The internal instruction 2019/I/45 of 26 September 2019 on the taxation of foreign dividends has caused controversy. This instruction stipulated that the deductible amount of foreign withholding tax cannot exceed the amount of tax that can be withheld according to the applicable double tax treaty, regardless of the amount of withholding tax that is actually withheld. The new Circular Letter 2020/C/96 of 9 July now revokes this unlawful instruction.
Belgian Income Tax Code: deduction of the foreign tax actually withheld
According to the Belgian Income Tax Code, the taxpayer must declare the net foreign dividend in his or her personal income tax return. The foreign tax that is actually withheld, is deductible.
The following example illustrates this:
A Belgian resident has a foreign investment portfolio including Nestlé shares. In 2019, a gross dividend of €100 was distributed on these shares. 35% Swiss withholding tax was withheld (€35). Consequently, a net dividend of €65 must be declared in the Belgian resident’s personal income tax return regarding assessment year 2020 (2019 income).
However, the double tax treaty between Belgium and Switzerland limits Switzerland’s right to tax such dividends to 15% withholding tax (Article 10 §2).
In 2020, the Belgian shareholder recovers the excess withholding tax (i.e. 20%, €20). The Belgian shareholder must then declare this refund in the personal income tax return regarding assessment year 2021 (income 2020) and will pay tax on this refund via the tax assessment.
Internal instruction: deductible foreign tax limited to the treaty tax rate
The internal instruction of 26 September 2019 provided that the deductible amount of foreign tax must be limited to the maximum rate as included in the double tax treaty, irrespective of whether a higher tax was actually withheld.
If this instruction is upheld, the above example should be amended as follows:
The Belgian shareholder can only deduct the foreign withholding tax up to the maximum rate as indicated in the treaty (in this case 15%, €15). The Belgian shareholder must declare a net dividend of €85 in the tax return regarding tax assessment year 2020 (2019 income), even though a foreign tax of 35% was actually withheld.
In this scenario, the Belgian shareholder is taxed on an income of €85, whereas only income of €65 is received.
Although the internal instruction lacked legal basis, it was nevertheless applied by several tax inspectors.
This instruction also created uncertainty when the excess withholding tax was recovered. When the Belgian shareholder recovers the 20% excess tax withheld, there is a risk of double taxation if the income is declared in the personal income tax return in accordance with the Belgian Income Tax Code.
New circular letter revokes unlawful internal instruction
A new circular letter regarding foreign movable income was published on 9 July 2020.
Fortunately, this circular letter refers to the law and stipulates that the actual amount of withheld foreign tax can be deducted. The circular letter also confirms that the unlawful instruction is revoked for the past.
Announcement of new definitions in new circular letter
The new circular letter also announces that another circular letter will be published, clarifying certain notions such as “amount received” and “foreign withholding tax”.
It is not certain what the announced circular letter will bring. It is however encouraging that, at least for the time being, the tax authorities are taking a position in line with the law.
We will follow up on this matter and will keep you informed. Please do not hesitate to contact your Loyens & Loeff advisor should you have any questions.
