At the beginning of July, the Dutch Court of Appeal (“the Court”) issued a ruling on the EU compatibility of Dutch dividend withholding tax (hereafter WHT) levied on outbound dividend payments made to a Luxembourg SICAV (“the Claimant”).
The tax reclaim filed by the Claimant was based on two main arguments. Firstly, the Luxembourg SICAV should be compared to Dutch entities that are exempt from Dutch corporate income tax (e.g., pension funds/charities). In this respect, the Claimant put forward that a Luxembourg SICAV (i.e., exempt from Luxembourg corporate income tax) should benefit from the same tax treatment as tax exempt Dutch resident entities which are entitled for a refund of Dutch WHT.
Secondly, the Claimant invoked that Dutch investment funds are de facto exempt from Dutch dividend tax upon profit distribution to their investors which results in a higher tax burden in the situation where a Dutch investor invests in Dutch shares via a Luxembourg SICAV versus a Dutch investment institution. The Claimant took the view that this difference in treatment constitutes a restriction on the free movement of capital.
First of all, the Court considered that the old and the new tax regimes (applicable as of 1 January 2008) are in essence the same. As a consequence, the below arguments put forward by the Court apply to both tax regimes.
Secondly, the Court considered that a Luxembourg SICAV is not comparable to a Dutch tax exempt entity.
The third point addressed by the Court was the comparability between Dutch investment institutions and non-resident UCITS funds (i.e., a Luxembourg UCITS SICAV in the case under review). In this respect, the Court considered that the mere fact that the non-resident investment fund is a UCITS is insufficient to consider that it is comparable to a Dutch investment institution. It must rather be determined whether the non-resident investment fund is materially comparable to a Dutch investment institution by, amongst other, verifying whether the first meets the so-called distribution requirement (and the profit must be equally spread over the shares).
Finally, when carrying out the comparability test to the case under review, the Court concluded that the mere fact that the non-resident investment fund has issued different share classes (i.e., distributing and accumulating) on which – depending on the share class – no dividend is actually distributed, means that the Luxembourg SICAV cannot be comparable to a Dutch investment institution. This applies, even if during the respective year, a loss was suffered by the Luxembourg SICAV (whereas a Dutch investment institution, in a comparable situation, does not have to distribute a dividend if it has suffered a loss).
The first argument (i.e., comparability with Dutch corporate income tax exempt entities) seems to have no realistic chances of being successfully invoked anymore. Indeed, it is (very) unlikely that it will be referred to the Court of Justice of the European Union (CJEU) by the Dutch Supreme Court or the European Commission.
In the present ruling, the Court seems to suggest that, in order to be considered as comparable to a Dutch investment institution, a non-resident investment fund should fulfill the conditions to qualify as a Dutch investment institution (e.g., it must inter alia distribute 100% of its profits within 8 months after the respective financial year). An appeal to the Dutch Supreme Court is expected. It will have to be seen whether the Dutch Supreme Court will give further guidance under which conditions a non-resident investment fund is deemed comparable to Dutch investment institutions.
In this respect, it should be clarified whether it is sufficient that the non-resident investment fund distributes all its profits to be considered as comparable to a Dutch investment institution (or should other conditions be satisfied). In addition, it will also be interesting to check whether the Dutch Supreme Court will maintain the position that a non-resident investment fund being in a loss position should also distribute a dividend within 8 months after the loss has arisen.
As we can see it, a lot of uncertainty remains if and under which conditions non-resident investment funds will be able to obtain WHT reimbursements in the Netherlands. We hope that this will be clarified within the framework of a ruling of the Dutch Supreme Court or the CJEU.
In the meantime, we advise our clients to keep the claims alive by, in case of rejection of the claim, filing objection letters without detailed analysis. This especially applies to distributing investment funds which are more likely to qualify as a Dutch investment institution.
For further information, please do not hesitate to contact us.
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