By Jian-Cheng Ku & Tim Mulder, DLA Piper Nederland N.V., Amsterdam
The European Court of Justice has considered whether the Netherlands’ denial of a dividend withholding tax refund for dividends distributed to a German investment fund violates the EU free movement of capital principle. The case is Köln-Aktienfonds Deka (C-156/17), decided January 30.
Dutch tax treatment of fiscal investment enterprises
Dutch fiscal investment enterprises, called fiscale beleggingsinstellingen or FBIs, are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU directives and are subject to specific tax provisions.
A Dutch FBI pays a zero corporate income tax rate and can claim a refund of dividend withholding tax withheld on dividends received in the Netherlands. When the FBI distributes dividends to its shareholders, the FBI is, in principle, required to withhold Dutch dividend withholding tax.
Whether a Dutch entity qualifies as FBI depends upon a couple of conditions. First, the Dutch entity must distribute all income eligible for distribution to its shareholders or participants within eight months after the end of its financial year (the redistribution condition). The shareholders or participations in the Dutch entity must also comply with specific conditions since the FBI regime can only be used by investors for whom it is intended (the “shareholder condition”).
Dispute and preliminary questions
Köln-Aktienfonds Deka (DEKA) is an investment fund constituted under German law (Publikums- Sondervermögen) and established in Germany. DEKA, as a UCITS entity, is exempt from German corporate tax and has no legal personality.
DEKA received dividends from its Dutch investments, which withheld 15% Dutch dividend tax on these distributions. DEKA filed a request for a refund of the Dutch dividend withholding tax on the basis of the free movement of capital, arguing that it is comparable to a Dutch FBI.
DEKA’s request was rejected by the Dutch tax inspector since DEKA’s distributions are not subject to Dutch dividend withholding tax. DEKA objected and appealed and the Dutch lower court subsequently asked the Supreme Court of the Netherlands to resolve whether DEKA is comparable to a Dutch FBI.
The Netherlands Supreme Court confirmed that the legal form of DEKA is comparable to a Dutch FBI and is, in that regard, objectively comparable to an FBI established in the Netherlands.
In addition, the Netherlands Supreme Court stated that, whereas a Dutch FBI would have been entitled to the refund of the dividend tax, DEKA cannot derive any right to a refund of dividend tax either from Dutch domestic legislation or from the Netherland-Germany tax treaty.
The Netherlands Supreme Court raised the preliminary question to the ECJ of whether the denial of refund of Dutch dividend withholding tax to a non-resident UCITS is compatible with the European principle of free movement of capital.
ECJ judgment
The ECJ issued a judgment confirming that the denial of a Dutch dividend withholding tax refund to a non-resident UCITS partly violates the European principle of free movement of capital.
The shareholder conditions applicable to UCITS are not, in themselves, a violation of EU law insofar the condition applies to both resident and non-resident UCITS and thus make no distinctions.
However, a violation might arise if the requirements “de facto” disadvantage non-resident UCITS or if the tax authorities only require proof of compliance with the shareholder conditions from non-resident UCITS.
Regarding the redistribution condition, the ECJ decided that EU law is violated if the objective of the condition is taxing a UCITS shareholder’s profits and, according to the UCITS’ resident state, the profits of the UCITS are deemed to be distributed to and subject to tax at the shareholder level. In such a situation, the UCITS is comparable to a Dutch FBI.
Takeaways
With respect to DEKA, the Netherlands Supreme Court will use the judgment received from the ECJ to answer the preliminary questions raised by the lower court. The lower court should subsequently use these answers for its assessment of whether DEKA should have the right to receive a refund of the Dutch dividend withholding tax.
For other non-resident UCITS, it is important to assess if the refund of Dutch dividend withholding tax has been rejected based on the distribution and/or shareholders conditions and whether this might be a violation with the European free movement of capital.
Jian-Cheng Ku
Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations, and planning and design of transfer pricing policies.
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Jian-Cheng Ku
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