The impact of Commission v. Italy (Case C-540/07) on Belgian withholding taxes
Background of Commission v. Italy
Although dividends distributed to corporate shareholders residing in Italy are not subject to withholding tax, dividends distributed to non-resident corporate shareholders are subject to a 27% withholding tax (which may be reduced in accordance with the double tax conventions concluded by Italy or partially refunded under Italian domestic tax law). Moreover, up to 95% of the amount of dividends is excluded from the taxable income of Italian corporate shareholders, implying only the remaining 5% is subject to Italian corporate income tax.
Decision by the ECJ
The ECJ rules that the Italian withholding tax provisions make dividends distributed to non-resident companies subject to a less favourable tax regime than dividends distributed to resident companies and, thus, constitute an infringement of the EC principle of free movement of capital.
Application to the Belgian tax regime for outbound dividends
Under certain conditions, this decision of the ECJ in Commission v. Italy may have a significant impact on the Belgian tax regime for outbound dividends.
The standard dividend withholding tax rate in Belgium stands at 25%, with a withholding tax exemption applicable to dividends distributed to a parent company located in Belgium, in another Member State or in a State Belgium has concluded a DTC with, provided a participation of at least 10% has been held for an uninterrupted period of at least one year. Although the rate of withholding tax levied is irrespective of whether or not the beneficiary is a resident, a resident corporate shareholder is entitled to a refundable tax credit for any Belgian dividend withholding tax incurred. Consequently, in purely domestic situations, Belgian dividend withholding tax generally does not result in an effective tax burden.
Furthermore, and similar to the Italian tax regime, Belgium applies a so-called ‘dividend received deduction’ (“DRD”) regime to corporate resident shareholders. Following such regime and subject to certain anti-abuse provisions, dividends received are excluded from the taxable base up to 95%, provided the dividend relates to a participation of 10% or a participation with an acquisition value of at least 1.2 million EUR which is held in full ownership for an uninterrupted period of at least one year and qualifies as a financial fixed asset. Moreover, a Belgian corporate shareholder may even offset financing and other expenses against the remaining 5% dividend received income.
Consequently, even if a dividend distributed to a Belgian resident corporate shareholder is subject to withholding tax, a Belgian corporate shareholder would at most be taxed on 5% of such dividend (provided the DRD regime applies), as any withholding tax is fully creditable and the balance, if any, refundable. Such a situation could occur when a participation does not exceed the 10% minimum participation threshold for withholding tax exemption purposes but does exceed the nominal 1.2 million EUR threshold for DRD purposes.
For non-resident corporate shareholders holding a similar participation in a Belgian company, the Belgian withholding tax of 25% (potentially reduced according to domestic law or double tax conventions) would, following the Commission v. Italy decision, constitute a less favourable treatment compared to a Belgian resident corporate shareholder that is subject to an effective tax burden of no more than 1.7% (5% x 34%) at most.
If the participation in a Belgian company held by a corporate shareholder established in another EU Member State does not satisfy the conditions of the dividend withholding tax exemption whereas such participation would qualify for the DRD-regime if it was held by a Belgian corporate shareholder, there are persuasive arguments in the Commission v. Italy decision that allow Belgian subsidiaries of EU corporate shareholders to claim an exemption or significant reduction of the Belgian withholding tax.
The same position could be validly defended for non-EU corporate shareholders resident in a country which has concluded a double tax convention with Belgium providing for an “equal treatment clause” as regards dividends.
Non-resident corporate shareholders should review whether they received dividends from a Belgian resident company which were subject to Belgian withholding tax in cases similar to the one described above.
Valid arguments are available to sustain that refund claims could be introduced for dividend withholding tax levied up to 5 calendar years back (under the claim for ex-officio relief procedure)
 The minimum participation requirement of 10% became effective as from 1 January 2009, whereas it stood at 25% up to 31 December 2005 and has been gradually reduced since (20% as from 1 January 2005, 15% as from 1 January 2007).
 2.5 million EUR as from tax year 2011
 Historically 25%. See 1