New Dutch AG conclusion on the EU dividend withholding tax cases

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Introduction

The Dutch dividend tax has been discussed in the Netherlands quite a lot recently. In addition to the prominent discussion on whether or not the dividend withholding tax should be abolished, there has been another debate going on for multiple years.

In this second discussion, the focus is on foreign investment funds that have filed thousands of refund claims for dividend tax they incurred on their Dutch investments. These types of claims have not only been filed in the Netherlands, but in most of the EU countries. Albeit that the dividend tax rules throughout the EU are different, the common topic of this discussion is that the investment funds argue that the local dividend tax rules are not compatible with EU law, and more specifically, not compatible with the free movement of capital (article 63 TFEU).

Following a recent ECJ ruling in a Danish case (“Fidelity Funds” – see below), the ECJ requested the Netherlands whether it would deem it necessary to maintain two pending Dutch cases. The Dutch Advocate General has issued a conclusion in relation to this request.

In this article, Intaxify will first provide a timeline on the discussion more in general (see paragraph 1). In paragraph 2, Intaxify will subsequently share a summary of the latest conclusion and its potential impact.

The conclusion of the AG can be found here (in Dutch).

EU Dividend Withholding Tax Cases of Foreign Investment Funds

1 - The story so far...

 

The Issue

Thousands of claims

Over ten years ago, the first dividend withholding tax refund requests were filed by foreign investment funds with the Dutch tax office. Many years, many refund requests and now also many local court and even ECJ proceedings later, the topic has still not been closed.

The core of the discussion is related to the fact that the Netherlands (similar to several other EU countries), has a special regime in place that allows for a tax neutral investment via an investment vehicle. The idea behind this is that investors may find it attractive to invest (collectively) via an investment vehicle, as they are for example able to spread risks. Yet, such “indirect” investment would not be beneficial if this would result in an additional layer of tax.

The Dutch FBI regime

To facilitate tax neutrality, the Netherlands implemented the so-called FBI regime. An FBI is a collective investment vehicle, taxed against 0% corporate income tax. This means that the investment income generated at the level of the FBI is effectively not subject to corporate income tax.

However, the income should also flow out of the FBI without triggering additional tax for the tax neutrality to be achieved. After all, dividends or other types of investment income generated by the FBI may have been subject to withholding taxes (“inbound WHT”), while dividends flowing out of the FBI are in principle also subject to Dutch dividend withholding tax (“outbound WHT”). In a direct investment (i.e. without investment fund), the investor would only be confronted with one layer of WHT and such investor would generally be able to credit this against its income tax or corporate tax liability.

Without any special measures, investing via the FBI thus would result in an extra layer of tax compared to a direct investment. To avoid this, a refund regime was in place (up to 2007), which was replaced by a rebate regime (as of 2008). Under the refund regime, the FBI could obtain a refund of the inbound WHT. Under the rebate regime, the FBI withholds tax on the distributions to its participants, but does not have to remit the outbound WHT to the tax office insofar as it can be offset with the inbound WHT. Due to the fact that formally, WHT has been withheld at the expense of the participants (the outbound WHT), they may be able to credit this or ask for a refund, if eligible (for example by exempt investors). To summarize, both the old regime and the new regime therefore effectively eliminate the inbound WHT.

Foreign investment funds 

The issue at hand stems from the fact that EU law stipulates that domestic and cross border situations should be treated equally. Up to 2007, foreign investment vehicles were however not able to benefit from the special FBI refund regime as this required (among others) that the entity was a Dutch resident while having a specific Dutch legal form. Also under the new regime (as of 2008), foreign investment vehicles are worse off as they are generally not required to withhold Dutch dividend tax on their distributions, so effectively they cannot benefit from the rebate regime. They may however be required to withhold local withholding tax (“foreign outbound WHT”), depending on their local legislation. This would result in the two layers of taxation for their Dutch investments as the inbound WHT is not eliminated.

Foreign investment funds therefore argue that they are in a worse position compared to their Dutch competitors when it comes to investing in the Netherlands. After all, Dutch investment funds may be able to facilitate a tax neutral investment, while foreign investment funds may not be able to eliminate the Dutch inbound WHT. This gave rise to foreign investment funds massively reclaiming Dutch dividend tax by taking the position that the Dutch tax framework is in this respect incompatible with EU law.

Claims based on EU Law

To successfully invoke one of the EU freedoms, it is important that a few parameters are met. In the first place, the claimant needs to have access to EU Law. Secondly, it needs to be objectively comparable with another EU person or entity. In the third place, it is important that the comparable claimant is disadvantaged compared to the person or entity it is comparable with, while there is no justification for such disadvantage.

Comparability

As mentioned, one of the requirements for successfully invoking article 63 TFEU is that the claimant (the foreign investment vehicle) is comparable with a local taxpayer (the Dutch FBI). The comparability criterion has extensively been discussed in Dutch literature and Dutch and EU case law. Because of the fact that the Dutch FBI regime is very comprehensive and has a lot of strict requirements, foreign investment vehicles may not always meet these exact requirements (for example because those requirements are not relevant at all under their own legislation). Most of the cases litigated in the Netherlands (already) failed on this particular requirement as the Dutch tax office (and court) require foreign funds to meet the FBI requirements at a very detailed level.

Dutch FBI vs. foreign investment funds

One of the Dutch FBI requirements for example is that the FBI needs to distribute its income to its participants within eight months after the year-end. The idea behind this is to avoid that FBI’s (subject to 0% CIT) are used as (indefinite) tax deferral vehicles. Foreign investment companies are not always subject to such re-distribution requirement. The Dutch tax office therefore often took the position that a foreign investment fund that is not subject to such requirement and/or does not de facto meet this requirement, cannot be considered comparable with a Dutch FBI.

Withholding tax obligation 

Another feature of FBI’s is that they are required to withhold Dutch dividend tax on their distributions. Foreign investment funds are generally not required to do this. This “difference” has also often been used by the Dutch tax office to conclude that foreign investment funds are not comparable with FBIs.

The Dutch Supreme Court confirmed this latter argument in July 2015 where a Luxembourg investment fund was denied a refund as the Supreme Court held that it was not comparable with a Dutch FBI as it was not required to withhold Dutch dividend tax on its re-distributions.

After this ruling by the highest court in the Netherlands, one could say that the case was closed. However, many investment funds did not give up and continued filing requests and litigating them. One of the drivers was to ultimately bring cases before the ECJ, which was not done with the Luxembourg fund case.

 

 

Are they com-parable?

Key case

Dutch Supreme Court Ruling of 10 July 2015, ECLI:NL:HR:2015:1777, “Luxembourg Fund”.

 

 

Further develop-ments

Key cases:

Dutch lower court ruling of 1 August 2016, ECLI:NL:RBZWB:2016:2828, “UK Fund”.

Dutch lower court ruling of 1 August 2016, ECLI:NL:RBZWB:2016:4829, “German Fund”.

Supreme Court preliminary questions to ECJ of 3 March 2017, ECLI:NL:HR:2017:346, “UK Fund”.

Supreme Court preliminary questions to ECJ of 3 March 2017, ECLI:NL:HR:2017:342, “German Fund”

ECJ ruling of 21 June 2018, C-480/16, “Fidelity Funds”.

 

 

 

 

 

ECJ ruling in “Miljoen, Société Générale and X”

Within two months after the Supreme Court ruling in the Luxembourg fund case, the ECJ rendered an important verdict on the compatibility of the Dutch dividend tax framework with EU law. In the three joint cases, the ECJ held that the Dutch dividend tax burden for non-resident investors participating in Dutch companies, cannot be higher than the Dutch tax burden for resident investors. In this respect, it is important to consider that the resident investors can generally credit the dividend tax with their income tax or corporate income tax. The ECJ therefore held that when making the comparison between the final tax burden of residents and non-residents, this aspect should be considered.

Albeit that the three joint cases concerned direct investments (i.e. without an intermediate investment vehicle), they are also relevant for the investment funds. Therefore, this ruling further fueled the discussion and criticism on the Dutch Supreme Court ruling in the Luxembourg fund case.

Two new cases – a German and UK fund

After the Supreme Court ruling in the Luxembourg case, two new cases were litigated, one considering a German fund and one considering a UK Fund. These cases were quite prominent as they can be considered “test-cases” for a large part of the thousands of requests currently pending. 

Preliminary questions 

The July 2015 Supreme Court ruling did not really result in investment funds withdrawing their requests, not did it stop them from filing new requests. Although the tax office initially rejected claims by referring to the Supreme Court ruling, it became clear that further clarification was needed. The Dutch lower court decided to raise preliminary questions with the Dutch Supreme Court (making these the first tax cases for which this was done).

The Supreme Court decided subsequently to refer the two cases to the ECJ.

ECJ ruling in “Fidelity Funds”

While the two Dutch cases are still pending before the ECJ, the ECJ rendered an important verdict in a Danish case (“Fidelity Funds”) in the meantime.

Comparability

In this ruling, the ECJ first assessed the comparability of two situations (i.e. between a Danish investment fund and a foreign investment fund) and clarified which elements are relevant for making such comparison.

The ECJ emphasized that to assess comparability, the overall aim, purpose and content of the Danish legislation should be considered. The Danish tax framework’s objective was to achieve a tax neutral indirect investment (i.e. one level of taxation, at the level of the investors (outbound WHT)). The Danish tax framework included an exemption for inbound WHT for qualifying Danish funds that met a certain minimum distribution requirement, while such exemption was not available for foreign investment funds.

Denmark held that the foreign fund did not meet this distribution requirement and could therefore not be considered comparable. The ECJ however held that such distribution requirement is not necessarily decisive in establishing comparability with foreign investment funds. Instead, the ECJ held that as soon as a Member State subjects both resident and non-residents to tax on income received from resident companies, the situation of those non-resident recipients becomes comparable with resident recipients of such income. In other words, the ECJ held that the foreign fund was objectively comparable with a Danish fund.

Justifications for discriminatory measures

In certain strict cases, discriminatory measures are still permitted under EU law. However, this is only the case when this is justified by overriding reasons in the public interest, while appropriate for ensuring the attainment of the objective that the measure pursues, and, only when the measure does not go beyond what is necessary to meet this objective.

The Danish (and Dutch) government considered that the restriction on the free movement of capital was justified by the need to preserve the coherence of the Danish tax system. The Danish (and Dutch) government considered furthermore that the restriction was justified by the need to ensure the balanced allocation of the power to impose taxes between the Member States.

The ECJ however disagreed and held that less restrictive measures could be imposed to achieve the tax neutrality goal of the Danish measure, by allowing foreign investment funds the same exemption on inbound income, provided that they would then also remit the same amount of tax on outbound income as a Danish investment fund would be required to remit. In other words, the ECJ concluded that the measure cannot be justified and therefore remains prohibited under EU law, as less restrictive alternatives could be pursued to achieve the same goal.

EU Dividend Withholding Tax Cases of Foreign Investment Funds

2 - ... and the most recent AG Conclusion

The latest update

Following the Fidelity Funds ruling, the ECJ requested the Netherlands whether the preliminary questions raised for the German and UK fund were still relevant. At the end of September 2018, the Dutch AG issued his conclusion following the new development.

The AG’s recommendation

The AG’s view on this discussion is in line with previous recommendations he made – the Dutch system is not incompatible with EU law and therefore no refund is required.

The AG is rather strict in his opinion, he even considers that the ECJ’s ruling in the Fidelity Funds case is wrong. Nonetheless, he feels that it may be worthwhile to convince the ECJ that there is a difference between the Dutch tax framework and the Danish one. More specifically, he feels that the Dutch framework is not discriminatory, yet that the potential disadvantage is either caused by a disparity, or due to the fact that the source states impose withholding taxes on outbound income while not allowing for a credit of the inbound withholding taxes.

The AG furthermore feels that the less restrictive alternatives proposed in the Fidelity Funds case – whereby foreign funds should be allowed to (voluntary) opt for the same tax treatment as resident funds – would not really bring any benefits to foreign investment funds. Moreover, he considers that this may result in a lot of practical issues.

Despite the fact that is seems as if the AG in any case considers it a clear cut case (no refund of Dutch dividend tax), he does recommend to the Supreme Court to consider asking the ECJ to clarify that the Dutch tax framework is different than the Danish one. 

Intaxify’s view

What about exempt participants?

Although a lot has been said on this topic, there are (at least) two aspects that have not been (sufficiently) covered so far. In the first place, the position of exempt participants has not been considered much. Perhaps because this was not relevant in the cases litigated so far. However, exempt pension funds commonly invest via investment vehicles so this is definitely an element with practical importance.

The AG’s logic that foreign investment funds would not really improve their position by opting for the same tax treatment as resident funds, does not hold for investment funds with exempt participants. After all, in the Netherlands, such situation (exempt participant – FBI fund – investment) would effectively neither result in inbound or outbound WHT. Exempt participants investing via an FBI can therefore achieve full tax neutrality, and foreign funds “opting” for the same tax treatment as an FBI should then also be able to achieve this (while currently, the Dutch inbound WHT remains applicable).

The standstill-clause

In the second place, most of the cases that are litigated in an advanced stage concerned claims of EU based funds. However, the EU free movement of capital also extends to third countries. This may add an additional layer to the discussion, as the so-called standstill clause may allow for restrictive Dutch tax measures towards non-EU claimants. This clause does not apply in intra-EU situations. Whether or not the standstill-clause applies to the Dutch tax framework has not been covered yet by the ECJ.

In this respect, it may be worthwhile to mention that currently, also at least one important case on behalf of a US investment vehicle is litigated (the lower court verdict can be found here). In this specific case, both the discussion of exempt participants as well as the standstill discussion are covered, meaning that this case has certain additional elements to it that may not be covered in the German fund case currently pending before the ECJ.

Next steps?

Whatever one may find on the correctness of the Dutch Supreme Court verdict of 2015, the more recent Fidelity Funds verdict of the ECJ or the AG’s views on this recent development, Intaxify in any case feels that it would be good if there would be further clarity on the compatibility of the Dutch tax framework with EU law. Intaxify therefore welcomes the idea to maintain the Dutch preliminary questions before the ECJ.

In this respect, Intaxify observes that the outcome of the German case currently pending before the ECJ may provide clarify for similar German investment funds and potentially other foreign funds. Yet, depending on the outcome – especially if negative – it is very well possible that other investment funds will keep arguing that “their case is different” and therefore not impacted by any negative Supreme Court of even ECJ verdict.  After all, this same position was taken when the Dutch Supreme Court rendered a negative verdict for the investment funds. Although some cases were dropped, the majority of claimants kept filing new claims and maintained the ones already filed. On the other hand, the Dutch tax office may keep denying claims of non-EU funds by invoking the standstill-clause. This means that also in case of a positive outcome for the German investment fund, the case may not be closed as yet for all claimants.

In other words, to be continued…

More info?

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