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Changes to the dividends-received deduction and exemption from withholding tax on dividends

This article was written by Sven Loosvelt, Steffi Sioen.
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Changes to the dividends-received deduction and exemption from withholding tax on dividends
With the entry into force of the Belgian Act on Fiscal Provisions on 1 December 2016 (Belgian Official Gazette 8 December 2016), two new provisions have been introduced concerning the dividends-received deduction and the exemption from withholding tax on dividends. An anti-hybrid provision and a general anti-abuse provision have been introduced. Both measures are the result of amendments to the Parent-Subsidiary Directive (Directive 2014/86/EU of 8 July 2014 and Directive 2015/121 of 27 January 2015) and are intended to counteract tax abuse and tax evasion.

Anti-hybrid provision

Following the amendment of the Parent-Subsidiary Directive, a parent company may no longer receive a tax exemption on dividends received if the dividend is deductible for the distributing subsidiary. An additional exclusion from the dividends-received deduction has been included in the Act regarding dividends paid by a "company to the extent that the company has deducted this income or can take it from its profit" (new Article 203, §1, 6° Belgian Income Tax Code).

Specifically, in Belgium this mainly affects profit participating loans (PPLs) that Belgian companies enter into with a Luxembourg or Dutch company. In Belgium, the fees for such loans are considered as deductible interest, while this is qualified by the Luxembourg and Dutch company as a dividend, exempt from corporation tax. From now on, neither Luxembourg nor the Netherlands will be allowed to make use of exemptions.

Anti-abuse provisions

The exemption from withholding tax and the dividends-received deduction will no longer be allowed if the dividends are linked to "an act or series of acts for which the record-keeping ­ taking into account all relevant facts and circumstances - has shown, unless there is evidence to the contrary, that this act or this series of acts is artificial and was created with the main purpose or one of the main purposes of achieving the dividends-received deduction, the exemption from withholding tax or one of the advantages under the Parent Subsidiary Directive" (new Article 203, §1, 7° and new Article 266, §4 Belgian Income Tax Code). This new anti-abuse provision also applies in Belgium to payments between Belgian companies and in relations with third countries.

Entry into force

The changes to the dividends-received deduction apply to income that was either paid out or allocated from 1 January 2016 onwards. However, income that has been paid out or allocated in a taxable period prior to 1 January 2017 does not fall within the scope of applicability. The anti-abuse provision regarding the exemption from withholding tax applies to income that was allocated or made available for pay-out from 1 January 2017 onwards.

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