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ECJ: Advocate General finds Belgian withholding tax on interest paid to companies resident in other Member States compatible with EC freedom of establishment – details

As previously reported, on 18 September 2008, Advocate General (AG) Kokott of the European Court of Justice (ECJ) gave her opinion in the case of Etat belge - SPF Finances v. Truck Center SA (C-282/07). Details of the opinion are summarized below.

(a) Facts and legal background. SA Wicker Finances (Wicker), a Luxembourg company, held a 48% participation in Truck Center SA (Truck Center), a company resident in Belgium. In 1992, Wicker advanced an interest-bearing loan to Truck Center; the receivables from that loan were subsequently assigned to two other Luxembourg companies. In 1994, 1995 and 1996, having accounted for the relevant interest payables, Truck Center did not withhold a tax from the interest accrued to the lenders. Therefore, by virtue of the office, the Belgian tax authorities assessed a withholding tax of 13.39% and 15% on the interest accrued in 1994–1995 and 1996, respectively.

Under Belgian law, a withholding tax is due upon payment or allocation of interest income to non-resident recipients. In contrast, such interest income derived by resident companies is generally exempt from withholding tax, but is subject to corporate income tax. Under the Belgium-United Kimngdom tax treaty, no withholding tax shall generally be levied in Belgium on interest paid to a company resident in Luxembourg. However, a 15% withholding tax may be levied if the recipient is a company which holds directly or indirectly at least 25% of the voting stock or shares of the relevant Belgian subsidiary. That tax treaty further provides for the credit method for the elimination of double taxation in respect of such interest. In particular, the credit for the Belgian withholding tax may not exceed either (i) the amount of tax which bears the same proportion to the income received in Belgium or (ii) an amount corresponding to the tax withheld in Luxembourg from similar income derived by residents of Belgium.

It should be noted that the provisions implementing the Interest and Roualties Directive 2003/49/EC did not apply at the material time.

(b) Issue. The issue was whether or not Belgian rules, under which interest paid to non-residents is subject to a withholding tax, while interest derived by resident recipients is generally exempt from that tax (but is subject to a corporate income tax), are compatible with EC law.

(c) Advocate General's Opinion.

Scope of the fundamental freedoms

Referring to the ECJ settled case law, the AG observed that the applicable freedom must be determined on the basis of the purpose of the legislation concerned. In particular, the freedom of establishment (Art. 43 of the EC Treaty) applies in the case of shareholdings that enable the holder to have a definite influence on a company's decisions and to determine its activities.

Belgian domestic legislation on withholding taxes operates independently on the lender's shareholding in the capital of the borrower. However, under the Belgium-Luxembourg tax treaty, which forms part of the Belgian legal order, a 15% withholding tax may be levied on the interest in question if the lender holds directly or indirectly at least 25% of the voting stock or shares of the relevant Belgian subsidiary, while no withholding tax generally applies in other cases. The AG further recalled that the relevant lenders always held a 48% shareholding in Truck Center's capital and concluded that, also in view of the factual background, the case falls within the material scope of the freedom of establishment.

Infringement of the freedom of establishment

(i) Withholding tax. At the outset, the AG observed that the freedom of establishment (Art. 43 of the EC Treaty) precludes both discriminatory and restrictive national measures.

With respect to discrimination, the AG opined that resident and non-resident recipients of interest are not in an objectively comparable situation with regard to the conditions for the collection and recovery of taxes, since non-residents are not directly subject to fiscal control in the Member State of source. The exercise of fiscal control over non-residents therefore requires the cooperation of the tax authorities of their Member State of residence. Thus, the conditions for the collection of taxes constitute an objective difference which may justify the levy of a withholding tax on interest derived by non-residents.

AG Kokott further considered whether the measure is proportionate to the objective of ensuring the effective collection of taxes, i.e. whether (i) it is suitable and (ii) does not go beyond what is necessary for attaining that objective. She opined that the withholding tax was suitable in view of the foregoing objective pursued. With regard to the necessity of the measure, she first observed that the Nutual Assistance Directive [for the recovery of claims] 76/308/EEC did not apply to direct taxes at the material time, a circumstance that the ECJ considered to be relevant in its judgment in Scorpio (C-290/04). However, in 1952, Belgium and Luxembourg concluded an Agreement on Mutual Assistance in the Recovery of Tax Claims, which could also be deemed relevant in the assessment of the necessity of the measure at issue. While acknowledging that the agreement in question might provide for legal assistance in the recovery of tax claims, the AG opined that the collection of the tax on interest derived by non-residents under normal assessment procedures, as opposed to its retention at source, would result in significantly higher costs, both for the tax authorities and the group concerned.

In respect of a potential cash-flow disadvantage for non-residents, she observed that that disadvantage, if any, would be negligible, since resident companies deriving interest income shall pay corporate income tax advance payments. In any event, any minor disadvantages for non-residents would be outweighed by the simplification of tax administration as a result of the withholding tax regime.

AG Kokott thus opined that the withholding tax levied on interest derived by non-residents does not constitute prohibited discrimination. Any restriction of the freedom of establishment, resulting from the different treatment of cross-border and domestic situations, is justified by imperative requirements in the general interest, i.e. the need to ensure the effective collection of taxes.

(ii) Financial disadvantages. The AG further rejected Truck Center's claim that, from a financial viewpoint, the Belgian withholding tax makes it less attractive to obtain a loan from a parent company resident in another Member State. The plaintiff argued that, unlike resident parent companies, non-resident recipients of interest on such loans are subject to both a withholding tax in Belgium and a corporate income tax in Luxembourg. The resulting juridical double taxation is not fully eliminated, since Luxembourg does not levy a withholding tax on interest derived by Belgian residents (and the credit for Belgian tax is granted up to the amount of any Luxembourg withholding tax on similar income derived by residents of Belgium under the relevant tax treaty).

Referring to the ECJ judgment in Kerkheart-Morres (C-513/04), the AG observed that the fundamental freedoms do not address situations involving adverse consequences arising from the parallel exercise by two Member States of their fiscal sovereignty. She further opined that the ECJ findings in Denkavit (C-170/05) and Amurta (C-379/05) are not relevant. Those cases dealt with a system for elimination of economic double taxation, which provided for a full exemption of dividends from withholding tax, as those dividends were already taxed at the level of the distributing subsidiary as part of its profits. By contrast, in this case, although interest derived by resident companies is exempt from withholding tax, it is subject to corporate income tax in the hands of those resident recipients.

Therefore, she opined that the levy of a withholding tax on interest derived by non-residents, along with subjection of similar income to a corporate income tax in the hands of resident recipients, is allowed, insofar as the resulting tax burden borne by non-residents is not higher. With respect to deduction of (directly linked) business expenses that would not be possible under the withholding tax regime, she observed that (i) deduction of such expenses should generally be allowed by Luxembourg which has primary taxing rights over interest income of its residents (as opposed to very limited source taxation in Belgium) and (ii) the amount of such expenses should not be significant in the case of intra-group loans.


The AG concluded that the Belgian withholding tax on interest derived by companies resident in other Member States is compatible with the freedom of establishment (Art. 43 of the EC Treaty), subject to the proviso that the interest received by resident companies, although exempt from withholding tax, is liable for at least the same amount of corporate income tax in the hands of these resident recipients.


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