TAX NEWS - DECEMber 2009

Belgium Tax: European Commission challenges participation exemption

According to a press release issued 20 November 2009, the European Commission has sent a reasoned opinion to the Belgian government stating that certain aspects of the Belgian dividends received deduction regime are not compatible with the EC Parent-Subsidiary Directive. If Belgium fails to respond within two months or the Commission considers a response to be insufficient, it may refer the case to the European Court of Justice.

The Parent-Subsidiary Directive imposes an obligation on EU Member States to grant relief from double taxation when a parent company holds at least 10% in the capital of the subsidiary. The Directive allows Member States to exclude from these benefits parent companies that do not maintain their participation in the subsidiary for a minimum period (which may not exceed two years).

In its implementation of the Directive, Belgium introduced stricter conditions to qualify for the dividends received deduction regime (i.e. a deduction of 95% of qualifying dividend income). In addition to requiring that the parent company hold at least 10% of the share capital of the subsidiary or that the participation have an acquisition value of at least EUR 1.2 million (EUR 2.5 million as from 1 January 2010) for an uninterrupted period of at least one year, Belgian law requires that the shares also qualify as fixed financial assets as defined under Belgian accounting law.

Under the accounting law, shares qualify as fixed financial assets if the holding of the shares aims to create a specific and lasting relationship with the subsidiary, thus enhancing the activities of the parent company. Participations representing the majority of voting rights or giving the shareholder the right to appoint and dismiss the majority of the directors of the subsidiary are irrefutably presumed to constitute fixed financial assets. Accounting law also provides for a refutable presumption that shares representing 10% of the share capital qualify as fixed financial assets.

According to the European Commission, the fixed financial asset requirement is not permitted by the Parent-Subsidiary Directive and, therefore, denies the benefits to Belgian companies even though they otherwise comply with the requirements of the Directive.


Impact

Dividends received on shares not qualifying as fixed financial assets are taxable at the full statutory tax rate (currently 33.99%). Although most shares held by Belgian companies would meet the fixed financial asset test, situations may arise where this is not the case (or may be in question). For example, in some cases where shares are held by Belgian investment companies or financial or insurance companies; where a company's shareholding does not represent 10% of the share capital of the company in which the shares are held but has an acquisition value of at least EUR 1.2 million; or where it is uncertain whether the shares create a specific and lasting relationship with the subsidiary, enhancing the activities of the parent company. Issues also may arise in divestment situations, for example, where a Belgian parent company receives dividends from a company and the parent has decided to dispose of its shareholding in that company. In such a case, the shares may no longer qualify as fixed financial assets (but instead would qualify as "other investments"). The same issue would arise in the case of shares acquired to be resold within a period of 12 months.

Belgian companies holding shares that do not or that may not qualify as financial fixed assets under Belgian accounting law should consider preemptively claiming the application of the dividends received deduction, provided the other requirements are met.