A ruling by the Court of Appeal in Ghent has determined that the Belgian subscription tax levied on Luxembourg investment funds violates the Belgium-Luxembourg double taxation agreement. The decision, issued on Tuesday 5 November 2024, marks a significant development in a longstanding legal battle between the Belgian tax authorities and foreign investment funds, particularly Luxembourg funds, which have been subject to this tax since its introduction in 2004.

The ruling has not yet been published, but Paperjam obtained a copy of the judgement.

Double taxation concerns

In 2004, Belgium extended a pre-existing “annual tax” that had previously applied only to Belgian collective investment funds to include non-Belgian funds, such as those registered in Luxembourg. This tax is imposed based on the amount of capital held by Belgian investors in these funds. Luxembourg funds, which already pay a wealth tax and in the grand duchy, raised concerns about double taxation in Belgium. Patrick Smet, a tax partner at A&O Shearman in Brussels and a lawyer handling the case, explained to Paperjam that the new law resulted in Luxembourg funds being taxed twice on the same capital: once in Luxembourg and again in Belgium.

Legal proceedings and earlier rulings

The legal dispute over this annual tax dates back to 2006, when asset managers filed lawsuits arguing that the Belgian subscription tax violated the Belgium-Luxembourg double taxation agreement. The tax applies a rate of 0.0925% per year on assets held by individual Belgian investors, and 0.01% for institutional investors. In 2016, following a preliminary ruling by the Brussels Court of Appeal, the European Court of Justice ruled in Case C-48/15 that the annual subscription tax did not breach EU law. However, the issue remained unresolved in the context of international tax treaties, and the Brussels Court of Appeal ruled in favour of Luxembourg funds, leading to retroactive tax refunds.

The Belgian state responded by filing cassation appeals, which led to contradictory rulings in 2022.

Supreme Court rulings in 2022

In March 2022, the French-language Chamber of the Belgian Supreme Court ruled that the subscription tax was not considered a wealth tax for the purposes of the Belgium-Luxembourg tax treaty. This decision annulled the Brussels Court of Appeal’s ruling and referred the case to the Court of Appeal in Liège, where the refund claim was ultimately denied.

Meanwhile, in April 2022, the Dutch-language Chamber of the Belgian Supreme Court ruled that the subscription tax was indeed a wealth tax under the Belgium-Netherlands tax treaty and, therefore, breached the treaty. The Dutch funds were eligible for refunds, though the amount was limited due to the relatively small number of Belgian investors in Dutch funds.

The inconsistency between these rulings prompted further appeals, resulting in the case being referred to the Court of Appeal in Ghent, where the most recent decision was issued.

Ghent Court of Appeal’s ruling

On 5 November 2024, the Ghent Court of Appeal ruled that the subscription tax is a wealth tax and that it breaches the Belgium-Luxembourg tax treaty. The court’s reasoning echoed that of the Brussels Court of Appeal, which had previously found the tax incompatible with the treaty. The Ghent Court of Appeal further emphasised that it was indefensible to classify the subscription tax as a wealth tax for one treaty (Belgium-Dutch) but not for another (Belgium-Luxembourg).

Smet, representing the asset managers, noted: “We argued before the Ghent Court of Appeal that the annual tax is covered by the definition of tax in the Belgium-Luxembourg tax treaty and that therefore the annual tax breaches the treaty; it is irrelevant whether or not the list of covered taxes mentioned in the tax treaty is limitative.”

Despite this significant ruling, Smet cautioned that the Belgian government may still file another cassation appeal, which could lead to further judicial review by the Supreme Court on the new arguments raised in the Ghent Court of Appeal.

Financial impact

The impact of this ruling could be substantial, especially for Luxembourg investment funds. Belgian private investors are estimated to have around €70bn invested in Luxembourg Sicavs (investment companies with variable capital). If the ruling is upheld and the tax is refunded retroactively, the refunds could amount to a significant sum. This would have considerable financial implications for asset managers offering Luxembourg funds in Belgium.

Wider implications

The Ghent Court of Appeal’s ruling has broader implications beyond the subscription tax. Smet believes that Luxembourg Sicavs are entitled to treaty benefits, meaning they are eligible for a reduced withholding tax on Belgian dividends. However, the statute of limitations for refund claims is five years, which limits the potential recovery for Belgian investors.

Furthermore, the ruling has prompted the Belgian tax authorities to revise their stance on the securities tax levied on Luxembourg residents and companies. Previously, it was believed that Belgium had no taxation rights over the securities tax paid by Luxembourg account holders, as it was classified as a wealth tax under the Belgium-Luxembourg tax treaty. Following the restrictive interpretation of the treaties by the Supreme Court, the securities tax could now potentially be imposed on Luxembourg-based account holders in Belgium, further complicating the tax landscape.

Robeco

Paperjam has separately learned that the appellees in the case were three Luxembourg funds and two Dutch funds, all of which have parent affiliations with Rotterdam-headquartered Robeco, an asset management firm. A representative of Robeco told Paperjam that “for many years, Robeco has been litigating against this levy, as we believe that Belgium does not have the right to impose it on Luxembourg funds. This ruling is a next step in this litigation. We are pleased that a Belgian court has once again ruled in favour of our position. We await the further course of the proceedings.”

A spokesperson for the Belgian ministry of finance stated, “The subject is quiet complex, and the analysis of this very recent ruling will take a while,” and refrained from offering an official comment at this stage.

Next steps

While the Ghent Court of Appeal’s ruling marks a major victory for Luxembourg funds and asset managers, the legal battle is far from over. The Belgian state may seek further judicial clarification from the Supreme Court, potentially leading to more extensive interpretations of cross-border taxation under the Belgium-Luxembourg tax treaty. The outcome could have wide-reaching consequences for asset managers, investors and tax authorities in both countries.