The Court of Cassation has for the second time confirmed that under the double taxation treaty between France and Belgium ("Treaty"), Belgium must relieve the double taxation of French-sourced dividends by granting to its individual residents a tax credit of minimum 15% of the received net dividend. The total tax burden suffered by Belgian individual residents on French-sourced dividends should as a consequence significantly decrease from 40,50% to 27,75%1 (or even 25,50%2).
Based on that jurisprudence, Belgian resident taxpayers should examine their position regarding the dividends and interest they receive from Israel, Australia, Italy, Hungary and the Ivory Coast. Belgium's treaties with these countries contain clauses that are similar to the one in the treaty with France, with some of them being even broader in scope.
It may reasonably be expected that the Belgian tax authorities will accept the Court of Cassation's opinion.
Issue: double taxation
Dividends distributed by French companies to Belgian individual residents are subject to a 15% withholding tax in France. The received net dividend is subsequently taxed in Belgium at a rate of 30%. Hence, if a gross dividend of 100 EUR is distributed, the Belgian shareholder will receive a net dividend of 85 EUR, on which he will have to further pay 30% in Belgium, leaving him with a net dividend after tax of 59,5 EUR .
The Treaty entered into force in 1965. Its article 19, A.1, al. 2 enunciates as follows: "The tax due in Belgium on the income, after deduction of French tax referred to in the preceding paragraph ... will be reduced on the one hand, by the movable prepayment levied at the normal rate and, on the other by the lump-sum amount of foreign tax which may be deducted under the conditions laid down in Belgian law; however, that lump-sum amount may not be less than 15% of the amount of the income after deduction of the French tax".
In 1988, the possibility to alleviate double taxation under Belgian law was de facto abolished by the insertion of a condition that cannot be fulfilled by individuals.
The question is however whether irrespective of its domestic law, Belgium must grant a foreign tax credit of minimum 15% of the net received dividend based on the wording of the Treaty.
Court of Cassation
In 2017, the Court of Cassation already interpreted article 19, A.1, al. 2 of the Treaty in the sense that regardless of the conditions under Belgian law, Belgium must grant a foreign tax credit of at least 15% of the received net divided. The Court's reading of the provision implies that it did not follow the tax authorities' view that the minimum credit only applies if the conditions under Belgian law are met.
The tax authorities refused to accept the Court's position and continued to reject foreign tax credit claims made by Belgian residents in relation to qualifying French-sourced income. When asked by Parliament in 2019 about his position on the matter, the Finance Minister referred to a second case that would be brought to the Court of Cassation. He stated that the tax authorities' position would remain unchanged until the Court would rule on that second case, which eventually happened on October 15, 2020.
The wording of the second (short) ruling does not allow to fully decipher the content of the arguments put forward by the tax authorities. Suffices to say that the Court of Cassation dismissed these arguments and thus upheld its view that Belgium must grant the credit based on the Treaty.
Given the Minister of Finance's 2019 statement, one may reasonably expect that the tax authorities will change their position and that they will no longer reject foreign tax credit claims that meet the conditions under the Treaty.
Not just dividends and Belgian resident individuals
Although these decisions pertain to dividends received by Belgian resident individuals, it is important to note that the scope of the consequences of this jurisprudence is much larger:
- the foreign tax credit can also be claimed in relation to French-sourced interest income;
- aside from Belgian resident individuals, legal entities that are subject to legal entities tax (impôt sur les personnes morales/rechtspersonebelasting), such as foundations and non-profit organizations, may also claim the said credit under the Treaty.
General consequences and opportunities
This jurisprudence is essentially based on the idiosyncratic wording of the Treaty. The said wording is quite rare in Belgium's double taxation treaties that are currently in force.
Belgian taxpayers should however be aware that the treaties with Australia, Hungary, Israel, Italy and the Ivory Coast do contain similar clauses providing for an obligation for Belgium to grant a minimum foreign tax credit. Some of these clauses are even broader in scope than the one in the French treaty. Belgian taxpayers who receive movable income from these countries should therefore analyze their position, as they may possibly be entitled to a tax credit for local foreign tax withheld on that income.
Belgium and France have in the meantime renegotiated the Treaty. It is reasonable to expect that the clause in question will not be included in the the new treaty. French-sourced dividends and interest will thus again be subject to a heavier tax burden once the new treaty will enter into force, which will happen in 2021 at the earliest.
Footnotes
1. Gross dividend = 100. Dividend received net of French tax: 85. Belgian tax on dividend: 25,50 (= 85 x 30%). Minimum foreign tax credit: 15% of 85 = 12,75. Final tax due in Belgium: 12,75 (= 25,5 - 12,75). Total tax burden: 27,75 (15 in France and 12,75 in Belgium).
2. Gross dividend = 100. Dividend received net of French tax: 85. Belgian tax on dividend: 25,50 (= 85 x 30%). Foreign tax credit under Belgian domestic law: 15/85 x 85 = 15. Final tax due in Belgium: 10,5 (= 25,50 - 15). Total tax burden: 25,50 (15 in France and 10,50 in Belgium).
Originally Published 16 November, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
