The European Court of Justice, on June 5, ruled in joined cases, X BV and TBG Limited, that the Netherlands could impose a dividend withholding tax on dividends distributed to a Netherlands Antilles parent company even though, under Dutch law, dividends paid to a Netherlands parent or another member state are exempt from withholding tax.
“European Union law must be interpreted as not precluding a tax measure of a Member State which restricts movements of capital between that Member State and its [own overseas countries and territories (OCT)] whilst pursuing the objective of combating tax avoidance in an effective and proportionate manner, ” the ECJ said.
The ECJ said it did not need to examine the question of “to what extent the rules of European Union law applicable to the relations between the European Union and OCTs apply between a Member State and its own OCT.”
Rather, the ECJ said that Council Decision 2001/822/EC of 27 November 2001 (OCT Decision) applies to the relationship between a member state and its OCT. Article 55(2) of the OTC Decision states that “nothing in [the OCT Decision] may be construed to prevent the adoption or enforcement of any measure aimed at preventing the avoidance … of taxes pursuant to the tax provisions of … domestic fiscal legislation in force.”
The Dutch withholding tax measure was designed to prevent excessive capital outflows toward the Netherlands Antilles and to counter the Netherlands Antilles’ appeal as a tax haven, the ECJ said. Thus, the withholding tax on dividends distributed to Netherlands Antilles parent companies falls under the tax carve-out clause of Article 55(2), the ECJ reasoned.
-For more analysis, see Deloitte
