Reduced dividend withholding tax rate only available to “new” shares

On 23 May 2019, the Constitutional Court rendered decision No. 75/2019 on a preliminary ruling request by the lower court of Liège. The request concerned the old 15% reduced withholding tax rate (abolished in 2013).

(a) Facts. During the years 2007 to 2011, a Belgian one person company distributed dividends on which it withheld and paid 15% dividend withholding tax. The company, which was incorporated in 1987, had increased its capital in 2002 without the creation of new shares and believed this was sufficient to benefit from the reduced rate.

The tax authorities were of the opinion that the conditions to benefit from the 15% rate where not met. It taxed the dividends at the regular 25% dividend withholding tax rate.

(b) Legal background. Although the regular withholding tax rate for interest and dividends was 25%, a reduced rate of 15% was available between 1 January 1994 and 1 January 2013 for qualifying dividends.

One of the main conditions was that new shares must have been issued which represented capital raised through cash contributions.

The lower court of Liège requested a ruling on the question whether this condition violated the constitutional principle of equal treatment and non-discrimination. It, after all, created a difference in  treatment between a one person company which issued new shares to its sole shareholder and a one person company which merely increased its capital, while there being, other than being able to benefit from the reduced rate, no need for new shares.

c) Decision. The Court ruled in favor of the government, stating that these kinds of policy measures are a prerogative of the legislator, allowing it to direct and correct the socio-economic environment. The government proved (reasonably justified) that there are valid reasons and objectives for the condition that new shares must be issued.

The preparatory clearly shows that the purpose of the condition, in addition to being able to properly  audit its application and limiting its budgetary impact, was to increase the investment in venture capital by as much persons as possible.

Consequently, the Court decided that the condition to issue new shares under the old reduced rate is compatible with the Constitution.

The Court also emphasizes that the taxpayer was able to benefit from the reduced rate if it had issued new shares. Hence, one cannot conclude that the condition of new shares excluded the taxpayer from the application of the reduced rate in a discriminatory manner. It’s up to the taxpayer to weight the pros and cons of issuing new shares.

Note: A new 15% reduced withholding tax rate exist for shares issued after 1 July 2013 in exchange for cash contributions (art. 269, §2 ITC/92).

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