ECJ Case C-782/22, XX vs. Inspecteur van de Belastingdienst
The case brought before the court does not concern a new issue. Several other decisions were taken by the Court on the levying of withholding taxes on the gross amount of income. The Court acknowledged in these cases that there could be an unequal treatment between non-resident taxpayers and resident taxpayers, because the latter are usually taxed on their net income and can often completely offset the withholding tax. A possibility that is not always granted to non-resident taxpayers.
For dividends specifically, the Court stated in some of these cases (for instance Miljoen e.a., C‑10/14, C‑14/14 and C‑17/14) that only expenses which are “directly linked” to the actual payment of dividends must be taken into account for the purpose of comparing the tax burden of companies. This criterium of a “direct link” leads to some interpretational difficulties. The Court seemed to interpret this notion narrowly, i.e. only expenses linked to the actual receipt of dividends. In other cases, like the College Pension Plan of British Columbia (C-641/17), the Court did find a causal link between dividend income and expenses relating to the increase of mathematical reserves of a pension fund.
The facts in the current case were quite straight-forward and more or less similar to aforementioned case C-641/17: a UK insurance company concluded “unit-linked insurance contracts” with its clients (mainly institutional pension insurance companies and employers). The UK insurer invested the premiums amongst others in shares of Dutch companies. The dividends paid by these Dutch companies were subject to a “dividend tax” at a rate of 15%. The UK insurer does not have the possibility to deduct any expenses (in the Netherlands) or offset the 15% tax against its UK tax base. An insurance company established in the Netherlands would, on the other hand, be able to offset the dividend tax (= an advance levy) in full against the corporation tax due and, if the latter tax is lower than the dividend tax that has been levied, the difference is refunded. The tax on these dividends would therefore be virtually nil, because when determining profit, the increase in commitments to clients under unit-linked insurance contracts would be taken into account as expenses.
The Court reiterates its position that only “directly linked business expenses” must be taken into account when comparing the tax burden between resident and non-resident insurance companies. However, it concludes that this criterium is met for expenses relating to the increase in commitments of unit-linked insurance policies. As a consequence, the Dutch legislation is contrary to EU Law, to the extent that it does not allow a reduction of the withholding tax base with these expenses.
Belgium sourced dividend income
Belgium sourced investment income received by foreign insurance companies can also be subject to withholding tax in Belgium. For instance, when a Belgian company distributes dividends to a foreign insurer, Belgian withholding tax is prima facie due at a 30% rate, unless domestic or treaty exemptions (or lower rates) apply. This withholding tax is in principle levied on the gross amount of the dividend income, without the possibility of deducting expenses or losses incurred by the foreign insurance company.
A Belgian insurance company, on the other hand, is subject to corporate income tax on its net income. Specifically regarding unit linked insurance policies, investment income received within these policies can (in most cases) be (almost entirely) compensated with the expenses related to the formation of technical reserves. Belgian insurance companies can then in principle (and subject to conditions) credit the Belgian withholding tax levied, and have the excess amount reimbursed. Consequently, the final tax base of the income received by a Belgian insurance company within a unit linked insurance policy can be very limited, whereas Belgian withholding tax on dividend income paid to a foreign insurance company is levied on the gross amount of the income.
In October 2020, the European Commission sent a “letter of formal notice” to Belgium stating that the levying of taxation (withholding tax or non-resident corporate income tax) on the gross amount of Belgian sourced investment income received by foreign insurance companies might, in some instances, be discriminatory. This position of the Commission seems to be confirmed by the ECJ in the XX-case.
We recommend foreign insurance companies to assess their tax position and, if impacted, to consider filing a Belgian tax refund claim. In our view, the wording of the Court is broad enough, potentially allowing a reclaim of withholding taxes on income relating to other types of insurance products as well. Belgian WHT can be reclaimed for a period of 5 years starting from January 1st of the year in which the WHT was paid.
