New double tax treaty Belgium - France has consequences for the taxation of dividends

Saga of the FTC on French dividends

The dividends received by a Belgian resident from a French company were subject to a 15% withholding tax in France (or 12.8% under certain conditions) and to the 30% withholding tax applicable in Belgium on the net income at the Belgian border. The final effective taxation on this dividend was therefore 40.5% if the French withholding tax was 15% or 38.96% if the French withholding tax was 12.8%.

For example, for a gross dividend of EUR 100 paid by a French company and received by a Belgian resident natural person, the situation was as follows:

This legal double taxation was not in line with the wording of the current double tax treaty between France and Belgium. The Treaty provides that Belgian tax on the dividend (in this case 30% of the net dividend at the Belgian border) is reduced by a Foreign Tax Credit (FTC), which is deductible under the conditions set out in Belgian law, without this credit amounting to less than 15% of the net border income.

In its judgment of 25 February 2021, the Belgian Court of Cassation ruled that, although the FTC on dividends no longer exists in Belgian domestic law (with one exception for shares used in a professional context), the Treaty provides that the tax in Belgium on net cross-border income is reduced by a minimum of 15%. Since international law takes precedence over Belgian domestic law, a tax credit must thus be applied by Belgium despite the absence of a provision in Belgian domestic tax law.

Following this case law of the Court of Cassation, the Belgian tax administration has revised its position on the legal double taxation of Belgian individuals on dividends received from French companies. This position is applicable as from income year 2020. A circular letter dated 28 May 2021 also clarifies the amended position, as according to the Belgian tax authorities not all situations are covered by the case law of the Court of Cassation. With the application of a tax credit on the tax in Belgium of the net income at the border, the final effective tax rate on this dividend for the Belgian taxpayer is 27.75% if the French withholding tax is 15%, or 25.88% if the French withholding tax is 12.8%.

For example, for a gross dividend of EUR 100 distributed by a French company and received by a Belgian resident inatural person, the situation is as follows:

Abolition of the FTC in the new Treaty

The new double tax treaty no longer contains a provision on the FTC. The tax burden for Belgian taxpayers (individuals) on dividends of French origin will therefore increase once the new double tax treaty enters into force. However, the text of the new treaty provides that the maximum French withholding tax cannot exceed 12.8% (compared to 15% under the current treaty). The final effective tax rate on this dividend for the Belgian taxpayer will therefore again be 38.96%.

For example, for a gross dividend of EUR 100 distributed by a French company and received by a Belgian resident individual, the situation is as follows:

Although the maximum French withholding tax will not exceed 12.8% (compared to 15% under the current treaty), the tax burden at the entry into force of the new treaty (i.e. 38.96%) will thus be higher than under the current treaty (i.e. 27.75% or 25.88%).

Entry into force of the new Treaty

To enter into force, the new agreement still needs to be ratified in Belgium and France. It is expected to enter into force on 1 January 2023 at the earliest.