In last September’s issue, we reviewed important pending cases and recent decisions of the European Court of Justice ("ECJ"). This article contains an update on these matters and highlights a number of recent developments, especially with respect to the Belgian tax treatment of cross-border dividends.
Dividends received deduction ("DRD")
Under Belgian law, up to 95% of dividends received on qualifying shares can be deducted from the receiving company's net taxable income. However, this deduction (the so-called dividends received deduction or DRD) is only available if the receiving company has a sufficient net taxable profit. In other words, the deduction does not apply if it would increase the recipient’s net losses or turn a net profit into a loss.
For example, suppose a Belgian parent company with a net operating loss of 50 receives a dividend of 100, yielding a net profit of 50. In principle, the DRD is 95 (95% of 100). In practice, however, the company will only be able to deduct 50 (the extent of its net profit). The remainder (45) is lost and may not be carried forward. On 12 February 2009, the ECJ ruled in Cobelfret that this restriction on the deduction is incompatible with Community law (C-138/07,12 February 2009, Belgium v. Cobelfret NV).
On 4 June 2009, the ECJ confirmed its Cobelfret decision. It added that the Member States are not obliged to allow a full deduction (from the parent company’s taxable income) of dividends received from a foreign subsidiary and the resulting losses to be carried forward. However, if a Member State opts to apply the exemption method (i.e., the dividends received are exempt from tax) and allows losses to be carried forward, that Member State may not reduce the parent company’s losses carried forward by dividends received from a foreign subsidiary (joined cases C-439/07, 4 June 2009, KBC Bank NV v. Belgium and C-499/07, 4 June 2009, Beleggen, Risicokapitaal, Beheer NV v. Belgium).
On 23 June 2009, the Belgian Ministry of Finance issued a circular (Ci.RH.421/597.150) on the implementation of these cases in practice. According to the circular, the unused portion of the DRD on qualifying foreign-source dividends may now be carried forward. For the sake of completeness, please note that this rule also applies to the purely domestic situation (i.e., dividends received from a Belgian subsidiary).
In short, the circular states that the unused portion of the DRD may be carried forward to tax year 2009 or later if no final assessment has been issued. For 2009, the unused portion of the DRD must be claimed using a separate form attached to the tax return. As from 2010, it will be possible to claim the unused portion of the DRD on the tax return itself. The deduction can be carried forward indefinitely.
While the circular answers many questions, one important question remains unanswered, namely whether the abovementioned rules also apply to dividends received from companies based outside the European Economic Area. The ECJ stated that the national courts should verify on a case-by-case basis whether the refusal to take non-EEA dividends into account violates Article 56 of the EC Treaty.
Belgium only grants the DRD if (i) the receiving company is the legal owner of the shares and (ii) the shares are fixed assets. In Les Vergers du Vieux Tauves, the ECJ confirmed Belgium’s position (contrary to the Advocate General’s opinion) that a parent company can only claim the benefit of the Parent-Subsidiary Directive if it is the legal owner of the shares, not merely the beneficial owner (C-48/07, 22 December 2008, Belgium v. Les Vergers du Vieux Tauves).
Cross-border dividends and interest payments
On 16 July 2009, the ECJ held in Jacques Damseaux that the double taxation (in France and Belgium) of French-source dividends paid to Belgian shareholders is not contrary to Community law (C-128/08, 16 July 2009, Jacques Damseaux v. Belgium). The ECJ did not agree with the position that Belgium (the claimant’s state of residency) should take measures to avoid double taxation by allowing Mr Damseaux to deduct the French tax from the tax due in Belgium.
Belgium is not obliged to renegotiate its tax treaty with France so as to eliminate the double taxation of dividends. The ECJ reiterated that whilst the abolition of double taxation within the European Union is indeed a Community objective, many Member States have not yet concluded multilateral treaties in this respect (with the exception of the 1990 Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises).
Back in 2006, the ECJ ruled (C-513/04, 14 November 2006, Kerckhaert & Morres v. Belgium) that Belgium’s taxation of French-source dividends was not contrary to the free movement of capital. This case, discussed in the December 2006 issue of bTPP, also involved the taxation of French-source dividends paid to Belgian residents. Contrary to the Damseaux case, however, the claimant in Kerckhaert & Morres only asked the ECJ whether the Belgian withholding tax was contrary to EU law and did not mention Belgium’s double tax treaty.
Finally, the ECJ ruled in Truck Center SA (C-282/07, 22 December 2008, Belgium v. Truck Center SA) that Belgian legislation providing for an exemption from withholding tax for interest paid to a Belgian-resident company but not for interest paid to a Luxembourg company does not violate Community law. The ECJ held that even though withholding tax is not applied in the purely Belgian (domestic) context, the receiving company will at the end of the day have to pay Belgian tax. It ruled that the situations of a Belgian company and a Luxembourg (non-resident) company are not comparable.
Taxation of interest paid by foreign banks to individuals
Belgium currently exempts interest payments of up to EUR 1,730 from withholding tax, if the interest is paid by a Belgian bank to an individual with a savings account in Belgium. Any interest in excess of this amount is subject to withholding tax at a rate of 15%. The European Commission claims that this provision undermines the freedom to provide services and the free movement of capital as interest payments by foreign banks do not qualify for the exemption. If the legislation is not amended in the coming weeks, the case may be brought before the ECJ.