The Belgian Supreme Court has – for the second time – confirmed that the double taxation treaty between Belgium and France, Belgium must give a tax credit for the French withholding tax on French dividends against the Belgian withholding tax. The Belgian tax authorities cannot hide behind the text of the Belgian tax code to deny Belgian taxpayers the benefit of the Belgium-France tax treaty.
The case is a classic example of double taxation of dividends. French dividends are taxed at source at a reduced rate of 15 percent, and the net dividends are taxed again in Belgium upon their distribution to a Belgian resident. The income tax treaty grants taxpayers a foreign tax credit which the Belgian tax authorities refuse to honour.
Belgian Domestic Law
Dividends received by Belgian residents are subject to withholding tax at a fixed rate of 30 percent. This withholding tax is the final tax, and the taxpayer must not declare the dividend in his tax return. However, if no tax has been withheld at source, either by the company distributing its profits or by the intermediary (such as a bank), that the taxpayer must declare the dividend and pay income tax at a rate of 30 percent.
Inbound dividends paid by a foreign company are taxed in the same way, but usually these dividends have already been taxed in the state of source. Belgium grants a (partial) unilateral tax relief from double taxation by applying the deduction method. This means that the Belgian withholding tax (or, alternatively, the 30 percent income tax) is calculated on the net dividend (after the deduction of the foreign withholding tax).
French dividends are taxed at source at a reduced rate of 15 percent, in accordance with article 15(2) of the Belgium-France tax treaty. In Belgium, the net dividends are then taxed at 30 percent upon their distribution to a Belgian resident. Inbound dividends are effectively taxed twice, as this table shows.
| Belgian-source dividend | French dividend | |
| Dividend | 100,00 | 100,00 |
| 15 % French withholding tax | – 15,00 85.00 | |
| 30 % Belgian dividend tax 15 % | -30.00 | -25.50 |
| Net dividend after tax | 70.00 | 59.50 |
The 1964 Belgium-France tax treaty is quite particular, though, in that it specifically grants Belgian taxpayers a foreign tax credit for the 15 percent French withholding tax against their Belgian income tax liability:
The tax payable in Belgium on the amount net of French withholding tax will be reduced, on the one hand, by the withholding tax levied at the standard rate and, on the other hand, by the lump sum of the foreign tax credit under the conditions laid down by the Belgian legislation, but this credit cannot be less than 15 pc of said net amount. (Article 19A(1).)
The foreign tax credit referred to was the “quotitĂ© forfaitaire d’impĂ´t Ă©tranger” in the Belgian income tax code. However, in 1988, Belgium abolished the foreign tax credit in the Belgian Income Tax Code, nearly 25 years after the income tax treaty entered into force.
A Solution Under European Law?
Belgian taxpayers have tried, in vain, to find a solution before the Court of Justice of the European Union for this problem of double taxation. The Court referred to the absence of discrimination in Belgium and the fiscal autonomy of the member states.
Kerckhaert-Morres v. Belgian State (C-513/04) was the first Belgian case on the subject submitted to the CJEU. The Belgian tax authorities denied Kerckhaert and Morres the FTC for the 15 percent French withholding tax against their Belgian income tax liability for lack of an FTC provision in the Income Tax Code. Kerckhaert and Morres challenged this position on the grounds of an infringement of article 19A(1)(2) of the income tax treaty as well as article 73b(1) of the EC Treaty (now article 56(1) EC).
The Court held that Belgian legislation that does not offer resident taxpayers a tax credit for foreign withholding tax is not contrary to article 73b(1).
The CJEU had dealt with the taxation of inbound dividends before and condemned national tax legislation that held a different tax treatment for domestic and inbound dividend income. But in this case, Belgium did not have different tax rules for domestic and inbound dividends: Both were taxed at the fixed rate of (at the time) 25 percent. The difference in treatment is the result of the parallel exercise by two member states of their fiscal sovereignty.
What makes the difference is that France exercised its fiscal sovereignty and withholds tax at source on outbound dividends. A Belgian taxpayer does indeed pay more tax on foreign dividends, but that is the consequence of a combination of the Belgian tax rules and the French income tax rules regarding French-source dividends.
The Court acknowledged that the coexistence of national tax systems may have negative effects on the functioning of the internal market but said these need to be resolved through income tax treaties. Article 293 EC states that member states will enter into negotiations with each other with a view to securing the abolition of double taxation within the Community for the benefit of their nationals.
Apportioning fiscal sovereignty among member states with a view to eliminating double taxation falls outside the ambit of Community law, except in the limited situation covered by the EC directives. For the rest, member states must take the necessary measures to prevent such situations by applying, in particular, the apportionment criteria followed in international tax practice.
That the Belgian legislation does not offer resident taxpayers a tax credit for foreign withholding tax is not contrary to article 73b(1) of the EC treaty (now article 56(1) EC). However, the Court did not give any indication how member states are to reconcile fiscal sovereignty with double taxation situations. It merely states that the Belgium-France income tax treaty has been signed to apportion fiscal sovereignty. However, that treaty itself is not an issue in this case.
Jacques Damseaux (Damseaux v. Belgian State, C-128/08) tried another tack. He had held shares of a Belgian company, Petrofina, that merged into the French company Total S.A. While he had been paying 25 percent tax on dividends paid by Petrofina, after the merger he paid 15 percent French withholding tax and 25 percent Belgian tax on the dividends paid by Total S.A.
Damseaux asked the Court to confirm that the principle of free movement of capital requires Belgium to grant relief to Belgian residents receiving dividends from France, as it is, in principle, obliged to do under article 19A(1) of the Belgium-France tax treaty.
The Court reiterated that, in the absence of discrimination under Belgian law, the disadvantages that arise from the simultaneous exercise of both member states’ fiscal sovereignty do not constitute restrictions under EU law. Consequently, EU law does not oblige the shareholder’s member state of residence to grant a tax credit to relieve juridical double taxation.
Finally, in Daniel Levy and Carine Sebbag v. Belgian State, C-540/11, the applicants asked the CJEU whether it would have given the same answer if it had taken account of article 10 EC and the principle of loyal cooperation that it puts forward. In other words, does the 1988 legislative change suppressing the FTC not infringe the principle of loyal cooperation of article 10 EC?
The Court did not see a problem. It stated that when a member state is bound by a bilateral income tax treaty to establish a mechanism to eliminate double taxation of dividends, article 56(1) EC — now article 63(1) TFEU — read in conjunction with articles 10 and 293 EC does not preclude that member state from deleting the mechanism by legislative amendment, with the effect of reintroducing double taxation. Moreover, the Court found that article 10 EC does not impose an independent obligation for member states that goes further than the obligations they may incur under articles 56 EC and 293 EC; in particular, it does not give individuals any rights that they may invoke before national courts.
These three decisions left the Belgian taxpayer without any recourse under European law to eliminate the double taxation in France and Belgium on any dividends paid by a French company to a Belgian resident shareholder. Belgian tax rules do not discriminate between domestic and inbound dividends; therefore, an individual shareholder cannot rely on European law to obtain tax relief based on Belgium’s breach of contract (after signing the 1964 tax treaty with France, it promised an FTC and then repealed that FTC).
A Partial Solution from the French Conseil d’Etat
In the Reynaerts case, the plaintiff took a completely different route. He claimed back the 15 percent withholding tax (€616.23) from the French tax authorities, arguing that the discriminating legislation was French rather than Belgian.
The Conseil d’Etat reiterates the principles set out by the CJEU. In matters of direct taxation, residents and non-residents are not considered to be in a comparable situation since non-resident taxpayers only pay tax on part of their income. Therefore, the fact that a member state does not grant certain advantages to non-residents is not, as a rule, discriminatory. It can be discriminatory, though, when, in light of the purpose and content of the national provision at issue, the two categories of taxpayers are in a comparable situation. When the member state of the distributing company taxes resident and non-resident shareholders, they are in a comparable situation.
The Conseil d’Etat found that a French resident taxpayer receiving dividends is entitled to a standard deduction of 40 percent of the gross dividend and an annual abatement of €1,525 for single taxpayers and €3,050 for married taxpayers filing jointly to encourage shared ownership, not to prevent double taxation. However, in all circumstances the tax burden due by a French resident — on the dividends Reynaerts received — is subordinate to the treaty rate of 15 percent.
Because the French tax regime amounts to different taxation of residents and non-residents who are in comparable situations, discrimination and, thus, a violation of the free movement of capital is established. The Conseil d’Etat therefore maintained the decision of the administrative court that ordered the full reimbursement of the French withholding tax of 15 percent to the taxpayer.
The Co nseil d’Etat has looked at the same problem from the French side and confirms that Belgian taxpayers are discriminated against. It is unlikely that this decision will help many Belgian taxpayers, though, particularly because France abolished the annual abatement of €1,525 for single taxpayers and €3,050 for married taxpayers filing jointly with effect from 2013.
The Belgian Supreme Court
The decision of the Cour de Cassation, Belgium’s Supreme Court is a complete departure from case law to date.
In this case, the taxpayers had also received French-source dividends on which French withholding tax had been deducted at the rate of 15 percent, and in Belgium they were asked to pay income tax on the net dividend at the fixed rate of 25 percent (30 percent today). The taxpayers claimed the FTC of 15 percent on the net amount in accordance with article 19.A(1) of the Belgium-France tax treaty, but the tax authorities and the Ghent Court of Appeal refused the tax credit because it had been scrapped from the domestic tax law.
It is to be noted that the Court of Cassation does not rule on the merits. The Court controls the correct application of the law by the courts and tribunals. It only assesses the legality of contested decisions. If the Court of Cassation finds that there has been a contravention of a law or a breach of form, either substantial or prescribed on pain of nullity, it quashes the decision and refers the case back to another court of appeal or another court where it will be tried again. In this way, it ensures a certain unity of case law, even if the rule of English law (“common law”) known as “precedent” does not apply in Belgium.
On 16 June 2017, the Cour de Cassation found the taxpayers’ claim to be justified. It is a general principle in Belgian law that international treaties take precedence over domestic legislation, so the Belgium-France tax treaty takes priority over domestic law. Consequently, as the treaty requires Belgium to grant a minimum FTC, the domestic provisions that attach additional conditions to this tax credit must be ignored.
The fact that the provision in domestic law granting the FTC has been abolished does not mean that the FTC can be refused. That would be a violation of article 19.A(1) of the Belgium-France tax treaty.
The Supreme Court annulled the decision of the Ghent Court of Appeal and referred the case to the Antwerp Court of Appeal. That court has heard the case again and confirmed that the 1964 double tax treaty takes precedence over domestic legislation, so the Belgium-France tax treaty takes priority over domestic law. Consequently, the court ordered the Belgian tax authorities to pay back the excess tax.as the treaty requires Belgium to grant a minimum FTC, the domestic provisions that attach additional conditions to this tax credit must be ignored.
The Belgian 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 in Parliament, the Finance Minister referred to a favourable decision of the Brussels Court of Appeal dated 20 September 2018, pending review by the Supreme Court.
The Brussels Court of Appeal had confirmed the case law of the Supreme Court. The Finance Minister stated that the position of the tax authorities would remain unchanged until the Court ruled on that second case.
Not surprisingly, the Supreme Court, confirmed its case law in a succinct decision dated 15 October 2020. However, the Belgian tax authorities have not conceded defeat yet. In any event, many taxpayers have filed appeals to recover the tax.
The question has arisen whether the appeal is admissible if the bank or another intermediary had deducted the 30% withholding tax at source. The Ghent Court of Appeal has decided that it was and ordered the Belgian tax authorities to reimburse part half of the withholding tax.
| French dividend | French dividend with Foreign Tax Credit | ||
| Dividend | 100,00 | 100,00 | |
| 12.8%1 French withholding tax | -12,80 87.20 | -12,80 87.20 | |
| 30 % Belgian dividend tax 15 % Foreign tax credit  | -26.16 |  -26.16 15%*87.20 = +12.75 | |
| Net dividend after tax | 61.04 | 76.04 |
Conclusion
Although these decisions relate to dividends received by Belgian resident individuals, the scope of this case law are much wider.
Some other, pre-1988, double tax treaties concluded by Belgium (e.g. those with Australia, Hungary, Israel, Italy and the Ivory Coast also mention the “quotitĂ© forfaitaire d’impĂ´t Ă©tranger”, although Belgian investors are more likely to have invested in France than in any of these countries. Moreover, it can also be applied to other taxpayers than individuals and to other types of income.
For more than a decade, Belgium and France have been renegotiating the double tax treaty between the countries. That Treaty has been signed but the text is not available yet. It stands to reason that this peculiar clause will not be included in the new double tax treaty.
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