Belgium has recently introduced a series of measures intended to combat withholding tax avoidance schemes and to improve the recovery of withholding tax in the event of an incorrect application of an exemption or refund of such withholding tax. These measures became effective on January 22, 2019 (Law of January, 11 2019 on Combatting Tax Fraud and Tax Avoidance Regarding Withholding Tax).
The measures are partly a consequence of the "Cum-Ex" scandals, which have made the headlines in October of last year and resulted in billions of lost tax revenues for several European countries. The law itself and the remarks made by the Ministry of Finance show a clear intention to aggressively combat such withholding tax schemes. It is crucial, especially for Belgian and foreign pension funds, to properly examine their position and exposure to these measures, as litigation and additional taxes are very real possibilities.
Pension funds and dividends
The most striking aspect of the measures is the introduction of a rebuttable presumption pertaining to Belgian and non‑Belgian pension funds, irrespective of their regulatory status. All the legal acts related to dividends received by a pension fund will be considered “artificial” if the pension fund has not held the underlying shares in full ownership for an uninterrupted period of at least 60 days. This rebuttable presumption effectively creates a distinction between short-term and long-term participations held by pension funds.
The consequences of this presumption may take two forms:
- According to the text of the law, dividends received in relation to "artificial legal acts" are precluded from taking the benefit of any withholding tax exemption provided by the Royal Decree implementing the Belgian Income Tax Code ("RD/BITC"), such as e.g. article 106, §2 & §4 of the RD/BITC, which provides for a conditional withholding tax exemption for dividends distributed to non-Belgian pension funds.
- Any non-final Belgian withholding tax imposed on dividends arising from a short‑term participation can no longer be used to offset Belgian income tax (or be reimbursed if insufficient Belgian income tax is due), unless the above mentioned presumption is rebutted by the taxpayer. This measure should, in practice, only apply to Belgian pension funds or Belgian establishments of non-resident pension funds holding short-term participations in Belgian companies.
The new law further also provides that Belgian pension funds will be the debtor of any Belgian withholding tax on foreign-sourced dividends they receive abroad without the intervention of a Belgium-based intermediary. This new provision should not bear significant consequences, given that a general exemption should apply in such cases (art. 106, §1 of the RD/BITC). That said, if such foreign-sourced dividend relates to a short-term investment and the pension fund cannot rebut the legal presumption of artificiality, it will owe Belgian withholding tax on the gross dividend income as the final tax.
Other more general measures
The law has also introduced other new anti-abuse measures, which may be relevant for Belgian and non‑Belgian taxpayers, as well as for the financial sector:
- Belgian withholding tax imposed on any dividends may now only be used to offset Belgian income tax (or be reimbursed insofar as insufficient Belgian income tax is due) if the beneficiary of the dividend has held the shares in full ownership on the date on which the beneficiary of the dividend is identified (i.e. the "record date"). Before the law became effective, this condition had to be met on the date of the payment. This change is aimed at avoiding double requests for withholding tax refunds.
- As a general rule, Belgian withholding is paid by the debtor of the investment income (or by the Belgium-based intermediary). The beneficiary of that income becomes liable for the Belgian withholding tax only in specific and exceptional circumstances. The law has now expanded these exceptions to cases where the beneficiary of the income incorrectly benefits from a withholding exemption or incorrectly obtains a refund. This is expected to increase the likelihood that the Belgian tax authorities will recover withholding taxes on investment income.
The Minister of Finance has declared that the "same approach", i.e. a refusal to grant an exemption from (or reduction of) dividend withholding tax for short-term participations, will be applied with regard to the specific exemption for dividends distributed to pension funds under the double taxation treaties concluded by Belgium with the US. and the UK. He also emphasized the tax administration's operational readiness, by stating that the team dealing with withholding tax refund claims by virtue of double taxation treaties "has received reinforcement and will remain reinforced".
It is unclear whether the tax authorities will effectively adopt such a policy in the treaty context. In any event, we believe that there are strong legal arguments against such an approach. Questions may be raised also with regard to the overall scope of application of this new provision, given that it was integrated into art. 266, al. 4 of the Belgian Income Tax Code, which implemented the anti-abuse measure of EU Directive 2015/121/EU (which amended the Parent-Subsidiary Directive).
Finally, although the above-discussed legal presumption became effective on January 22, 2019, the Minister of Finance has declared that the tax administration will take it into account with regard to dividends declared or attributed before that date in order to combat tax fraud and avoidance. In our view, it is doubtful that any retroactive application of the new measures would withstand judicial scrutiny.