Netherlands foreign investment fund tax regime may breach EU law, advocate general says

By Jian-Cheng Ku & Rhys Bane, DLA Piper, Netherlands

On September 5, European Court of Justice Advocate General Pitruzzella delivered his opinion in the case of Köln-Aktienfonds Deka v. State Secretary of Finance, which involves the application of the Dutch fiscal investment institution (fiscale beleggingsinstelling) fund regime to foreign investment funds.

The case arose when the Dutch Supreme Court requested a preliminary ruling from the European Court of Justice on March 27, 2017, on the question whether or not the Dutch fund regime is in breach of the free movement of capital of Article 63 of the Treaty on the Functioning of the European Union (TFEU).

Non-resident investment funds

Köln-Aktienfonds Deka is a German fund (a collective investment vehicle) that is exempt from German corporate income tax as an investment fund (Sondervermögen). The fund is listed on the German stock exchange (via ‘global stream’).Köln-Aktienfonds Deka held shares in several Dutch companies which distributed dividends on which 15% Dutch dividend withholding tax was withheld.

Although Köln-Aktienfonds Deka was not subject to Dutch dividend withholding tax, it requested a refund of the Dutch dividend withholding tax withheld from the Dutch companies it held. This refund was denied by the Dutch tax authorities.

Dutch dividend withholding tax refunds

The fund objected and appealed the denial of the refund of Dutch dividend withholding tax by the Dutch tax authorities.

The lower court referred a request for a preliminary ruling to the Dutch Supreme Court. In turn, the Dutch Supreme Court requested a preliminary ruling from the European Court of Justice.

Köln-Aktienfonds Deka requested a refund on the basis of the free movement of capital of Article 63 TFEU, arguing that it is comparable to a Dutch fund with fiscal investment institution status.

On-distribution requirement

Advocate General Pitruzzella opined that a Member State such as the Netherlands may have certain shareholder requirements for the refund of dividend withholding tax. However, these requirements should apply to both resident as well as non-resident collective investment vehicles without discrimination.

Furthermore, AG Pitruzzella opined that a denial of a Dutch dividend withholding tax refund for not meeting the requirement that the profits must be on-distributed within 8 months after the end of the financial year is a breach of the free movement of capital where the fund makes it plausible but near-impossible for a non-resident investment fund to meet the requirements that apply to Dutch entities using fiscal investment institution regime and where the profits are deemed distributed or taxed at the shareholder or participant level as if the profits were distributed in the Member State of the fund’s residence for tax purposes (i.e., Germany).

If the European Court of Justice follows Advocate General Pitruzzella’s opinion, funds in a similar position as Köln-Aktienfonds Deka should receive a refund of Dutch dividend withholding tax insofar they can establish that they meet all the requirements of the Dutch fiscal investment institution regime except for the 8-month on-distribution requirement due because it is (near-) impossible to meet this requirement and the profits are deemed to be distributed or are included in taxation at the level of the shareholders or participants as if the profits had been distributed in their Member State of residence.