Tax Treaty Case Law around the Globe 2020

S. 309Chapter 26 Belgium: Belgian Foreign Tax Credit in Tax Schemes with Italian Bonds

Anne de Vijver

26.1. Introduction

The decision of the Belgian Supreme Court concerns a well-known aggressive tax planning scheme involving Italian bonds. Under this scheme, a Belgian company bought Italian bonds shortly before the interest due date. After the interest payment, the company again sold the bonds. The operation as such was not profitable, since the interest income was offset with the (tax-deductible) loss upon the sale of the bond. However, article 23 of the (old) Belgium-Italy Income Tax Treaty (1970) provided that the holder of the bond was entitled to a foreign tax credit (FTC) of 15% of the income included in the taxable basis of the company (i.e. the interest after deduction of the 6.25% Italian withholding tax). Consequently, the FTC made the operation profitable.

Meanwhile, treaty and domestic rules have ended the advantages of this scheme. The new Belgium-Italy Income Tax Treaty (1983) now refers to the domestic FTC conditions, and under domestic law, the FTC is limited on a pro rata basis, linked with the duration of the ownership of the bond. Nevertheless, the decision of the Supreme...