On 23 October 2020, the Dutch Supreme Court ruled that a non-resident UCITS fund is eligible for a refund of Dutch dividend withholding tax with respect to its investments in the Netherlands if strict criteria are met.
With this decision, the Dutch Supreme Court explicitly acknowledges, as a result of the Court of Justice of the European Union (“CJEU”) ruling in the case Fidelity Funds (C-480/16), that its earlier decision on this topic1 was not in line with EU-law. The decision of the Dutch Supreme Court concerns the refund regime which was applicable until the financial year 2008, but may also be relevant for the subsequent rebate regime which is, as of 2008, still in place.
1. The Dutch system conflicts with EU law
The Dutch dividend withholding tax position of non-resident investment funds with respect to their investments in the Netherlands has been a hot topic over the last decade. Non-resident investment funds have filed thousands of refund claims for Dutch dividend withholding tax they incurred on their Dutch investments, because in their view the Dutch tax system conflicts with the EU free movement of capital.
For years until financial year 2008, a Netherlands investment institution that elects to be treated as a Netherlands resident non-taxed investment institution (fiscale beleggingsinstelling, “FBI”) was eligible for a refund of Dutch dividend withholding tax withheld provided that the FBI-requirements are met. Similar foreign investment funds, on the other hand, are not eligible for such refund of Dutch dividend withholding tax. Effectively, this often results in double taxation because the Dutch dividend withholding tax is typically not creditable at the level of the fund’s investors. In its decision of 23 October 2020, the Dutch Supreme Court rules that such different treatment of non-resident investment funds compare to Dutch FBIs conflicts with EU law, provided that strict criteria are met (see below).
2. Comparability of foreign investment funds to a Dutch FBI
In its decision of 10 July 2015, the Dutch Supreme Court ruled that a foreign investment fund is not comparable to a Dutch FBI, simply because a foreign investment fund is not subject to Dutch dividend withholding tax (contrary to a Dutch FBI). In its decision of 23 October 2020, the Dutch Supreme Court explicitly acknowledged that its earlier decision was not in line with EU law.
The Dutch Supreme Court rules in its verdict of 23 October 2020 that further assessment of the characteristics of the foreign investment fund is required to determine the foreign fund’s comparability to a Dutch FBI. The most important requirements that must be satisfied are the Shareholders Requirement and the Redistribution Requirement. The Shareholders Requirement entails in short that no single investor is allowed to exceed a certain capital interest in the fund. The Redistribution Requirement entails that the fund must distribute its profits within eight months after the end of its financial year. The Dutch Supreme Court ruled that a non-resident investment fund must (in practice) satisfy the Redistribution Requirement to be comparable to a Dutch FBI, even if the fund is not obliged to distribute profits based on its fund articles or domestic law in its jurisdiction of residence. The Dutch Supreme Court ruled that the fund’s (worldwide) profits should be calculated in accordance with Dutch standards. Please find more details and background to the Shareholders Requirement and the Redistribution Requirement in our tax alert of 3 February 2020 here.
Only if a foreign investment fund can demonstrate that it satisfies (among others) the Shareholders Requirement and the Redistribution Requirement, such foreign investment fund should be considered sufficiently comparable to a Dutch FBI and should be eligible for a refund of Dutch dividend withholding tax, provided that all the other requirements are also satisfied.
3. Calculation of the refund
The Dutch Supreme Court sets a threshold with respect to the amount of the refund, even though Dutch law does not contain a legal basis for such threshold. To determine the actual refund of Dutch dividend withholding tax, the Dutch Supreme Court requires a comparison between (1) the foreign fund’s actual Dutch dividend withholding tax due in a certain financial year and (2) the foreign fund’s hypothetical Dutch dividend withholding tax due in that same financial year, calculated as if the foreign fund – and the fund’s participants that are resident of the same jurisdiction as the fund – were tax resident of the Netherlands. Only insofar as the actual amount of Dutch dividend withholding tax in situation (1) exceeds the hypothetical amount that would have been due in situation (2), the foreign fund is eligible for a refund of Dutch dividend withholding tax.
4. Practical implications
We note that the decision of the Dutch Supreme Court concerns the refund regime that was in place until the financial year 2008. A similar case2 concerning the current rebate regime, which is in place as from 2008, is still pending before the Dutch Supreme Court. That case covers a non-EU fund and should also address the question whether the above only applies to EU funds or also to non-EU funds.
It is expected that in limited cases the Dutch dividend withholding tax due will exceed the threshold set by the Dutch Supreme Court. As mentioned, the decision of the Dutch Supreme Court concerns the refund regime in place until financial year 2008, for which - due to the statutory time limitation -no longer new refund claims can be filed for those years. It seems conceivable that the Dutch Supreme Court will decide along the same lines with respect to the current rebate regime, but we will have to await the verdict of the Dutch Supreme Court in the pending case. Dutch tax law does not limit the application of the rebate regime in time.
1. Dutch Supreme Court Decision of 10 July 2015, BNB 2015/203
2. Dutch Supreme Court case number 19/00104