The year 2014 has shown new developments in withholding tax (WHT) reclaim procedures in The Netherlands. Further to our e-alert 2014-04 dated 16 July 2014, the Dutch Court of Appeal confirmed (in line with an earlier Supreme Court ruling) that foreign investment funds should not be compared to Dutch tax exempt entities, but to Dutch fiscal investment institutions (FIIs). The present E-Alert aims at describing the discriminatory tax treatment under the Dutch remittance reduction rule that is applicable to Dutch FIIs and highlight the time limitation period that, due to the comparison with a Dutch FII, may be applicable when filing the WHT reclaim. This E-Alert does not deal with the old-Dutch FII regime (financial years that have started before 1 January 2008).
The Dutch remittance reduction rule
Dutch FIIs are, like non-resident investment funds, subject to a (non-refundable) 15% WHT when they receive dividends from a Dutch company. According to Dutch law, an FII can however claim the benefit of the so called “remittance reduction” once it distributes its own profit to its shareholders. The remittance reduction comes down to the possibility to deduct WHT (suffered on Dutch and foreign dividend/interest income received) from the WHT that an FII needs to withhold and pay to the Dutch Tax Authorities (DTA) once it distributes its own profit to its investors. As a result, an FII frequently does not pay WHT to the DTA upon its profit distributions. Its investors are nevertheless entitled to a credit, and in case of insufficient tax liability, to a refund of such unpaid WHT.
However, if the Dutch investors invest in a Dutch company via a non-resident investment fund (e.g., a Luxembourg SICAV), they are not entitled to benefit from the remittance reduction mechanism which, in our view, results in a discriminatory tax treatment.
The below graph illustrates the Dutch system generally:
Time limitation period
The benefit of the remittance reduction is to be claimed via a dividend tax return. A dividend tax return needs to be filed within 1 month after profit has been put at the disposal of the investors. Please note that Dutch tax law has its own specific rules for determining when and to what amount profit has been distributed. If a Dutch FII files the dividend tax return late (e.g. after 6 weeks, 10 months or 2 years), the consequences will in principle be limited to a (small) fine.
As, under Dutch law, no explicit time limitation period applies to non-resident investment funds, and taking into account the fact that Dutch FIIs can effectively file the dividend tax return outside the 1 month period without jeopardizing the benefit of the remittance reduction, means that there is a strong argument for taking the position that also valid tax reclaims could be filed outside that 1 month period.
Further, there are no clear procedural rules – let alone time limits – for non-resident investment funds to claim a benefit that is similar to the remittance reduction. There are also no other (obvious) wider rules that non-resident investment funds could invoke in this respect. In theory, this means that there may be no time limit. Furthermore it is relevant that any excess WHT suffered (WHT for which no remittance reduction has been claimed) is rolled over indefinitely for Dutch FIIs.
Based on the above, we believe that there are arguments to sustain that no time limitation period shall apply to non-resident investment funds when filing WHT reclaims in the Netherlands. We therefore advise investment funds that suffered WHT in The Netherlands to apply for a refund of WHT as of 1 January 2008 (i.e., moment when the remittance reduction system was introduced into Dutch law).
For further information, please do not hesitate to contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.