What for decades proved a disadvantage for the Luxembourg fund industry is now quietly becoming an advantage: Luxembourg investment companies can invoke the double taxation treaty with Belgium, among others. Among other things, this allows them to claim a refund of Belgian withholding tax on Belgian dividends, as well as a refund of Belgian tax on UCIs.
Initially, the strength of the Belgian Sicav was that it could invoke the double taxation treaty because of its theoretical subjection to Belgian corporate income tax, while the Luxembourg Sicav could not. This has recently changed based on case law.
This was recently reaffirmed in four judgments of the Brussels Court of Appeal dated 25 April 2023. This is a major victory in favour of Luxembourg SICAVs, both passported funds and alternative funds without a passport, including Sicav-SIFes, Sicav-RAIFs, Sicar, etc.
A Luxembourg SICAV is a Luxembourg resident fund entitled to invoke the DTC between Belgium and Luxembourg. To invoke the DTC, one must be a tax resident of one of the two countries, i.e. subject to taxes of that country. The fact that a Luxembourg SICAV is also tax resident in Luxembourg, due to its (limited) subjection to Luxembourg income taxes (withholding tax), was implicitly confirmed in the judgment of the Dutch-speaking Chamber of the Court of Cassation on 22 April 2022. It was also recently explicitly emphasised in the four judgments of the Brussels Court of Appeal on 25 April 2023.
Right to reduce withholding tax in the source state
As a result, on the basis of the double taxation treaty, Luxembourg investment companies can also request the application of reduced withholding tax on dividends of Belgian origin, which they receive or have previously received. If a Belgian withholding tax of 30 percent was withheld, it can be reduced to 15 per cent under the treaty. This difference can be reclaimed for the last five years. This means that reclaims of Belgian withholding tax that are still imposed this calendar year 2023 can in principle go back up to and including calendar year 2019.
Recovery of Belgian tax on UCIs
The Belgian-Luxembourg treaty also provides for a double wealth tax avoidance scheme. In practice, Luxembourg SICAVs pay Belgian tax on UCIs to the extent that their shares are traded in Belgium. This tax is calculated on the total net amounts outstanding in Belgium on 31 December of the previous year.
The French-speaking chamber of the Court of Cassation held on 25 March 2022 that the UCI tax does not constitute a wealth tax. A month later, on 22 April 2022, the Dutch-speaking chamber of the Court of Cassation confirmed that this UCI tax does constitute a wealth tax. But that a flawed wording of the Belgian-Luxembourg double taxation treaty prevents that treaty from being effectively invoked against this tax.
The Brussels Court of Appeal, in its four recent judgments of 25 April 2023, made firewood of these contentions of the Court of Cassation. The Court also clearly refuted the arguments of the French chamber of the Court of Cassation that this was not a wealth tax.
The Court of Appeal thus concludes that the Belgium-Luxembourg double taxation convention can be applied to this UC tax and that Luxembourg has sole jurisdiction to levy this wealth tax. Belgium should grant an exemption, which it did not.
Luxembourg SICAVs that have paid this Belgian UCI tax can still reclaim it. However, the period for doing so is remarkably shorter than that for recovering withholding tax, namely two years from payment of the tax.
Specific controls
Many Luxembourg funds, whether commercialised under a branch-23 investment insurance policy or not, have been questioned this year by the Belgian tax authorities on the application of this Belgian UCI tax. Perhaps the tax authorities are acting a bit too hastily based on the two 2022 cassation judgments.
The recent rulings of the Court of Appeal are very welcome in that respect and again give more hope for a positive outcome for the fund. Luxembourg funds can thus provide solid defence against the payment of the Belgian UCI tax.
Provision in cassation?
The deadline to file cassation against the 25 April 2023 judgments only expires by early December 2023. So far, it is not yet known whether the Belgian State will appeal in cassation. In any case, Luxembourg Sicavs are back in ‘pole position’ to finally get their shot at home.
Dirk Coveliers is a lawyer and Investment Officer knowledge expert.