Belgian taxation under siege
The European Commission has recently sent four (4!) formal requests to the Belgian government in order to end various kinds of discriminatory tax treatment.
Flemish Registration Duties
The first request relates to Article 61/3 of the Flemish Registration Duties Code, according to which a certain amount of the registration duties paid previously on the purchase of a house is deductible from the registration duties on the purchase of a new house. Such feature was designed to stimulate geographical mobility within the Flemish region. It is therefore provided that only Flemish registration duties previously paid can be credited. As a result, citizens moving house from another Member State to Flanders cannot get a credit for the registration duties that they have paid on the purchase of a house in their Member State of origin.
The European Commission considers that the refusal to give credits for foreign registration duties restricts citizens from moving to Flanders and from acquiring properties there. Therefore, the Commission deems the Flemish rule to be an infraction of the right of every citizen of the European Union to move and reside freely within the territory of the Union (Article 18 EC Treaty), as well as of the freedom of establishment (Article 43 EC Treaty) and of the free movement of capital (Article 56 EC Treaty). This case also illustrates the fact that the regional authorities of the Member States are bound by the EC Treaty in the same way as the central government.
Personal tax deductions
Secondly, the European Commission has requested Belgium to end discrimination on personal tax deductions for residents with foreign source income. The Belgian legislation at issue discriminates Belgian residents who enjoy both Belgian and foreign income by not granting such residents a full deduction for personal and family allowances. When a double tax convention is applicable, Belgium applies the so-called exemption with progression method by calculating the normal tax due on the gross overall income and subsequently granting a foreign tax credit that equals the overall tax due multiplied with a proportionality factor. The numerator of that proportionality factor is the foreign source income and the denominator thereof is the overall income, in which the personal and family allowances are not taken into account. As a result, only a portion of the amount of the personal and family allowances result in an effective reduction of the Belgian tax payable.
The Commission considers that this limited deduction of personal allowances is contrary to the EC Treaty. The European Court of Justice has already ruled on a very similar issue in a case concerning the Netherlands (Case C-385/00 “De Groot”). The Commission considers that the unavailability of full personal deductions contravenes the free movement of workers and self-employed persons guaranteed by Articles 39 and 43 of the EC Treaty and the corresponding provisions of the EEA Agreement and the right of every citizen of the Union to move and reside freely within the territory of each Member State of Article 18 of the EC Treaty.
Inbound dividends
The third Commission request relates to the discriminatory taxation of dividends paid by foreign companies to Belgian private investors. 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 from other Member States are usually 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. Additionally, such dividends are taxed in Belgium at the special income tax rate of 25%. The result is that inbound dividends are taxed more heavily than domestic dividends.
The Commission has stated in its Dividend Taxation Communication of 19 December 2003 (IP/04/25) that a higher tax burden on inbound dividends constitutes a restriction within the meaning of Article 56 of the EC Treaty on individual taxpayers to invest in foreign shares. The European Court of Justice has interpreted the EC Treaty accordingly in the Manninen case (case C-319/02). In so far as the shareholding gives the shareholder control over the company it is also a restriction of the freedom of establishment of Article 43 of the EC Treaty. The same is true for the corresponding Articles of the EEA Agreement.
The subject matter of this complaint is also comparable to that of a request for a preliminary ruling, still pending before the European Court of Justice (case C-513/04 - Kerckhaert-Morres). That case is different, however, in so far that it concerns French dividends that entitled Belgian investors to a credit for French corporation tax, thus reducing the ultimate tax burden for Belgian investors when investing in France.
Outbound dividends
Finally, Belgium, together with Spain, Italy, Luxembourg, the Netherlands and Portugal, has received a formal request to amend its tax legislation concerning outbound dividend payments to companies. All six Member States tax dividend payments to foreign companies more heavily than dividend payments to domestic ones. Their national legislation provides for no or for only a very low taxation of domestic dividends while outbound dividends are subject to withholding taxes ranging from 5 to 25%.
The Commission’s legal analysis in these cases follows the one put forward in the aforementioned Commission’s Communication of 19 December 2003 (IP/04/25).
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These four requests from the Commission are in the form of “reasoned opinions” under Article 226 of the EC Treaty. If Belgium does not reply satisfactorily to the reasoned opinions within two months, the Commission may refer the matters to the European Court of Justice.
The online press releases of the Commission can be found here:
Flemish registration duties
Personal tax deductions
Inbound dividends
Outbound dividends
