On 10th November 2012, the Belgian Constitutional Court(Cour Constitutionelle/Grondwettelijk Hof) gave its decision in the case of Agfa Gevaert NV v. Belgische Staat, FOD Financiën, Administratie der Directe Belastingen en de Belgische Staat, Fod Financiën (No. 5259) on the constitutionality and compatibility with the 1994 protocol to the Belgium – Korea (Rep.) DTAA (1977) (as amended through 1994) and the 1993 protocol to the Belgium – Venezuela DTAA (1993) of the denial of a carry-forward of the non-deductible part of foreign dividends received from a Korean and Venezuelan subsidiary.
Court of Appeal Antwerp (Hof van Beroep Antwerpen) requested a preliminary ruling from the Belgian Constitutional Court on 22nd November 2011.
The Court first held that the denial of the carryforward possibility with respect to the non-deductible part of the 95% foreign dividend deduction for non EEA-countries is not incompatible with the equality principle of articles 10 and 11 of the Belgian Constitution. The Court held decisive that the EEA constitutes a special legal order which may justify that cross-border economic activities within the EEA are not always taxed in the same manner as economic activities between an EU/EEA Member State and third countries.
Furthermore, the Court considered that the legislature may take into consideration the budgetary consequences, when deciding whether or not to expand the carry-forward possibility with respect to non-deductible part of 95% foreign dividend deduction to third countries. In this context, the Court held that its decision will not be different if the budgetary aspect is not mentioned in the Parliamentary Documentation. Based on those arguments, the Court held that the different treatment is not incorrect or unreasonable.
With respect to the compatibility with articles 63 and 64 of the DTAA on the Functioning of the EU (TFEU) on the free movement of capital in respect of third countries, the Court held that the different treatment at issue does not result from the domestic provision at issue, but from the relevant EU provisions. The Court held that it is not competent to decide on such different treatment.
Finally, the Court also held that the laws concerning the ratification of the protocol to the tax treaty with Korea (Rep.) and the treaty with Venezuela are compatible with the equality principle of the Belgian Constitution. The Court based its decision on the fact that it held that a different treatment of dividends received from an EEA Member State and a third state is compatible. This means that the legislator also has the leeway to ratify a tax treaty which maintains such distinction.
In addition, the Court held that the equality principle neither requires that Belgium under each tax treaty signed guarantees the most beneficial outcome for the taxpayer under the laws existing at the time of signing nor that the same issues are regulated in the same manner under all tax treaties. Note: It has to be seen whether the different treatment at issue will also be EU compatible. In the first place, it must be noted that with respect to domestic provisions whose application does not depend on the size of the participation, both the freedom of establishment as well as the freedom of capital can be applicable.
If the freedom of capital would be applicable, the European Court of Justice (ECJ) has repeatedly held that the freedom of capital, generally, precludes all restrictions of the freedom of capital between EU Member States and third countries. For the determination whether a restriction nevertheless can be justified, it must be considered that capital flows with third countries take place in a different legal context than capital flows with EU Member States.
Finally, the ECJ has decided that movement of capital vis-à-vis third countries may, however, be justified for a reason, which would not constitute a valid justification for a restriction on capital movements between Member States. The different treatment in such cases can be based on the need to ensure the effectiveness of fiscal supervision or fiscal coherence.
