Recently, the Belgian Supreme Court issued several judgements regarding the compatibility of the annual tax on undertakings for collective investment with double tax treaties. These cases give some interesting insights on the question which taxes are covered by a double tax treaty, including the tax on securities accounts.
Annual tax on undertakings for collective investment (UCIs)
Belgian undertakings for collective investment (UCIs) must pay an annual tax on undertakings for collective investment (hereinafter referred to as “annual tax”). Also foreign UCIs marketing their units in Belgium are subject to this tax, which is calculated based on the total of the net outstanding amounts in Belgium as per 31 December of the previous year, from the time of their registration with the FSMA. The tax rate equals in principle 0,0925% for Belgian and foreign public UCIs. In 2016, the CJEU found that EU law does not preclude the levying of a tax on UCIs established in another Member State, such as the Belgian annual tax.
Is the annual tax compatible with double tax treaties?
Recently, the Supreme Court ruled in several cases on the compatibility of this annual tax with the double tax treaty that Belgium concluded with the Netherlands and Luxembourg. More in particular, the question was raised whether this annual tax qualifies as a tax on capital that falls into the scope of these two double tax treaties. The annual tax is not explicitely listed as a tax to which these treaties apply.
On 25 March 2022, the Supreme Court decided that the annual tax is not a tax on capital within the meaning of the tax treaty that Belgium concluded with Luxembourg and, consequently, does not fall into the scope of the treaty (‘first case’). The Supreme Court, same chamber but composed differently, ruled somewhat differently on 21 April 2022 (‘second case’). In this case, the Supreme Court considers that the annual tax does qualify as a tax on capital, but that it was not covered by the tax treaty with Luxembourg, which only covers the taxes that are listed exhaustively. In the same judgment, however, the Court also decided that this annual tax is covered by the tax treaty with the Netherlands on the grounds that the list of covered taxes contained in the latter treaty is preceded by the word "in particular" which indicates that the list is not exhaustive. The Supreme Court concludes that the annual tax is a tax on capital to which the treaty with the Netherlands applies.
Since the Dutch fund was structured as an NV and subject to corporate income tax in the Netherlands (even though exempt), it can invoke the treaty as it qualifies (according to the Court of Appeal) as a tax treaty resident. Considering that this treaty does not allocate the taxing rights to Belgium, the annual tax is in breach of this double tax treaty.
1. Tax refund
In principle, Dutch UCIs (formally subject to corporate income tax) can now ask a refund of the annual tax unduly paid in recent years on the grounds that the tax treaty concluded between Belgium and the Netherlands has been violated.
In practice, however, it is necessary to verify the statute of limitation. In 2019, the regulations regarding the annual tax have been moved from the Inheritance Tax Code to the Code of Miscellaneous Duties and Taxes. One of the consequences of this change is that the statute of limitation period has been reduced from 5 years to 2 years. The impact thereof has to be analysed on a case-by-case basis.
2. Impact on the application of the tax on securities accounts to French residents?
The new double tax treaty that Belgium concluded with France does not explicitly list the tax on securities accounts. In a previous newsletter, we mentioned that is is not entirely clear whether the new treaty covers this tax. Based on the judgement of the Supreme Court of 21 April 2022, it can be argued that the tax on the securities accounts qualifies as a tax on capital to which the treaty applies since the treaty equally make reference to “in particular” when listing the covered taxes. However, this does not automatically imply that the tax on securities accounts breaches the treaty. Although the treaty in principle allocates the taxing rights to France, Belgium is also allowed to tax elements of capital if France does not effectively taxes these elements. At present, France in principle does not tax the movable assets of its residents (nothwithstanding some exceptions). As a result, the impact should be verified on a case-by-case basis and no hasty conclusions should be drawn.
3. Do Luxemburg SICAVs qualify as tax treaty residents?
The cases discussed above concerned a Luxembourg fund structured as a SICAV. A question that was dealt with by the Courts of Appeal was whether these funds qualified as tax treaty residents within the meaning of article 4 of the tax treaty with Luxembourg.
Contrary to the position defended by the Belgian tax authorities in these cases, the Brussels Courts of Appeal ruled that a Luxembourg SICAV can be qualified as a tax treaty resident since the entity is subject to the annual tax.
Although the Belgian tax authorities argued in the first case that the Luxembourg SICAV could not be regarded as a resident for treaty purposes, the Supreme Court did not rule on this issue since its conclusion that the annual tax was not covered by the treaty was sufficient to decide the case. It seems that the Belgian tax authorities did not make this argument anymore in the second case.
Can we now conclude that the SICAV qualifies as a tax treaty resident who can, for example, benefit from the reduced withholding tax rates on dividends it receives from Belgian companies? Since the Supreme Court did not rule on this aspect, any conclusion remains premature. The relationship between article 4 (tax treaty resident) and article 2 (that defines the term ‘tax’ on the one hand and the taxes covered on the other hand) is in any case not that straight forward. To be continued...