The Belgian State claimed that both of the FIIs did not qualify for the exemption because the “subject to tax” requirement provided by Article 2, sub c) of the Directive had not been met. In 1999/2000, the Directive’s implementation into domestic legislation (Article 106, § 5 Royal Decree implementing the Belgian Income Tax Code) provided as a requirement for the exemption’s application that the beneficiary qualified as a parent company resident in an EU Member State (as defined in the Directive). By contrast, Wereldhave Belgium, Wereldhave International and Wereldhave, all argued that, as a rule, FIIs remained taxable in the Netherlands as public limited companies under Article 1 of the Wet op de vennootschapsbelasting 1969 (Corporate Tax Law 1969, or Wet Vpb). They argued that tax liability was sufficient for eligibility for the exemption from any advance tax on investment income.
In the resulting litigation, the Court of Appeal of Brussels submitted two questions to the Court of Justice of the European Union (“CJEU”) for a preliminary ruling:
Is the Directive to be construed as precluding a national rule that does not waive the Belgian advance tax on income from investments for dividend payments made by a Belgian subsidiary to a parent company established in the Netherlands that fulfils the condition of a minimum participating interest and the holding of such an interest, on the ground that the Dutch parent company is a FII that is required to distribute all of its profits to its shareholders and, subject to that proviso, is eligible for the zero rate of corporation tax?
If the answer to the first question is negative, then are Articles 43 and 56 EC to be construed as precluding a national rule that does not waive the Belgian advance tax on income from investments for dividend payments made by a Belgian subsidiary to a parent company established in the Netherlands that fulfils the condition of a minimum participating interest and the holding of such an interest, on the ground that the Dutch parent company is a FII that is required to pay all its profits to its shareholders and, subject to that proviso, is eligible for the zero rate of corporation tax?
First question: a Dutch FII does not fall under the Parent-Subsidiary Directive 90/435
On the first question, the CJEU ruled that the Directive lays down a positive criterion for qualifying, that is to say, being subject to the tax in question, and a negative criterion, that is to say, not being exempt from that tax and not having the possibility of an option. The establishment of both these criteria, one positive, the other negative, led to the conclusion that the Directive does not only require that a company should fall within the scope of the tax in question, but also seeks to exclude situations involving the possibility that, despite being subject to that tax, the company is not actually liable to pay that tax. Although, formally, a company which is subject to tax at a zero rate, provided that all of its profits are paid to its shareholders, is not exempt from that tax, it is, in practical terms, in the same situation as the one which Article 2(c) of the Directive seeks to exclude, that is to say, a situation in which it is not liable to pay that tax. Consequently, the Directive must be construed so that Article 5(1) does not preclude Member State legislation in which an advance tax on investment income is levied on dividends paid by a subsidiary established in that Member State to an FII established in another Member State that is subject to corporation tax at a zero rate, provided that all of its profits are paid to its shareholders (since such an institution does not constitute a ‘company of a Member State’ for the purposes of the Directive).
Second question: a “missed opportunity” for Wereldhave
The second question did not bring about a favourable decision for Wereldhave either. However, it is important to note that the CJEU ruled that the question was “inadmissible” in the absence of any details regarding the national legal framework applying to the payment of dividends to companies established in Belgium, which are comparable to the recipient companies at issue in the main proceedings. Given the absence of (sufficient) information about the Belgian tax rules that was submitted to the CJEU by the Court of Appeal of Brussels with the preliminary ruling request, the CJEU was not in a position to determine whether the dividends paid to the recipient companies at issue in the main proceedings have been treated unfavourably compared with the dividends paid to such comparable companies located in Belgium.
In our opinion, the CJEU would have decided the second question favourably if only the preliminary ruling had provided more information on the tax treatment of dividend payments by a Belgian company to a Belgian qualifying investment company. A dividend distribution to a qualifying investment company would qualify for exemption from withholding tax, on the basis of Article 106, § 6 of the Royal Decree implementing the Belgian Income Tax Code, if the minimum participation threshold (which still amounted to 25% in 1999/2000) had been met, which was the case. Moreover, the question for a preliminary ruling request should have referred to the CJEU’s C-387/11 judgment of 25 October 2012, which related to a case of a dividend distribution to a foreign fund, rather than to the Tate & Lyle judgment, which related to a dividend distribution to a foreign parent company subject to the common corporate tax regime.
For more information:
Christophe Coudron - counsel Tiberghien (firstname.lastname@example.org)