Belgian withholding tax exemption on savings deposits not in line with European Treaty

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7 June 2013

On 6 June 2013, the Court of Justice of the European Union ruled that the Belgian withholding tax exemption on interests from certain saving deposits is contrary to the free movement of services.

Exempted interests

The current Belgian legislation provides an exemption for individuals, from both withholding tax and income tax on EUR 1.250 of qualifying interest income per year (in 2013 this exemption amounts to EUR 1.880 of income from savings deposits received, without any contractual stipulation as to maturity dates or periods of notice, by credit institutions established in Belgium governed by the Law of 22 March 1993 relating to the status and control of credit institutions). Those deposits must meet some other criteria and conditions regarding the currency in which they are denominated, the conditions and methods of withdrawals and deductions and regarding the structure, the level and the method for calculating their remuneration.

The main result of these conditions and criteria is that Belgian residents are discouraged from using, for the management of savings accounts, the services of banks established in other Member States of the European Union and in States which are parties to the EEA Agreement. Interest payments by such banks can never be exempt on the sole ground that the debtor bank is not established in Belgium, even though that bank is able to fulfill all the other conditions laid down in the Belgian legislation in question.

The judgment

One of the main arguments from the Belgian government for the restriction was the effectiveness of fiscal supervision. The Commission conceded that supervision may, in certain situations, be very difficult and that, in principle, the need to prevent tax avoidance and abuses may justify restrictions on freedom of movement. But nevertheless, the measure manifestly exceeds the scope of what is necessary to achieve its objective. The Commission moreover observed that Belgium also participates in the information exchange system of the Interest Savings Directive 2003/48. The Court follows the reasoning of the Commission : “the justification based on the inadequacy of the cooperation instruments at the European Union level cannot be accepted”.

Another argument referred to the socio-economic nature of the exemption insofar as it purportedly encourages provident savings by ‘small taxpayers’. According to both the Court and the Commission, opening up the tax exemption to banks which are not established in Belgium does not run counter to that objective.

A third justification was based on the disparity of the levels of consumer protection where a bank fails. However, this regulation has been subject of harmonization in the European Union. In any event, according to the Commission, national legislation must not influence consumers by treating the financial instruments of banks established outside Belgium unfavorably.

As for, the final argument that Belgian savers would be inadequately informed on account of the fact that a bank established outside Belgium would not necessarily use one of the languages spoken in Belgium, the Commission contends that it is for consumers alone to judge in which language they are equipped to receive information regarding the opening of a savings account.

The Court concludes in its decision that, by introducing and maintaining a system of discriminatory taxation of interest payments by non-resident banks, resulting from the application of a tax exemption reserved only to interest payments by resident banks, Belgium has failed to fulfill its obligations under Article 56 TFEU and Article 36 of the EEA Agreement (i.e. free movement of services).

Reaction of the Belgian government?

The Belgian government will have to adapt the current legislation. The new legislation could be, either the complete abolition of the exemption or opening the exemption also for financial institutions abroad.

In a first reaction the Minister of Finance already announced that the judgement means that Belgium should open the exemption for foreign deposits also. Anyhow, since the government will start its budgetary control soon now, this judgment will be certainly on top of the agenda