Belgian tax. The Belgian withholding tax (or alternatively the final income tax) of 25 percent is due on the net dividend after deduction of the foreign withholding tax.

Mr and Mrs Kerckhaert-Morres, two Belgian residents claimed a tax credit in accordance with article 19A(1) of the Convention that provides that, the Belgian tax due on the amount net of the withholding tax "will be reduced by any withholding tax imposed at the normal rate and a fixed quota of foreign tax that is deductible in conditions fixed by Belgian law, provided that the quota may not be less than 15% of this net amount".

In recent cases (Verkooijen, Lenz, Manninen) the Court dealt with the taxation of inbound dividend income. And in those cases, the Court condemned the Member State of residence because it did not apply the same tax treatment to domestic and to inbound dividend income.

In this case, however, the Court found that the situation was entirely different. The Belgian tax legislation does not make any distinction between domestic and inbound dividends. Both are taxed at an identical rate of 25%.

However, what makes all the difference is that France, the Member State where the dividends originate, exercises its fiscal sovereignty and withholds tax at source. That a Belgian taxpayer ends up paying more tax on foreign dividends is not the consequence of the Belgian but of the French income tax system. It is the result from the exercise in parallel by two Member States of their fiscal sovereignty.

The Court merely acknowledges that the coexistence of national tax systems may have negative effects on the functioning of the internal market, but that these need to be resolved by double taxation agreements. In Article 293 of the EC Treaty, Member States have agreed to enter into negotiations with each other with a view to securing the abolition of double taxation within the Community for the benefit of their nationals.

Apportioning fiscal sovereignty between Member States with a view to eliminating double taxation falls outside the ambit of Community law, except in a few situations. The Court confirms that this remains a matter for the Member States. They have to take the measures necessary to prevent such situations by applying, in particular, the apportionment criteria followed in international tax practice.

The Court does not give any indication as to how this has to be done. It merely states that the France-Belgium double tax convention has been agreed to apportion fiscal sovereignty.

The Court can, therefore, only conclude that Belgium does not have to offer its residents a tax credit to set off the French withholding tax. The Belgian legislation that does not offer resident taxpayers a tax credit for foreign withholding tax is not contrary to Article 73b(1) of the Treaty (now article 56(1) EC).

 

 

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