Court of Justice declares Belgian withholding tax regime incompatible with fundamental freedoms

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To claim or … to claim: take action now!

Collective investment companies, insurance companies, pension funds, … (whether established in the EU, the EEA or third States) should urgently examine whether their investment portfolio allows them to file refund claims for withholding tax suffered in Belgium.

For all questions, please do not hesitate to reach out to Koen Marsoul, Stijn Vanoppen and Niels Bammens.

1. Background

On 25 October 2012, the Court of Justice of the European Union (CJEU) gave a decision in case C-387/11, Commission v Belgium.

The case concerns the different treatment in Belgium of resident and non-resident collective investment companies as regards withholding taxes on Belgian-sourced dividends. Belgian resident collective investment companies are taxed on an alternative (well-defined) taxable basis (article 185bis ITC 1992), which consists of abnormal or gratuitous benefits received and disallowed items excluding reductions in value and capital losses on shares (the companies also remain subject to the tax on secret commissions, if any). These companies are not taxed on their investment income, whereas the withholding taxes paid on such income are creditable against their corporate income tax payable in Belgium. The balance, if any, is refundable (article 270 et seq. ITC 1992).

In contrast, for non-resident collective investment companies (without a Belgian branch), the withholding tax is a final tax. It is not creditable, nor refundable in Belgium.

The European Commission considered this difference in treatment to infringe the freedom of establishment and the free movement of capital, as provided for in the Treaty on the Functioning of the European Union, and sent a reasoned opinion to the Belgian government on 4 June 2010. Because the response of the Belgian government was not satisfactory, the European Commission brought the matter before the CJEU.

2. The decision of the CJEU

2.1. The existence of discrimination
The CJEU agreed with the Commission’s assertion that a Belgian resident collective investment company and a non-resident collective investment company are comparable. In line with its earlier case law, the CJEU states that, as soon as a Member State subjects not only resident companies but also non-resident companies to tax on dividends which they receive from a resident company, “the situation of those non-resident companies becomes comparable to that of resident companies”. Since Belgium levies withholding tax both on dividends paid to resident investment companies and on dividends paid to non-resident investment companies, the CJEU concluded that the situations are comparable.

Given this comparability, the CJEU held that the different treatment as regards the entitlement to a credit or refund for Belgian withholding taxes constitutes discrimination.

2.2. Justification grounds
In order to justify the discrimination, the Belgian government relied on two justification grounds,  both of which were dismissed by the CJEU.

First, the Belgian government argued that granting a credit or refund to non-resident companies for the withholding tax levied would jeopardize the balanced allocation of taxing powers between Member States, since it would require Belgium to refrain from levying taxes on income obtained on its territory. The CJEU dismissed this argument by pointing out that Belgium refrains from taxing the same type of income when it is paid to resident investment companies. Additionally, the CJEU pointed out that the income generated on the Belgian territory had already been taxed in the hands of the distributing companies as profits realized by them. Therefore, it could not be said that extending the credit and refund would require Belgium to waive its right to tax such income.

Secondly, the Belgian government contended that the difference in treatment was justified by the need to ensure the effectiveness of fiscal supervision, since Belgium is unable to enforce effective fiscal supervision as regards non-resident taxpayers. The CJEU dismissed this argument as well, pointing out that non-resident investment companies are never entitled to a credit or refund for the withholding tax levied in Belgium, irrespective of the guarantees that they might be able to provide concerning financial supervision.

Since the discrimination could not be justified, the CJEU concluded that the distinction introduced by the Belgian withholding tax regime is incompatible with the fundamental freedoms.

2.3. Territorial effect
Interestingly, the CJEU does not limit its decision to one of the fundamental freedoms invoked. In general, a judgment of the CJEU in corporate tax matters is based on either the freedom of establishment or the free movement of capital, depending on whether the domestic legislation at issue applies to shareholdings enabling the holder to exert a definite influence over a company’s decisions and determine its activities (in which case the freedom of establishment applies).

In the present case, however, the CJEU decides to examine the Belgian regime in the light of both freedoms, because “it cannot be ruled out that the national provisions in question might affect both freedom of establishment and free movement of capital.”

Importantly, since the free movement of capital also applies in relation to third States, the decision is not only relevant for collective investment companies established in other EU Member States, but also for collective investment companies established in third States. In addition, the CJEU also expressly confirms that the Belgian regime is incompatible with the freedom of establishment and free movement of capital as provided for in the EEA Agreement. As a result, investment companies established in Iceland, Liechtenstein and Norway can also rely on this decision when filing a refund request in Belgium.

2.4. Temporal effect
Finally, it is important to note that the CJEU dismissed the Belgian government’s request to limit the temporal effect of the judgment. According to the CJEU, the Belgian government failed to demonstrate that there is a risk of serious economic repercussions.

As a result, the decision is not only relevant for future dividend payments in respect of which withholding taxes will be paid, but also for withholding taxes already paid in the past (provided that the domestic statutes of limitations have not yet run out).

3. Conclusion and recommendation

The decision is of considerable importance for non-resident collective investment companies receiving Belgian-sourced dividends, as it is the first time that the CJEU has expressly stated that the Belgian withholding tax regime for non-resident collective investment companies is incompatible with the fundamental freedoms.

Moreover, given the fact that the decision is also based on the free movement of capital, its potential effects should not be understated, considering the territorial scope of that freedom.  Therefore, collective investment companies, whether established in the EU, the EEA or third States, should examine whether their investment portfolio urges them to file refund claims.

Since the temporal effect of the judgment has not been limited, the period for which refund claims can be filed is governed by Belgian domestic procedural law. Consequently, when filing such claims, account  should be taken of the applicable statutes of limitations. With respect to withholding taxes paid since 1 January 2011, a refund request must be filed within a period of five years as from 1 January of the year in which the withholding taxes have been paid. With respect to withholding taxes paid before 1 January 2011, the applicable limitation period is most likely five years (although some uncertainty exists on this point, with some even arguing in favour of a ten year period).

How can EY help?

We have an experienced and dedicated tax team which is well positioned to assist you with any question or need you may have in relation to withholding taxes, particularly in the context of (protective) withholding tax claims on the basis of the EU fundamental freedoms, both on in – and outbound dividends.

Again, please do not hesitate to contact your usual contact person or one of the people listed under contacts.