On 10 April 2014, the Court of Justice of the European Union (CJEU) rendered its decision in the case Emerging Markets Series of DFA Investment Trust Company (C-190/12). The Court concluded that free movement of capital precludes legislation such as applied in Poland under which a tax exemption is not extended to outbound dividends paid to an investment fund established in a non-EU Member State, provided there is an obligation of mutual administrative assistance between the two countries which enables the national tax authorities to verify information provided by the investment fund.
Polish source dividends paid to resident investment funds operating in accordance with the Polish law on investment funds were exempt from Polish corporation tax. A similar exemption applied to EU/EEA investment funds that satisfied certain conditions regarding their formation and business. Conversely, dividends paid to a third country investment fund, such as the US claimant fund in this case, were subject to a 19 percent final withholding tax (subject to a potential double tax treaty reduction).
The Polish Administrative Court sought a ruling from the Court of Justice of the EU on, inter alia, whether the different tax treatment provided under the Polish law for dividends paid to resident and non-resident investment funds was in breach of EU law.
The CJEU’s Decision
The CJEU considered that the Polish rules constituted a restriction of the free movement of capital and clarified under which conditions such restriction may be justified. The Court made a distinction between situations where a regulatory framework of mutual assistance exists between the EU Member State and the third country in question and where there is no such framework. In the former situation, the taxpayer should be given the opportunity to provide the evidence that they operate within a regulatory framework equivalent to that in the EU.
The Court noted that a framework of cooperation did exist between Poland and the US, in the form of the information exchange provisions in the bilateral tax convention as well as the OECD Multilateral Convention on Mutual Administrative Assistance. The Court held that it could not be ruled out a priori that the US investment fund could not provide such evidence. However it was for the referring court to decide whether those provisions were in fact capable of enabling the Polish tax authorities to verify that evidence.
The CJEU further rejected justification arguments based on coherence of the Polish tax system and the balanced allocation of taxing rights. The Polish Government’s request for a temporal limitation of the effect of the ruling was rejected.
We believe that this decision is a very positive sign for non-EU resident investment funds willing to file withholding tax reclaims in EU Member States.
We would advise non-EU resident investment funds to take next steps in this respect, especially when a bilateral tax convention or a Multilateral Convention on Mutual Administrative Assistance exists between the country of investment and the country of residence of the fund.
For further information, please do not hesitate to contact us.
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