Belgian withholding tax regime on deemed dividend distributions to non-resident shareholder companies breaches EU freedom of capital

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On 12 July 2012, the Court of Justice of the European Union (CJEU) decided in the Tate & Lyle Investments case (C-384/11) that the Belgian regime on deemed dividends distributed by a resident company to a non-resident shareholder company, holding a participation of less than 10% in the capital of the resident company but with a purchase value of at least €1.2mn, is not compatible with the EU freedom of capital.

Facts

A UK company held a 5% shareholding in a Belgian company, the acquisition value of which was over €1.2mn. The Belgian company was subsequently demerged (partially). The demerger was treated as a taxable restructuring, so that the Belgian company was considered to have distributed a deemed dividend to its shareholders.

The UK company was subject to a withholding tax (WHT) of 10% on the dividend since the Belgian domestic WHT exemption for parent companies could not be applied (which requires a 10% shareholding under Article 106 Royal Decree implementing the Belgian Income Tax Code). As the WHT was not creditable or refundable under Belgian domestic tax law, it constituted a final tax for the UK recipient company.

However, if the UK recipient company had been a Belgian resident company, the WHT of 10% would have been creditable against the corporate income tax payable in Belgium and the balance, if any, would have been refundable (Article 270 at seq. Income Tax Code 1992 (ITC 1992)). Moreover, such a company would potentially be entitled to the Belgian Dividend Received Deduction (“DRD”) regime which requires, at the material time, a shareholding of at least 10% or an acquisition value of at least €1.2mn.

The Brussels Tribunal of First Instance therefore requested a preliminary ruling from the CJEU on whether the Belgian tax regime is, in this respect, compatible with the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU, previously Article 56 EC Treaty).

The CJEU approached its decision in accordance with article 104 (3) of the Rules of Procedure of the Court of Justice, which means either that the request for preliminary question is, according to the CJEU, identical to one on which the Court has already ruled, or that the answer to the question may be clearly deduced from existing case law. The procedure enables the Court to give its decision by “reasoned order”, where reference is made to its previous judgment or to the relevant case law.

Restrictions

The CJEU concluded that a restriction on the free movement of capital had occurred, for the following reasons:

  • As Belgium levies a 10% withholding tax on deemed dividends (which do not qualify for the benefits of the Parent-Subsidiary Directive), irrespective of whether these deemed dividends are paid to resident or non-resident shareholder companies, the situation of a non-resident shareholder company and a resident shareholder company becomes comparable. In such a case, in order that the non-resident recipient company is not subject to a restriction on the free movement of capital, as prohibited by Article 63 TFEU, Belgium (as the source state) is obliged to ensure that both resident and non-resident shareholder companies are subject to the same treatment (cf. e.g., Test Claimant in Class IV of the ACT Group Litigation (C-374/04))
  • However, the UK shareholder company is treated differently to a resident shareholder company as (i) the WHT on the deemed dividends is a final tax for the UK company and (ii) it is not entitled to the application of the DRD. If the UK company had been a resident company, the WHT would be creditable and refundable. In addition, it would be entitled to apply the DRD regime.
  • Such a difference in treatment could dissuade non-resident companies from investing in Belgian resident companies. Therefore, the Belgian regime constitutes a restriction on the freedom of capital.

As Belgium levies a 10% withholding tax on deemed dividends (which do not qualify for the benefits of the Parent-Subsidiary Directive), irrespective of whether these deemed dividends are paid to resident or non-resident shareholder companies, the situation of a non-resident shareholder company and a resident shareholder company becomes comparable. In such a case, in order that the non-resident recipient company is not subject to a restriction on the free movement of capital, as prohibited by Article 63 TFEU, Belgium (as the source state) is obliged to ensure that both resident and non-resident shareholder companies are subject to the same treatment (cf. e.g., Test Claimant in Class IV of the ACT Group Litigation (C-374/04))

However, the UK shareholder company is treated differently to a resident shareholder company as (i) the WHT on the deemed dividends is a final tax for the UK company and (ii) it is not entitled to the application of the DRD. If the UK company had been a resident company, the WHT would be creditable and refundable. In addition, it would be entitled to apply the DRD regime.

Such a difference in treatment could dissuade non-resident companies from investing in Belgian resident companies. Therefore, the Belgian regime constitutes a restriction on the freedom of capital.

Belgium might succeed in ensuring compliance with its obligations under the TFEU if the double tax convention concluded with the UK (DTC) compensates for the effects of this difference in treatment under Belgian national legislation. In order to attain this objective of neutralization, the Belgian WHT on the deemed dividend would have to be deducted in its entirety from the tax due in the UK (see for example Commission versus Italy (C-540/07)). The Tribunal of First Instance of Brussels has not, however, included the DTC within the legal framework of the preliminary ruling in this case. It is therefore up to the national judge to decide whether the DTC is applicable in this case, and, if so, whether the DTC could neutralize the effects of the difference in treatment under national legislation.

The taxpayer argued that the DTC is of no relevance because, in this case, the UK did not recognize the deemed dividend. As a consequence, no UK tax was levied on the dividend and therefore there was no possibility of deducting the Belgian WHT from the UK tax.

If the objective of neutralization cannot be achieved through the DTC, the CJEU observes that the restriction on freedom of capital may be justified by overriding reasons relating to the public interest. The CJEU, however, has not ruled on any possible justifications as no justifications were invoked, either by the referring Tribunal or by the Belgian State.

Comment

It is yet to be seen what decision will be reached by the national judge on whether the effects of this restriction on the freedom of capital could be neutralized by the application of the DTC, or whether as an alternative the restriction could be justified by overriding reasons relating to the public interest. Based on existing (similar) case law of the CJEU (e.g., Amurta (C-397/05), Commission vs. Germany (C-284/09), though, one could argue that it is unlikely Belgium would be able to successfully invoke any justifications for the present breach of freedom of capital.

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