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Belgium Court Confirms Condition for Reduced Tax for on Dividends from SMEs — Orbitax Tax News & Alerts

A 23 May 2019 decision of the Belgian Constitutional Court has been published concerning the conditions for the special reduced dividends withholding tax rate of 15% for SME's as it applied between 1 January 1994 and 1 January 2013. The case involved a company that had increased its capital in 2002 and distributed dividends in 2007 to 2011. When the distributions were made, the company considered that its increase in capital had qualified it for the reduced rate and therefore withheld tax at a rate of 15%. However, the tax authority determined that the company did not qualify for the reduced rate because the increase in capital was not made through the issuance of new shares in exchange for cash contributions. As such, a 25% rate was imposed (standard rate at the time), which was appealed.

In its decision, the Constitutional Court agreed with the tax authority. In particular, the Court evaluated whether the conditions imposed violated the constitutional principle of equality and non-discrimination. In this respect, the Court found that the requirement to issue new shares was clearly justified by the need to be able to identify the investments in capital eligible for the reduced-rate benefit. Further, the Court found that the requirement made it possible to meet the objective of encouraging as many people as possible to participate in capital investment. Lastly, the Court found that there was no discriminatory treatment because all SMEs that carry out a capital increase may decide whether to issue new shares and become eligible for the reduced rate.

Based on the above, the Court decided that the requirement to issue new shares cannot be found to violate the principle of equality and non-discrimination.

Note - New reduced withholding tax rates for SMEs were introduced from 1 July 2013 (20% in the third year and 15% in the fourth and subsequent years), including the condition that new shares be issued for cash contributions. Although the Court decision does not address these reduced rates, it assumed a similar conclusion would be reached in similar cases.