Belgian Court Rules No Withholding Tax on Outbound Transfer of Seat for Belgian Resident Companies

In a judgment of 3 February 2023 (nr. 21/96/A), the Court of First Instance of Walloon Brabant ruled that no withholding tax must be retained upon the outbound transfer of the seat of a Belgian resident company, even in case where no permanent establishment in Belgium. It is the first ruling rendered on this highly controversial topic, for which two distinct Belgian tax administration services have opposite point of view.

According to Article 210, §1st, 4° of the Belgian Income Tax Code (“BITC”), a Belgian corporate entity transferring abroad its main establishment, place of effective management or registered office (the “seat”) – while not maintaining a Belgian permanent establishment – is subject to the same corporate income tax regime as liquidated companies under Articles 208 and 209 of BITC.

Article 208 imposes the taxation of the latent capital gains of the liquidated company upon the sharing of its corporate assets. As to Article 209 uses a legal fiction to treat the part of funds allocated that exceeds the revalued paid-up capital of the liquidated company as a taxable dividend.

How to apply Articles 208 and 209 of BITC to a company transferring its seat abroad while not maintaining a permanent establishment in Belgium in the future is straightforward. On the contrary, as to whether the shareholders of such company must be taxed on a deemed received dividend sparks a lot of discussion.

The central services of the Belgian tax administration usually take a traditional stance that shareholders are considered to have received a dividend, from a tax perspective, when the company relocates its seat out. The central services rely, for the most part, on an extensive interpretation of Article 18, 1st indent, 2°ter of the BITC. This provision stipulates that the sums defined as a deemed dividend under Article 209 of the BITC, in the event of a partial or complete sharing of the corporate assets of a Belgian resident company, qualifies as a taxable received dividend in the hands of the shareholders. In central services’ view, since Article 210, §1st, 4° of BITC renders applicable Article 209 of BITC to an outbound transfer of seat, this operation should be considered as a liquidation under said Article 209. Therefore, every shareholder of the emigrant company should be deemed receiving a taxable dividend as per Article 18, 1st indent, 2°ter of BITC, as if the outbound transfer was actually a liquidation leading to the sharing of the corporate assets.

Based on this reasoning, the central services of the Belgian tax administration consider that the emigrant company must retain upon its outbound transfer of seat a withholding tax on the amount of the dividend deemed to be distributed to its shareholders at a standard rate of 30%, unless the shareholder may enjoy a withholding tax relief or a more favourable rate. It goes without saying that under this interpretation of the tax legislation, the outbound transfer of the seat of a Belgian resident company can become very expensive for its shareholders.

On the opposite end of the spectrum, the Belgian ruling commission (a distinct service belonging to the Belgian tax administration as well) is of the long-held opinion that a transfer of seat – provided this operation is performed under accounting and legal continuity in the country of destination and is not tax abusive – must not lead to the recognition of a taxable received dividend at the level of the shareholders (see, among others, advance ruling nr. 2023.0344 of 27 June 2023). The ruling commission’s point of view can be summarised as follows:

• Since an outbound transfer of seat is by definition not a liquidation, the tax consequences attached to a liquidation apply to such operation only to the extent the BITC provides it expressly. It is the reason why it was necessary that Article 210, §1st, 4° of BITC expressly stipulates that the provisions setting out the corporate income tax regime applicable to the liquidated companies (i.e., Article 208 and 209 of the BITC) also apply to the outbound transfers of seat. As this provision is found under Title III – ‘corporate income tax’ of the BITC, one should conclude that recharacterisation of the transfer of seat as a liquidation only applies for determining the corporate income tax regime of the emigrant company and by no means may be used to determine the taxation regime of the shareholders.
  
  
• The intent of the Belgian lawmaker when introducing in the BITC the taxation in the hands of the shareholders of a deemed dividend upon a liquidation was, according to the ruling commission, to tax the transactions by which the shareholders get richer at the expense of the company. In case of an outbound transfer of seat under accounting and legal continuity in the country of destination, the shareholders receive nothing from the company as no sharing of the corporate assets occurs. There is no enrichment of the shareholders deriving from a correlative impoverishment of the emigrant company. Such operation is thus out of the intended scope of Article 18, 1st indent, 2°ter of BITC.
  
  
• Article 267 of the BITC 92 settles as the event triggering the obligation to retain a withholding tax the actual “attribution or payment of an income”. In the event of an outbound transfer of seat performed under continuity, the emigrant company by no means attributes or puts in payment an income to its shareholders. Retaining a withholding tax upon a transfer of seat would, therefore, not be legally sound under the Belgian ruling commission's view.

These contradictory points of view, both coming from the Belgian tax administration, leave the shareholders in the dark as to whether a withholding tax must be retained, except obviously in case where the concerned company benefits from an advance ruling confirming the absence of the obligation to retain a withholding tax upon its contemplated outbound transfer of seat.

For a long time, no Belgian Court ruling could be found on this matter. Only now has the Court of First Instance of Walloon Brabant issued a judgment tackling this issue on 3 February 2023.
In the case at hand, a Belgian private company (“BeCo”) had transferred its seat to France without maintaining any permanent establishment in Belgium and transformed itself into a real estate civil company (“Société Civile Immobilière” or “SCI” in French) shortly after. The transfer of seat had been performed under accounting and legal continuity in France. No (Belgian) withholding tax had been retained by BeCo.

Once noticing it, the Belgian tax authorities notified an ex officio assessment to BeCo, supporting that a withholding tax should have been retained. BeCo unsurprisingly supported otherwise, relying on the arguments that can be found in the advance rulings rendered by the ruling commission on this topic.

To settle the case, the Court fully embraced the arguments displayed by the ruling commission, as summarised above. The Court thus logically concluded that since the transfer of BeCo’s seat took place under accounting and legal continuity, there was no legal basis to support the obligation to retain a withholding tax on an alleged deemed dividend. It is worth noting that in its decision, the judge stressed more than the ruling commission did on the obligation to stick to a strict interpretation of the legal provisions: “in any event, if the intent of the lawmaker was clearly to include the transactions referred to in Article 210, § 1st, 4° of BITC in the scope of Article 18, 1st indent, 2°ter of BITC, it would have been less ambiguous to refer directly to Article 210 in this provision”, noted the judge.

The first ruling issued by a Belgian Court is thus in favour of the ruling commission’s stance and, by doing so, also in favour of the shareholders.

It remains to be seen what the Court of Appeal (if the tax authorities filed an appeal against the decision, which is very likely) will decide. Should the judge in appeal confirm the decision rendered in first instance, one hope that the central services of the Belgian tax administration will issue a circular letter confirming they align their stance with the case law. The Belgian tax administration previously did this already, for example when they issued a circular letter in 2017, informing they will follow, from then on, the stance of the Court of Appeal of Liège regarding the scope of application in time of the legal fiction of the deemed dividend in the framework of share redemption transactions.

Ultimately, the most likely scenario remains that the Belgian tax administration will file a petition to start a cassation proceeding against the judgment in appeal that would be in favour of the stance supporting the absence of withholding tax, provided that there are legal motives to do so. Most likely the taxpayers will thus have to wait a few more years to get the tax certainty they hope.