Belgium Faces European Court Threat To Unfair Dividend Tax Regime

by Ulrika Lomas, Tax-News.com, Brussels

21 July 2006

The European Commission has warned the Belgian government that it will face legal action in the European Court of Justice if it fails to remove a discriminatory dividend tax regime that favours domestic investors.

Under the Belgian tax system, there is no double taxation for domestic dividends while there is for foreign, or 'inbound,' dividends.

According to the Commission, this difference in treatment is contrary to the freedom of establishment and the free movement of capital, guaranteed by the EC Treaty.

"The Member States must tax inbound dividends paid to private investors in the same way as domestic dividends," commented EU Taxation and Customs Commissioner Laszlo Kovacs.

"That implies that they have to apply the same mechanisms to avoid double taxation to inbound dividends as to domestic dividends," he added.

Presently, Belgian private investors receiving domestic dividends either pay a final tax withheld by the company or they are taxed at a special income tax rate of, in principle, 25%. Inbound dividends are first subject to a withholding tax of up to 15% in the source State, on the basis of the double taxation agreement between Belgium and that State, and then suffer Belgian income tax at the special income tax rate of 25%. The result is that inbound dividends are taxed more heavily than domestic dividends.

The Belgian authorities have two months to respond to the EC's request, after which the Commission may refer the matter to the Court of Justice.

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