Recent Belgium court decisions on the taxation of French-source dividends paid to Belgium residents have raised the possibility that taxpayers may be able to file a refund claim for overpaid Belgian income taxes on French dividends.
For some types of income, this right to tax is not exclusive, so that both countries can levy tax on the same income. This is the case for dividends; most tax treaties stipulate that the country of source may tax dividends (although at a maximum percentage that is generally lower that the standard rate in that country), but that the country of residence of the beneficiary is also allowed to tax that income. This is typically the case in most tax treaties signed by Belgium. Belgium will tax foreign dividends at a standard rate of 30%.
The current treaty between Belgium and France, however, deviates from this standard approach. The Belgium-France tax treaty, signed in 1964, includes an article stating that Belgium will grant a tax credit to Belgian tax residents for the tax paid in France on French-source dividends, the so called “lump sum foreign tax credit” or QFIE in French or FBB in Dutch.
This article in the treaty has given rise to some disputes between the Belgian tax authorities and individual taxpayers. Indeed, Belgium had reduced the tax credit to 0% for private investors, so that the provision in the treaty has been de facto overruled. A few years back, court rulings had already obliged Belgium to reinstall the foreign tax credit on French-source dividends for individual taxpayers. However, this did not resolve the issue.
It should be noted that when Belgian residents receive foreign-source interest or dividends on securities held on a securities account with a Belgian bank, the bank must withhold tax at a 30% rate. Since this withholding tax rate is identical to the final tax applied, Belgian tax law allows Belgian taxpayers to consider that withholding tax paid as final, and taxpayers are no longer required to include the interest or dividends received in their annual income tax returns.
The Belgian tax authorities’ current position is that the foreign tax credit on French-source dividends is granted only to taxpayers who have included those dividends in their annual income tax return. Their argument is that the non-application of the foreign tax credit in cases where the taxpayers did not include the dividends in the income tax return is the result of a decision made by the taxpayers themselves to consider the withholding tax as final. Taxpayer claims to obtain a refund for overpaid taxes on French-source dividends that were not included in a tax return have been systematically rejected by the tax authorities.
A few considerations should be taken into account. First, taxpayers may want to include their French dividends and claim the tax credit in their annual income tax return, as this approach provides the most certainty, given that it is unclear how the Belgian tax authorities will react to the new court rulings. In addition, a few cases are still pending in court, and different courts may rule differently. However, filing a claim based on these new court rulings may be worth it for prior years if the claim is not precluded by the statute of limitations.
Second, the foreign tax credit is available only with respect to French-source dividends received by Belgian residents. No credit is available for taxes paid on dividends received from other countries.
Finally, the foreign tax credit mechanism is not included in the new treaty that Belgium and France signed on 9 November 2021, which has not yet entered into force. The new treaty will enter into force on 1 January of the year following that year during which the new treaty is ratified by both countries; in other words, 1 January 2025 at the earliest. Under the new treaty, French dividends received by Belgian residents will be treated the same way as dividends from other countries: a 30% tax will apply on the dividend amount net of foreign taxes.
For more information on the taxation of French-source dividends, please consult your regular BDO contact or the author of this article.
Background
Double taxation agreements (DTAs) are treaties signed between two countries to avoid double taxation on different types of income: when both counties claim taxing rights over a type of income, the DTA will determine which country’s right to tax will prevail.For some types of income, this right to tax is not exclusive, so that both countries can levy tax on the same income. This is the case for dividends; most tax treaties stipulate that the country of source may tax dividends (although at a maximum percentage that is generally lower that the standard rate in that country), but that the country of residence of the beneficiary is also allowed to tax that income. This is typically the case in most tax treaties signed by Belgium. Belgium will tax foreign dividends at a standard rate of 30%.
The current treaty between Belgium and France, however, deviates from this standard approach. The Belgium-France tax treaty, signed in 1964, includes an article stating that Belgium will grant a tax credit to Belgian tax residents for the tax paid in France on French-source dividends, the so called “lump sum foreign tax credit” or QFIE in French or FBB in Dutch.
This article in the treaty has given rise to some disputes between the Belgian tax authorities and individual taxpayers. Indeed, Belgium had reduced the tax credit to 0% for private investors, so that the provision in the treaty has been de facto overruled. A few years back, court rulings had already obliged Belgium to reinstall the foreign tax credit on French-source dividends for individual taxpayers. However, this did not resolve the issue.
It should be noted that when Belgian residents receive foreign-source interest or dividends on securities held on a securities account with a Belgian bank, the bank must withhold tax at a 30% rate. Since this withholding tax rate is identical to the final tax applied, Belgian tax law allows Belgian taxpayers to consider that withholding tax paid as final, and taxpayers are no longer required to include the interest or dividends received in their annual income tax returns.
The Belgian tax authorities’ current position is that the foreign tax credit on French-source dividends is granted only to taxpayers who have included those dividends in their annual income tax return. Their argument is that the non-application of the foreign tax credit in cases where the taxpayers did not include the dividends in the income tax return is the result of a decision made by the taxpayers themselves to consider the withholding tax as final. Taxpayer claims to obtain a refund for overpaid taxes on French-source dividends that were not included in a tax return have been systematically rejected by the tax authorities.
Recent developments
On 23 November 2023, the Belgian Supreme Court (Cour de Cassation) ruled in two cases that Belgium is required to grant the allocation of a foreign tax credit of 15%, including in cases where taxpayers did not report the French-source dividends in their annual income tax return. These new court rulings raise the possibility that taxpayers may be able to file a refund claim for overpaid Belgian income taxes on French dividends for income years for which the three-year statute of limitations has not expired.A few considerations should be taken into account. First, taxpayers may want to include their French dividends and claim the tax credit in their annual income tax return, as this approach provides the most certainty, given that it is unclear how the Belgian tax authorities will react to the new court rulings. In addition, a few cases are still pending in court, and different courts may rule differently. However, filing a claim based on these new court rulings may be worth it for prior years if the claim is not precluded by the statute of limitations.
Second, the foreign tax credit is available only with respect to French-source dividends received by Belgian residents. No credit is available for taxes paid on dividends received from other countries.
Finally, the foreign tax credit mechanism is not included in the new treaty that Belgium and France signed on 9 November 2021, which has not yet entered into force. The new treaty will enter into force on 1 January of the year following that year during which the new treaty is ratified by both countries; in other words, 1 January 2025 at the earliest. Under the new treaty, French dividends received by Belgian residents will be treated the same way as dividends from other countries: a 30% tax will apply on the dividend amount net of foreign taxes.
For more information on the taxation of French-source dividends, please consult your regular BDO contact or the author of this article.
Peter Wuyts
BDO in Belgium