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European Union- Belgium

13 August 2006

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European Commission requests Belgium to terminate discriminatory taxation of inbound dividends

On 20 July 2006, the European Commission announced that it had sent Belgium a formal request to end its discriminatory taxation of dividends paid by foreign companies to Belgian private investors. The case reference number is 2005/4504.

The request is in the form of a reasoned opinion which is the second stage of the infringement procedure under Art. 226 of the EC Treaty. If Belgium does not reply satisfactorily to the reasoned opinion within 2 months, the Commission may refer the matter to the European Court of Justice (ECJ). Details of the Belgian rules and the Commission's reasons for finding those rules discriminatory are summarized below.

Belgian private investors receiving domestic dividends either pay a final tax withheld by the company or they are taxed at a special rate of, in principle, 25%. Inbound dividends received from a foreign company are first subject to a withholding tax of up to 15% in the source state, on the basis of the applicable tax treaty between Belgium and the source state, and thereafter taxed at the special income tax rate of 25% in Belgium. Consequently, inbound dividends are subject to a higher tax burden than domestic dividends.

The Commission referred to its Communication of 19 December 2003 on the taxation of dividends where it was indicated that the higher tax burden on inbound dividends constitutes a restriction on the free movement of capital (Art. 56 of the EC Treaty) as it constitutes a restriction on investment in foreign shares. In addition, if the shareholding gives the shareholder control over the company, it also restricts the freedom of establishment (Art. 43 of the EC Treaty).

Referring to the ECJ's decision in the Maninnen (Case C-319/02), the Commission pointed out that the said fundamental freedoms oblige the Member States to apply the same system for the avoidance of double taxation to inbound dividends as to domestic dividends.

Finally, the Commission noted that the subject matter of this complaint is similar to the issue of the Kerkhaert-Morres (Case C-513/04) pending before the ECJ. However, a difference is that in that case, French dividends were paid at a time when France still paid out a credit for French corporate income tax (avoir fiscal) to Belgian investors, as a result of which it was more attractive for Belgian investors to invest in France than in Belgium

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