On 12 July 2012, the European Court of Justice ("ECJ") ruled that the Belgian withholding tax rules on dividends paid by Belgian companies to non-resident corporate shareholders were incompatible with the free movement of capital. For EU-based foreign companies, this may be an opportunity to claim back Belgian withholding tax paid on outbound dividends.


A UK company, Tate & Lyle Investments ("TLI"), owned 5% of a Belgian company, Tate & Lyle Europe ("TLE"), a shareholding valued at over EUR 1.2 million. A few years ago, a partial demerger of TLE was carried out. Pursuant to Belgian tax law, the payments made to TLI were deemed dividend income, subject to withholding tax at a rate of 10%.

TLI, as a non-resident corporate shareholder, could not benefit from the set-off and/or deduction of withholding tax afforded resident corporate shareholders under Belgian law. As a result, it paid a final withholding tax of 10% on the dividends received. Had TLE been a resident corporate shareholder, the withholding tax paid would not have constituted its final cost: indeed, a resident company can set off withholding tax paid against its corporate tax liability. Moreover, a Belgian company that receives dividend income may benefit from the dividends received deduction, resulting in the exclusion of 95% of the dividend received from its taxable income. In this way, Belgium provides relief from economic double taxation, i.e. the taxation of two different taxpayers with respect to the same income (for example, when income earned by a corporation is taxed both in the hands of the corporation and in the hands of its shareholders when distributed as a dividend).

TLI filed a claim with the Belgian tax administration, arguing that the difference in treatment of resident and non-resident corporate shareholders violated EU law. After the tax authorities rejected its claim, TLI commenced proceedings before the Brussels Court of First Instance, which submitted a request for a preliminary ruling to the ECJ.

The judgment

In a situation not covered by the Parent-Subsidiary Directive, the Member States are free to impose withholding tax on dividends paid by a subsidiary to its parent company. However, national tax measures cannot undermine basic freedoms, including the free movement of capital. TLI argued that Belgium's refusal to allow non-resident companies to benefit from the set-off or deduction of withholding tax in the same way as Belgian parent companies is discriminatory and discourages foreign companies from investing in the country. Since this difference in treatment is not justified, Belgian tax law violates the principle of the free movement of capital.

In its defence, the Belgian government presented two arguments to the ECJ. Firstly, Belgium argued that the UK, TLI's country of residence, should prevent economic double taxation on dividends received by UK companies. This argument, however, did not convince the Court, which found that if Belgium chooses to exercise its right, as the source state, to tax income sourced within its borders and mitigate economic double taxation, it should do so not only for resident companies but for non-resident companies as well. In other words, Belgium may not prevent economic double taxation only for its own residents. Secondly, according to the Belgian government, the tax treaty between the UK and Belgium must be taken into account, the application of which would neutralise the alleged discriminatory treatment of Belgian outbound dividends, as a tax credit is available in the UK for the Belgian withholding tax. TLI responded, however, that dividends received from Belgium are not considered taxable income in the UK and therefore it cannot acclaim a tax credit under the treaty. The ECJ ruled that the national court should determine whether the tax treaty effectively neutralises the impact of the withholding tax on the free movement of capital. If so, it is quite possible that no violation of EU law exists. However, as the ECJ requires that the discriminatory treatment be fully neutralised by the tax treaty, we doubt a national court would rule in favour of the Belgian tax administration.


As this decision is in line with prior rulings of the ECJ (Denkavit International, C-170/05; Amurta, C-379/05; and Commission v Italy, C-540/07), the Court issued a reasoned order rather than an official judgment. Earlier decisions have confirmed that, when it comes to withholding tax, both apparent discrimination (e.g. different withholding tax rates for residents and non-residents) and covert discrimination (e.g. not allowing the same type of tax relief for resident and non-resident companies) are impermissible. In the case at hand, it was obvious that even though the withholding tax rate is the same for both resident and non-resident companies, a Belgian parent company will receive a higher net dividend than a parent company based in another Member State. Covert discrimination therefore exists.

This decision may be considered a "new fact" for purposes of the automatic relief rule. This means that EU parent companies with a stake of less than 10% in a Belgian subsidiary but which has an acquisition value of at least EUR 2.5 million can claim a refund of Belgian withholding tax on the basis of this decision (the alternative threshold to benefit from the DRD was recently increased from EUR 1.2 million to EUR 2.5 million).