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Brussels, 20 July 2006

Direct taxation: Commission requests Belgium to end discriminatory taxation of inbound dividends

The European Commission has sent Belgium a formal request to end the discriminatory taxation of dividends paid by foreign companies (inbound dividends) to Belgian private investors. Under the Belgian tax system, there is no double taxation for domestic dividends while there is for inbound dividends. The Commission considers that this difference in treatment is contrary to the freedom of establishment and the free movement of capital, guaranteed by the EC Treaty. The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If Belgium does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the European Court of Justice.

"The Member States must tax inbound dividends paid to private investors in the same way as domestic dividends." said EU Taxation and Customs Commissioner László Kovács. "That implies that they have to apply the same mechanisms to avoid double taxation to inbound dividends as to domestic dividends."

Inbound dividends are dividends paid by a foreign company to a resident shareholder. Domestic dividends are dividends paid by a resident company to a resident shareholder.

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 are first 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, and then suffer Belgian income tax at the special income tax rate of 25%. The result is that inbound dividends are taxed more heavily than domestic dividends.

As the Commission said in its Dividend Taxation Communication of 19 December 2003 (IP/04/25), the higher tax burden on inbound dividends constitutes a restriction in the sense of Article 56 of the EC Treaty on individual taxpayers to invest in foreign shares. 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.

According to the Commission the EC Treaty obliges the Member States to apply the same system that they have to avoid double taxation on domestic dividends to inbound dividends. The European Court of Justice has interpreted the EC Treaty accordingly in the case Manninen, case C-319/02.

The subject matter of this complaint is comparable to that of a request for a preliminary ruling, still pending in the European Court of Justice (case C-513/04 - Kerckhaert-Morres). A difference with that case is that it concerns French dividends, paid at a time when France still paid out a credit for French corporation tax to Belgian investors, ultimately making it more attractive for Belgian investors to invest in France than in Belgium.

The Commission's case reference number is 2005/4504.
For the press releases issued on infringement procedures in the taxation or customs area see:
For the latest general information on infringement measures against Member States see:

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