• WITHHOLDING TAX RATE ON DIVIDEND DISTRIBUTIONS TO FOREIGN HOLDING COMPANIES SOON TO BE LOWERED TO 1.69%

WITHHOLDING TAX RATE ON DIVIDEND DISTRIBUTIONS TO FOREIGN HOLDING COMPANIES SOON TO BE LOWERED TO 1.69%

24 November 2015

While the standard movable withholding tax rate is being raised to 27% by virtue of the tax shift measures, another bill will soon be put forward in Parliament aiming to reduce the rate to 1.69% for certain non-resident holding companies.

The terms and conditions for this lowered withholding tax rate have not yet been communicated.

The reason for this law amendment is the case Tate & Lyle (C-384/11 “Tate & Lyle Investments Ltd. against the Belgian State”) before the Court of Justice of the European Union. In this case, the European Court ruled that the Belgian withholding tax on dividend distributions to foreign company shareholders constitutes a restriction of the European right of free movement of capital within the EU.

Current withholding tax regulations

In Belgium several regulations exist for the determination of the withholding tax rate applying to dividend distributions.

Principle. The standard withholding tax rate on dividends is currently determined at 25% (soon to be raised to 27%), regardless of whether the dividends have been distributed to a natural person or a company.

In case of a share participation of at least 10% for a minimum duration of 1 year, an exemption of withholding tax applies if the shareholder is:

  • a Belgian company
  • an EU company
  • a company in a country that has concluded a double tax treaty with Belgium providing for a clause on the exchange of information.

What if the capital held in the distributing company is less than 10%?

The situation changes entirely if the participation of investor is less than 10%.

Belgian company shareholders would have to pay the withholding tax, but will be able to offset the withholding tax against corporate tax liabilities, and the balance can even be refunded.

Where the purchase value of the participation amounts to at least EUR 2.5 million, Belgian companies will be able to deduct 95% of the received gross dividend from their taxable profit under the so-called ‘dividend received deduction’ scheme. This results in a final tax of 1.69% (i.e. 5% of the 33.99% corporate income tax rate).

However, contrary to the above, foreign company shareholder cannot recover the withholding tax paid in Belgium. This implies that the withholding tax paid is a final tax for these companies. 

Belgian tax law constitutes a restriction of the free movement of capital (Tate & Lyle)

In a preliminary ruling in the aforementioned case Tate & Lyle in 2012, the Court of Justice of the European Union judged that foreign companies are taxed more severely than Belgian companies based on domestic tax law, which is in conflict with the European free movement of capital. Please note in this respect that the free movement of capital not only applies to European companies but also to a European country in relation to a non-EU country.

The fundamental principle of free movement of capital has direct effect and does not need any implementing legislation on domestic level. Under certain conditions, foreign companies can therefore request a refund of the withholding tax paid in excess during the last 5 years (Circular letter No. Ci.RH.233/609.568 (AAFisc 26/2013) dd. 28.06.2013) 

Lowered withholding tax rate to eliminate discrimination between Belgian and foreign shareholders

Nevertheless, the Belgian federal government has decided to enact a reduced withholding tax rate of 1.69% on dividend distributions by Belgian companies to foreign shareholders holding a participation of less than 10%, but with a purchase value exceeding EUR 2.5 million. This will equalise the tax burden of Belgian and foreign holding companies on this matter. This law amendment was also driven by the merger between AB Ibev and SAB Miller. 

Contact

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