In a previous issue of this newsletter, we discussed a decision of the European Court of Justice ("ECJ"), ruling 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. On 25 October 2012, the ECJ ruled on another withholding tax case, this time finding that non-resident investment companies without a permanent establishment in Belgium are discriminated against compared to (Belgian) resident investment companies and non-resident investment companies with a permanent establishment in Belgium.
Taxation of investment companies under Belgian law
Qualifying (Belgian) resident investments companies are subject to specific corporate tax rules - their corporate tax base is limited to certain exceptional revenue and disallowed expenses. Moreover, such companies can set off the withholding tax they pay on movable income (in general, 21% or 25% on interest and/or dividend income) against their (limited) corporate tax base. If the withholding tax exceeds the company's corporate tax liability, it can claim a refund.
Qualifying non-resident investment companies with a permanent establishment in Belgium can benefit from the same rules, meaning they can also claim back (excess) Belgian withholding tax on their Belgian non-resident corporate tax return.
However, this tax treatment is not available to non-resident investment companies without a Belgian permanent establishment. As a result, outbound income paid to such investment companies will be subject to Belgian withholding tax, but the recipient does not have the right to claim back excess withholding tax (on a Belgian tax return or by other means).
The ECJ ruled that the Belgian rules are discriminatory and violate the principle of the free movement of capital.
Analysis of the judgment
The national tax laws of the Member States may not infringe fundamental freedoms, such as the free movement of capital. On this ground, the European Commission brought an action against Belgium, claiming that its difference in treatment of investment companies constitutes a restriction on the free movement of capital.
In its submissions, the Commission argued that Belgian tax law, by granting only Belgian resident investment companies and non-resident investment companies with a permanent establishment in Belgium the possibility to set off withholding tax paid against their final corporate tax liability, makes it less attractive for non-resident investment companies without a permanent establishment in Belgium to invest in Belgian companies.
The Belgian government advanced seven arguments in support of its position, including the following:
- In order to preserve the balanced allocation of the power to tax between the Member States, Belgium cannot allow non-resident investment companies without a permanent establishment in the country to set off Belgian withholding tax against their national tax liability (as this power is, in principle, allocated to the investment company's state of residence). However, this argument did not convince the Court. Indeed, the Court found that the possibility for a non-resident investment company to set off Belgian withholding tax did not imply that its Member State of residence would have to give up its power to tax foreign-source income.
- The difference in treatment is justified by the fact that it is difficult for the tax authorities to effectively supervise foreign investment companies. The Court responded that this argument could not be accepted. Indeed, the Court explained that denying non-resident investment companies the right to set off withholding tax was "irrespective of the guarantees that they might be able to provide concerning financial supervision". In other words, the financial supervision justification could be accepted if the law allowed non-resident companies to set off withholding tax provided sufficient guarantees were given to the tax authorities to ensure effective supervision of these companies.
Based on these arguments, amongst others, the Court ruled that the Belgian withholding tax measures concerning investment companies constitute an obstacle to the free movement of capital. Moreover, the Court rejected the Belgian government's request to limit temporarily the effects of the judgment, finding that the judgment would have no serious economic repercussions. Thus, the Court's decision may lead to claims for reimbursement of withholding tax wrongfully levied on income paid to qualifying non-resident investment companies without a permanent establishment in Belgium.
Consequently, it can reasonably be inferred from these decisions that the free movement of capital appears to be a ground on which national tax law will increasingly have to be modified. More opportunities will arise in the future for non-resident companies to benefit from favourable national tax measures which, until recently, were reserved to resident companies and non-resident companies with a permanent establishment in the country in question.