Community legislation and case law are increasingly important in Belgian tax law. In the previous issue of this newsletter, we analysed the European Court of Justice's Zwijnenburg judgment, in which the Court held that the Merger Tax Directive prevents the tax authorities of a Member State from levying corporate tax on a merger, even if the purpose of the merger is to avoid real estate transfer tax. In this issue, we take a brief look at some provisions of Belgian tax law deemed to be potentially discriminatory by the EU authorities. For more detailed information on these and other tax-related matters, please consult the European Commission's website.
Dividend and interest withholding tax rates
Four types of potential discrimination have been raised with regard to Belgium's withholding tax rates on interest and dividends.
Firstly, Belgian resident individuals are subject to a withholding tax of 15% on dividends paid by a Belgian company if, amongst other requirements, either (i) the majority of the company's shares are held by individuals (i.e., natural persons) or (ii) part of the company's capital has been contributed by a so-called privak, i.e., a private investment vehicle established in Belgium. However, dividends paid by such companies based in other EEA Member States are subject to a 25% withholding tax in Belgium, without the possibility to apply a lower rate for inbound dividends. Secondly, Belgian investment companies, in practice, do not pay tax on Belgian-source interest and dividend income. Indeed, by means of their Belgian corporate tax return, they can request a refund of any Belgian taxes withheld from Belgian-source interest and dividends. Foreign investment companies, on the other hand, are subject to a withholding tax of 15% or 25% on their Belgian-source interest and dividend income and cannot claim a refund since they do not file a Belgian corporate tax return.
Thirdly, dividends on bearer shares that have been held since their issuance on deposit with a Belgian bank which is subject to oversight by the Belgian financial supervisory authority (the CBFA) and dividends on dematerialised shares held in a securities account in Belgium are subject to withholding tax at a rate of 15%. However, dividends on bearer shares or dematerialised shares held under similar arrangements (on deposit or in a securities account) with a financial institution established in another EEA country are subject to a 25% withholding tax. In addition, dividends distributed by Belgian investment companies are subject to a withholding tax of 15%, while dividends distributed by equivalent investment companies established in other EEA countries are subject to a withholding tax of 25%.
Finally, on 1 March 2010, Belgium amended its tax legislation on an important point. Before that date, dividends distributed by a Belgian company to a foreign investment fund were taxed at a rate of either 15% or 25% whereas dividends distributed by a Belgian company to a Belgian investment fund were tax exempt under certain circumstances. Furthermore, interest payments to a Belgian investment fund which met certain statutory requirements in terms of its investments were exempt from withholding tax if the interest derived from deposits in Belgium, while interest payments to foreign investment funds were taxed at a rate of 15%. Effective 1 March 2010, these exemptions no longer exist.
Tax exemptions for Belgian-source interest income on savings and for pension savings
The tax treatment of interest received by a Belgian resident on savings differs, depending on whether the interest is paid by a domestic (i.e., Belgian) bank or a foreign bank. Currently, when interest is paid by a Belgian bank on a qualifying savings account held by an individual in Belgium, up to EUR 1,730 of interest per year is exempt from withholding tax and need not be reported on the individual's Belgian tax return. Any surplus amount is subject to withholding tax at a rate of 15%. The European Commission claims that this provision is contrary to the freedom to provide services and the free movement of capital, as interest payments on savings accounts held elsewhere in the EU do not qualify for the exemption (and the interest income must thus be reported in full).
Only pension savings paid to Belgian financial institutions, or collective pension savings invested in Belgian pension funds, are tax exempt. Belgium justifies this restriction by citing the need to safeguard the security of pension savings. However, according to the Commission, Belgium could rely instead on the Mutual Assistance Directive to verify the information provided by foreign pension intermediaries or funds.
Corporate tax issues: Belgian exit tax upon the transfer of a company's registered office and the shareholding requirement of the Parent-Subsidiary Directive
When a company transfers its registered office or assets from Belgium to another Member State, it is immediately subject to corporate tax in Belgium (immediate taxation of capital gains when the company's tax residence is moved outside Belgium). According to the European Commission, the immediate taxation of accrued but unrealised capital gains at the time of transfer abroad is not allowed if there is no similar tax in comparable domestic situations. It follows from the case law that the Member States must defer taxation until realisation of the capital gains.
According to the Parent-Subsidiary Directive, a company can benefit from the Directive if it holds at least 10% of the shares of another qualifying company. Belgium, however, imposes an additional requirement, namely that the shareholding be considered a fixed financial asset.
Dividends paid by Belgian REITs
Dividends received from a Belgian real estate investment fund (REIT) are exempt from Belgian withholding tax, provided the REIT invests at least 60% of its assets in residential real estate situated in Belgium. According to the Commission, this requirement is contrary to EU law.
Abolishment of the tax representative requirement for EEA-based operators of foreign securities lending systems
Securities lending is an important part of the business of financial institutions. Further to the Belgian Royal Decree of 30 July 2010, EEA-based operators of foreign securities lending systems are no longer required to appoint a tax representative in Belgium. The European Commission formally asked Belgium to change its legislation in this regard on 18 March 2010, arguing that the operator of a foreign lending system is capable of correctly applying the withholding tax provisions without the assistance of a representative in Belgium.