On 3 October 2012, the Court of First Instance Bruges (Rechtbank van Eerste Aanleg Brugge) gave its decision in X NV v. the Belgian Tax Administration on the treatment of the non-deductible part of the foreign dividend deduction. Details of the case are summarized below.

(a) Facts. The Taxpayer was a Belgian company which could not fully use the 95% foreign dividend deduction. Therefore, the Taxpayer claimed a carry-forward of the non-used part of the deduction and included it in the losses to be carried forward.

Based on a 2009 Circular, the tax administration refused to include the unused part of the 95% dividend deduction in the losses to be carried forward.

(b) Legal background. Article 205 of the Income Tax Act provides that dividends received by resident companies or permanent establishments of non-resident companies from a participation in another resident company are first included in the taxable income. Then 95% of the dividends is deducted from the taxable income, i.e. the amount of the gross profits (excluding exempt income) less tax-allowed deductions and certain non-deductible costs. This calculation method means that no deduction is possible when the profits are insufficient or a company is in a loss position. Dividends that cannot be so deducted can be carried forward indefinitely.

In a Circular of 2009 (Ci.RH.421/597.150.), the Belgian tax administration clarified that the deduction for the unused part of the 95% dividend deduction can be carried forward indefinitely, but cannot be included in the losses to be carried forward.

(c) Decision. The Court rejected the restriction of the Circular and held that the unused part of the 95% dividend deduction can be included in the losses to be carried forward.

The Court held decisive that the unused part of the 95%-dividend deduction bears the same characteristics as the loss carry forward deduction.

Note. The decision is brought about by the decision of the European court of Justice (ECJ) in Cobelfret (Case C-138/07), in which the ECJ held that the 95% dividend deduction is incompatible with article 4(1) of Parent-Subsidiary Directive (90/435) as it imposes an additional requirement not envisaged by that Directive. This decision was based on the fact that in the case of losses, the 95% dividend deduction has to be compensated with the losses, and the unused part of the deduction could not be carried forward. As a result, various circulars were published providing for an unlimited carry-forward of the unused part of the deduction.