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Belgian abolition of fixed FTC incompatible with tax treaty between Belgium and US — Orbitax Tax News & Alerts

In a recently published decision of 10 March 2006, the Belgian Court of Appeal of Liége (Court d'Appel Liège/Hof Van Beroep Luik) confirmed a decision of the Court of First Instance Liége of 14 October 2003, in which the abolition of the fixed foreign tax credit was held to be incompatible with the Belgium-US income tax treaty of 9 July 1970 (the "treaty").

(a) Facts. Under Art. 10(2)(b) of the treaty, the withholding tax on dividends is 15%. Belgium must grant a tax credit for the withholding tax paid in the United States under Art. 23(3)(b) of the treaty. Accordingly, the taxpayer requested that the fixed foreign tax credit of 15% be applied.
The Belgian tax administration did not grant the fixed FTC of 15/85, included in Art. 29(3)(1) (now 286) of the Income Tax Code, due to its abolition in 1988 in respect of foreign dividend income derived by individuals from private property.

(b) Issue. The issue was whether or not the abolition of the fixed FTC on dividends was compatible with the treaty.

(c) Decision. The Court observed that in the case where the same income, contrary to the treaty provisions, is taxed in both treaty states, double taxation arises for which an ex officio exemption may be applicable.
In addition, the Court considered that pursuant to Art. 23(3)(b) of the treaty, Belgium is obliged to grant a fixed FTC on the net amount of US source dividends, interest and royalties received by Belgian residents. Further, the Court stated that as the treaty takes preference over domestic law, this obligation cannot be set aside by later restrictions introduced in Belgian domestic law.
Consequently, the Court Of Appeal confirmed the decision of the Court of First Instance that the denial of the foreign tax credit is incompatible with the treaty.