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.
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
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.
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.
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".
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
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.
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
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).