On 9 July 2020, the Belgian tax authorities published an administrative letter (Circular Nr. 2020/C/96) in respect to foreign investment and savings income, stating that when Belgium taxes this type of income, the foreign tax withheld at source can in principle always be deducted.
This new circular withdraws the position previously adopted by the Belgian authorities in an internal instruction of 26 September 2019, whereby the authorities stipulated that taxes withheld at source abroad were not always fully deductible.
In the 2019 Instruction, the authorities stated that in case a Double Tax Treaty (DTT) is in place with Belgium, the deductible amount of foreign withholding tax may never exceed the “preferential” rate as provided in the relevant DTT (even if a higher amount was withheld based on the domestic rate in that other country). In case the domestic rate is lower than the preferential rate, only the actual amount withheld at source could be deducted for Belgian tax purposes.
Evidently, this earlier position was highly criticized. If you know that our standard tax rate on investment and savings income is 30%, this is something worth arguing over.
Although the instruction was based on the rule that international law has priority over domestic law, the Belgian tax authorities were actually taxing a fictitious income, despite the general principle that only income the taxpayer has actually received can be subject to a taxation.
According to the new administrative letter of 9 July, when tax is withheld on the gross income at source abroad, the net amount (after the actual foreign WHT withheld) can now be reported in the taxpayer’s resident tax return instead. This can be clarified using the following example:
If an individual receives a gross dividend of €100 and a foreign WHT of 35% is deducted at source (100 – 35 = €65), the net dividend of €65 needs to be reported and subject to tax in Belgium. Previously, if the relevant DTT provided for a maximum WHT of e.g. 15% (100 – 15 = €85), the deductible amount was to be limited to the preferential rate of 15%. The taxpayer was then required to report €85 instead of €65 in his resident tax return in Belgium and pay tax on the higher amount.
This administrative letter actually reconfirms the situation how it was before the 2019 Instruction was released and makes the de facto double taxation of foreign investment and savings income a little bit more bearable for Belgian taxpayers who invest abroad.