In its decision of yesterday (29 January 2014, no. 14/2014), the Constitutional
Court decided (in a case that we handled) that an interpretation of the LFTC
regime (forfaitair gedeelte van buitenlandse belasting / quotité forfaitaire
d'impôt étranger) according to which the LFTC must always be added to
disallowed expenses, even though the company is not in a taxable position (in
which case the tax assets of the company are reduced) violates the
Constitution. In other words, only the amount of the LFTC that can effectively
be credited is to be added to the taxable base according to the Constitutional
The Constitutional Court also decided that the fact that no carry forward nor
refund of the unused LFTC is granted to taxpayers which were unable to use
the LFTC because they were not in a taxable position does not violate the
The LFTC regime (forfaitair gedeelte van buitenlandse belasting/la quotité
forfaitaire d'impôt étranger) aims to mitigate international double taxation by
granting a tax credit for foreign source interest and royalty income which has
been subject to withholding tax in the source country and which is
subsequently subject to Belgian corporate income tax.
From a technical perspective, this LFTC is first added to the taxable base as a
disallowed expense after which the LFTC can be credited against the
corporate income tax due on the taxable base (including the LFTC).
The example below illustrates the mechanism of the LFTC. It is assumed in
the example that the LFTC is equal to the amount of foreign withholding tax.
Gross interest received from abroad 100
Foreign withholding tax -10
Net interest received 90
Taxable base 100 (= 90 + 10 LFTC)
Belgian corporate income tax 34
LFTC to be credited 10
Additional corporate income tax due 24 (= 34 - 10 LFTC)
Net interest received 66 (=100-10-24)2 Constitutional Court declares parts of lump-sum foreign tax credit (LFTC) regime unconstitutional
Under the current LFTC regime the LFTC must be added to the taxable base
(as a so-called disallowed expense), irrespective of whether or not the
taxpayer can effectively credit the LFTC against any corporate income tax
due. This means that the LFTC creates a disadvantage for a taxpayer which is
not in a taxable position, as it results in a reduction of its tax assets (e.g. tax
losses) that can reduce future taxable profits.
In addition, if there is insufficient corporate income tax due against which the
LFTC can be credited, any excess LFTC is definitively lost and cannot be
Before the Tax Court of Antwerp we argued that the LFTC regime violated the
Constitution. This prompted the Court on 19 December 2012 to make two
requests for preliminary rulings to the Constitutional Court, which are
discussed in more detail below.
First question: inability to carry forward excess LFTC or
In the framework of the first question, we argued that the fact that the LFTC
cannot be carried forward to a later tax year nor refunded violates the
Constitution as it discriminates between (i) companies receiving interest
entitling them to LFTC in a year during which they have a sufficient taxable
base (as a result of which they can effectively credit the LFTC against their
corporate income tax liability and avoid double taxation) and (ii) companies
receiving interest entitling them to LFTC in a year during which they have no
or a negative taxable base (as a result of which the benefit of the LFTC is
permanently lost and double taxation arises).
The Court dismissed the first question on the basis, among other things, that
(i) the Constitution does not provide for a general prohibition of double
taxation, (ii) the legislator has a broad freedom of appreciation to determine
which tax deductions can be carried forward or not and (iii) one small and
rather general reference in the legislative history to an old Law of 1962
introducing the current withholding tax system stating that withholding taxes,
including the LFTC, were made non-refundable, "among other things for
Second question: obligation to add LFTC to taxable
In the framework of the second question, we argued that an interpretation of
the LFTC system according to which the LFTC must be added to disallowed
expenses, irrespective of whether or not the beneficiary of the interest is in a
taxable position, violates the Constitution as it discriminates between (i)
companies receiving interest entitling them to LFTC in a year in which they
have a sufficient taxable base (as a result of which such companies can credit
the LFTC against their corporate income tax and double taxation is avoided)
and (ii) companies receiving interest entitling them to LFTC in a year during
which they have no or a negative taxable base (as a result of which such
companies are not only unable to effectively utilize the LFTC but are also
obliged to include the LFTC in their taxable base so that the LFTC reduces
the amount of tax losses carried forward and other tax assets and so that
double taxation arises).
The Court accepted our reasoning based, among other things, on a reading of
the legislative history underlying the relevant provisions and a circular letter by
the tax authorities, which implicitly recognized the parallel between the
creditable LFTS and the LFTS to be grossed up.3 Constitutional Court declares parts of lump-sum foreign tax credit (LFTC) regime unconstitutional
The Court holds that an interpretation pursuant to which the amount of the
LFTC which could not be effectively credited against the tax due is
nevertheless to be added to the taxable base through the disallowed
expenses violates the Constitution. In other words, only the amount of the
LFTC that has effectively been credited against the corporate income tax is to
be added to the taxable base.
Consequences and recommended actions
For current and future tax years, it is now clear that taxpayers are only
required to add the LFTC to the taxable base (gross-up) to the extent they can
effectively credit it against corporate income tax due.
Belgian corporate taxpayers which have received foreign source interest and
royalties entitling them to LFTC and which have added such LFTC to their
taxable base in situations where they were not in a taxable position, should
not, according to the decision of the Constitutional Court, have had to reduce
their tax assets. As a result, they may pay in subsequent years too much
corporate income tax.
Even if the Belgian legislator does not adapt its legislation in line with the
decision of the Constitutional Court, other taxpayers can recover overpaid
corporate income tax in light of the decision. To this effect, taxpayers can file
a request for an ex officio relief of the tax that was not legally due. Such a
request must be filed within five years as of 1 January of the tax year in which
a "new fact" has occurred which has resulted in the overpaid tax. A decision of
the Constitutional Court on a request for a preliminary ruling qualifies as such
a new fact.
Accordingly, all taxpayers who were during the last 5 years in a position in
which they could not effectively use the LFTC because of an insufficient
taxable base, should review their tax returns and file a request for an ex-officio
relief of the tax that was not legally due.
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