14 December 2018

In Eubelius Spotlights September 2018, we focused on the consequences for foreign investors whose Belgian sourced income is subject to withholding taxes ("WHT") despite the fact that such investors might have substantial costs directly related to their investments or might be making a loss. Referring to recent decisions of the European Court of Justice and the opinion of Advocate General Wathelet in case C-575/17 we pointed out that such taxation is not always in line with the EU freedoms. As expected, on 22 November 2018, the Court confirmed that WHT levied on dividends paid to loss-making non-resident investors violates the free movement of capital.


Three Belgian holding companies received dividends from French companies which were not eligible for the participation exemption under the Parent-Subsidiary Directive and were therefore subject to a 15% WHT under the applicable double tax treaty. Since the Belgian investors were making a loss for tax purposes (which is often the case with holding companies leveraging their investments), the WHT resulted in a non-recoverable expense. Conversely, loss-making investors established in France were only taxed on their dividend income once they became profitable again or even were never taxed at all (if they were liquidated before becoming profitable). According to the Belgian investors, this difference in tax treatment constituted a breach of EU law.

On 20 September 2017, the highest administrative court in France ("Conseil d'État") referred the matter to the Court of Justice for a preliminary ruling in order to clarify the scope of the EU freedoms. One of the questions raised was whether the cash-flow disadvantage resulting from the application of WHT to dividends paid to loss-making non-resident investors constitutes a restriction of the free movement of capital, and if so, whether such restriction is justified.

Decision of the Court of Justice

In the first place, the Court of Justice considered that, under French legislation, dividends paid to loss-making non-resident investors are treated less favourably than dividends paid to resident investors in a similar situation. Indeed, loss-making resident investors collecting dividends are taxed only when they become profitable again, or will even benefit from an exemption if they are indefinitely loss-making or cease trading. At the same time, dividends paid to non-resident investors give rise to immediate and definitive taxation, regardless of the taxable income earned or the loss incurred by the non-resident investor. Therefore, non-resident investors suffer a considerable cash-flow disadvantage compared to resident investors in a similar situation. Referring to its previous case law, the Court of Justice ruled that such a difference in tax treatment constitutes a restriction on the free movement of capital. According to the Court of Justice, it is irrelevant that French legislation does not discriminate between profitable resident investors and profitable non-resident investors.

Next, the Court of Justice addressed the question of whether such a restriction can be justified. Since both resident and non-resident investors are taxed in France on their dividend income, the Court considers both investors to be in a comparable situation. According to the Court, the restriction cannot be justified on the grounds of the need to ensure a balanced allocation of taxing rights between Member States. The Court of Justice is of the opinion that providing a deferral of taxation for dividends received by loss-making non-resident investors would not deprive France of its taxing rights. Indeed, the French-sourced dividends would be subject to taxation once the non-resident investor became profitable during a subsequent tax period, similarly to the situation for a resident investor.

The French authorities tried to invoke a justification relating to the need to ensure the effective collection of tax. In that respect, the Court of Justice held that the existing mutual assistance mechanisms in tax matters applicable within the EU (Directive 2011/16/EU and Directive 2010/24/EU) are sufficient to allow Member States to verify the evidence put forward by non-resident investors claiming a deferral of taxation of dividends which they have received from sources located in such Member States.

Consequently, the Court of Justice concluded that the French legislation on the taxation of dividends collected by loss-making non-resident investors constitutes an unjustified violation of EU law.

We believe that the same considerations should also apply within the European Economic Area (including Norway, Iceland and Liechtenstein in addition to the EU Member States).

Comment and impact on cross-border investments

This new ruling provides loss-making non-resident investors with additional opportunities to recover WHT paid on dividends from companies located in another EU/EEA Member State.

Hence, this decision is directly relevant to Belgian investors investing in shares of other companies established in the EU/EEA which cannot benefit from the exemptions provided for by the Parent-Subsidiary Directive and, conversely, to foreign investors investing in Belgium.

Taking into account the Court of Justice's case law discussed in Eubelius Spotlights September 2018, the conclusion still stands: non-resident investors should be allowed to deduct expenses directly related to investment income (from the taxable WHT base) and loss-making foreign investors should be able to obtain a tax deferral. 

Investors in such a situation should thus seriously consider claiming a WHT refund with respect to their foreign sourced investment income.

We will be happy to assist you in assessing the feasibility of taking such action.