Luxembourg SICAV not entitled to dividend WHT refund
The present alert aims at providing an update on recent developments of the jurisprudence in the Netherlands regarding the entitlement of a SICAV to receive WHT reimbursements.
15% withholding tax (“WHT”) was levied on dividends distributed to a Luxembourg SICAV by a Dutch company. Due to its exemption from corporate income tax in Luxembourg, the SICAV was not able to credit the Dutch WHT levied, against its corporate income tax liability.
Based on the comparability of the Luxembourg SICAV to the Dutch fiscal investment institution (“FBI”), exemption from WHT was requested. The Luxembourg fund considered itself to be comparable to an FBI. An FBI is effectively tax exempt in the Netherlands and entitled to a credit/refund of the dividend withholding tax incurred on its investments when dividends are paid out to investors.
The effect of this is, that the FBI is able to pass on the underlying withholding tax credit to the participant of the FBI, which effectively means that investing through an FBI does not result in an additional layer of (withholding) tax or losing the ability to utilize the underlying withholding tax as a tax credit against the corporate or individual income tax liability of the investor. Based on this, the SICAV argued that it was also entitled to a credit/refund of the Dutch dividend withholding tax incurred on its investments in Dutch shares. Furthermore, the SICAV based its argumentation on the rights resulting from the Treaty on the Functioning of the European Union, since the difference in treatment should be seen as an infringement to the free movement of capital.
The Dutch Supreme Court ruling
Confirming the outcome of the previous instance, the Supreme Court declared in its ruling of 10 July 2015 the Luxembourg SICAV not being comparable to the Dutch FBI.
The Supreme Court argued that a Dutch dividend withholding tax is a final tax for a non-resident individual investing in Dutch shares. If a Luxembourg investment fund would be entitled to a refund of the Dutch withholding tax incurred on its Dutch investments, the investor in the Luxembourg fund would pay less tax than in case he would have invested directly in Dutch shares. The Dutch Supreme Court ruled that to ensure a consistent taxation of investors through an FBI, they need to be subject to a comparable tax treatment as they would have been, had they invested directly in the Dutch company. Non-resident individuals investing through an FBI face final 15% Dutch WHT when receiving dividends distributed by the FBI. According to the court ruling this principle should also apply for nonresident individuals investing in a Dutch corporation via a Luxembourg SICAV.
Based on the above, the court ruling is likely to impact non-resident investment institutions and prevent the enforcement of Dutch WHT refunds. In the light of previous milestone decisions, the underlying ruling could be seen sheer incomprehensible. Given the complexity of the case, it seems unclear why the Supreme Court has not taken the opportunity to refer the question to the Court of Justice of the European Union (CJEU).
The decision of the Dutch Supreme Court will likely result in the rejection of refunds by the Dutch Tax Authorities. Given the unilateral argumentation of the decision, a formal complaint to the EU Commission should in principle be conceivable. Based on the above, the chances of success for future tax reclaims should be rather low. Following a minimalistic approach, current reclaims might be maintained in the in expectation for a positive outcome of a potential infringement procedure with the EU Commission.
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