by JP Canavan
Dividends paid by a Belgian subsidiary to its parents, both Dutch UCITS (Undertakings for Collective Investment in Transferable Securities), do not qualify for an exemption from Belgian withholding tax under the EU Parent-Subsidiary Directive (the ‘Directive’), the Court of Justice of the European Union (CJEU) concluded in a March 8 ruling.
The case, Belgische Staat v. Comm. VA Wereldhave Belgium (C-448/15), provides further analysis of the CJEU’s perception of the Directive’s subject to tax requirement.
EU Parent-Subsidiary Directive
The EU Parent-Subsidiary Directive (2011/96/EU), as amended, in general provides an exemption from withholding tax on dividends made between subsidiary and parent entities located in differing EU Member States where there is a minimum 10% holding in the subsidiary.
EU Member States have adopted variations of the Directive into their domestic law, mainly in respect of the minimum holding percentage required and qualification of a holding period.
Furthermore, the Directive contains general anti-abuse rules (GAARs) to prevent the Directive’s benefits being afforded where arrangements have been put in place for the purpose or one of the main purposes of achieving of a tax advantage.
Article 2 of the Parent-Subsidiary Directive provides that a “company of a Member State” shall mean an entity as listed in the Directive’s Annex and moreover, is subject to a listed tax (some form of corporate income tax) in the relevant Member State.
Wereldhave Belgium case
The case relates to dividends paid by a Belgian company, Wereldhave Belgium, to its parents, both of which were Dutch UCITS that held the required shareholdings, in the tax years 1999 and 2000.
Under Dutch legislation, UCITS are entitled to a zero rate of corporation tax on profits (including profits received from a subsidiary) if the profits are fully distributed to shareholders.
The dispute centred around the question of whether the Parent-Subsidiary Directive precludes national legislation (transposing the Directive into domestic law) of a Member State, to levy withholding tax on dividends paid by a Belgian subsidiary to a parent established in another Member State, where that parent is subject to a corporation tax rate of zero, subject to the proviso, that it distributes all of its profits to its shareholders.
Dutch UCITS & dividend withholding
The CJEU concluded that a Dutch UCITS does not qualify as a “company of a Member State” for the purposes of Article 2(c), and therefore the exemption provided for under the Directive from withholding tax on dividend payments cannot apply to such payments.
In its analysis, the CJEU noted two important criteria that are contained within the provision. The first criteria is a positive condition that the parent company must be subject to one of the taxes listed in the provision, and the second, a negative condition that the company is not exempt from that tax nor does it have an option to be subject to or exempt from that tax.
The CJEU also considered the purpose and objective of the Directive, in that it seeks to harmonise the taxation regimes of differing EU Member States and, in so doing, avoid double taxation of profits at an EU level.
The Court identified that as the Dutch UCITS are entitled to a zero rate of corporation tax on profits (including those received from the Belgian subsidiary), on the proviso the profits are fully distributed to its shareholders under Dutch legislation, there is no risk of double taxation to those same profits.