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Belgian ruling that 95% dividend deduction applies to dividends received from Thai companies benefiting from tax holiday via intermediary companies in third states

Advance ruling no. 800.029 of 26 February 2008 of the Belgian Ruling Committee (Dienst Voorafgaande Beslissingen), on the application of the 95% dividend deduction, was recently published. Details are summarized below.

(a) Facts. The Belgian company would receive dividends from intermidiary companies established in third states, which would in turn receive the dividends from a group company established in Thailand, as well as from two other group companies to be incorporated in Thailand. The Thai companies export products, but also sell these products on the domestic market. In addition, the Thai companies benefit from a tax holiday.

(b) Legal background. The Belgian rules operate by including in taxable income all dividends received from a foreign source, and then deducting therefrom 95% of such dividends. However, the deduction is restricted to a deduction from the taxable income remaining after taking into account net operating losses. Art. 203(1)(1) of the Belgian Income Tax Code (ITC) states that the 95% dividend deduction will not be granted if the dividends are received from a company that is not subject to corporate income tax or a comparable tax, or is established in a country applying a considerably more favourable tax regime than that of Belgium.

In Thailand, the worldwide income derived by a company is taxed at 30%. However, subject to strict conditions and procedures, a tax holiday may be granted in respect of certain designated zones. The tax holiday includes the following benefits:

-   an exemption from corporate income tax for 8 years, followed by a 50% reduction for a subsequent 5 years;
-   an exemption from custom duties in respect of machines and tools used for business activities;
-  

an exemption from custom duties for 5 years, in respect of the importation of base material for the production of goods for export;

-  

a 75% reduction in custom duties for 5 years, for the importation of base material for the production of goods to be sold in Thailand; and

-   an additional deduction of 25% of the costs incurred on infrastructure related to the business activities.

(c) Issue. The issue was whether or not the 95% dividend deduction applies to the dividends received from intermediary companies, but which in fact originate from Thai companies benefiting from a tax holiday.

(d) Decision. The Belgian Ruling Committee observed that the Thai companies in principle meet the criteria for the application of the 95% dividend deduction because under the normal regime, they are subject to tax at the rate of 30%. Consequently, the normal tax regime in Thailand is not substantially more beneficial than the Belgian regime. The 95% dividend deduction is therefore applicable. This conclusion is not altered by the fact that, in order to foster investment in designated zones, and subject to strict conditions and procedures, Thai companies may benefit from a corporate income tax exemption for a period of 8 years, as well as a 50% exemption for a subsequent 5 years.

Furthermore, at the level of the intermediary company, the dividends received from the Thailand group company are not excluded from the 95% dividend deduction. This means that Art. 203(1)(5) ITC, which stipulates that dividends from an intermediary company are not deductible unless at least 90% of the dividends received by the intermediary would qualify for the exemption, is not applicable in the case at hand.

Finally, the Committee ruled that Art. 203(1)(3) ITC does not apply to the case at hand. That provision provides that the 95% dividend deduction does not apply if dividends are received from a company, to the extent that its income (other than dividends) has its source outside the state of its residence, if that income benefits from a special tax regime in the state where the dividends are sourced. The Committee considered that the provision only applied to countries which provide for a more favourable tax treatment (than that given by Belgium) for dividends from a foreign source. That was not the case here because the tax holiday applied to income from domestic as well as foreign sources.

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