Foreign investment funds have filed thousands of refund claims over the last years for Dutch dividend withholding tax they incurred on their Dutch investments, because they feel that the Dutch tax system is contrary to EU law. The Dutch Supreme Court requested in March 2017 a preliminary ruling from the Court of Justice of the European Union (“CJEU”) in this respect. On 30 January 2020 the CJEU rendered its decision in the Köln-Aktienfonds Deka (“KA Deka”) case.
KA Deka was an investment fund established in Germany. It was an Undertaking for Collective Investment in Transferable Securities (“UCITS”) within the meaning of Directives 85/611 and 2009/65, it was open-ended, it had no legal personality and it was exempt from tax on profits in Germany. It made investments on behalf of individuals. Its share price was listed on a stock exchange in Germany, but the shares were traded via a so-called ‘global stream system’ whereby the participant data has not been disclosed to the fund.
KA Deka held several portfolio investments (a maximum of 10% of the share capital of the relevant entities) in the Netherlands. KA Deka was not subject to Dutch dividend withholding tax on dividends that it distributed to its participants, but such tax at the rate of 15% was withheld on distributions made by the Dutch portfolio companies to KA Deka. According to German tax law rules, individuals who have invested in an investment fund are deemed to receive a theoretical minimum amount of dividends on which they were in principle taxed. KA Deka claimed based on EU law a refund of the Dutch withholding tax withheld in the years 2002 up to and including 2008.
2. Dutch legislation
Under Dutch tax law, dividend distributions to both resident and non-resident investment funds are in principle subject to a 15% Dutch dividend withholding tax. However, Dutch funds that elect to be treated as a fiscal investment institution (“FBI”) and meet the relevant requirements are subject to a specific tax regime based on which they are subject to 0% corporate income tax. FBIs are entitled to a tax refund of Dutch dividend withholding tax withheld on their income (until 2008) or a tax credit of this withholding tax (as from 2008) that is off-set against the dividend withholding tax they withhold when they further distribute profits to their shareholders.
To apply the FBI-regime several requirements need to be met. Key requirements are the so-called ‘redistribution’ requirement and the ‘shareholders’ requirement. The redistribution requirement entails that profits should be distributed within eight months after the end of the financial year. The shareholders requirement entails in short that no single individual may own an interest of 25% or more in the FBI and there may not be a single corporate shareholder who holds an interest of 45% or more in the FBI. This shareholders requirement is, however, only for regulated funds (the “less stringent shareholders requirement”). More strict shareholders requirements apply for non-regulated investment funds. Prior to 2007, a fund was only considered regulated if it was listed on the Amsterdam Stock Exchange. As from 2007 investment funds are considered regulated if they meet the requirements as set out in the Dutch Financial Supervision Act.
As a consequence of the application of the FBI-regime, the Dutch dividend withholding tax is effectively being refunded to Dutch FBIs that meet the relevant requirements. On the contrary, the Dutch dividend withholding tax on dividend distributions to foreign investment funds are an effective tax cost, as these funds are not entitled to a refund or to credit any tax upon distribution of profits to their participants.
KA Deka argued that this different treatment is contrary to the free movement of capital under EU law and requested a refund of the Dutch dividend withholding tax levied.
The Dutch tax authorities denied the refund request with the main argument that a foreign investment fund was not objectively comparable to a FBI, because it was not subject to Dutch dividend withholding tax. Secondly it was argued that KA Deka was also not comparable to a FBI as it did not meet the shareholders requirement (i.e. KA Deka could not provide evidence that the shareholders requirement was met due to the global stream system as referred to above) and the redistribution requirement (as only deemed distributions were made to the shareholders). This case came before the Dutch lower court.
In 2016 the Dutch lower court raised preliminary questions with the Dutch Supreme Court. After the CJEU verdict in the cases Miljoen, X and Société Générale (C-10/14, C-14/14 and C-17/14) the Dutch lower court was uncertain on whether the 2015 landmark case, whereby the Dutch Supreme Court ruled that funds that did not withholding Dutch dividend withholding tax cannot be comparable to a Dutch FBI (ECLI:NL:HR:2015:1777), was still in line with EU law and raised preliminary questions with the Dutch Supreme Court in this respect. The Dutch Supreme Court referred these questions to the CJEU. Following the CJEU verdict in the Fidelity Funds case (C-480/16), the Dutch Supreme Court withdrew the preliminary question on the withholding tax obligation. Therefore only the questions on the shareholders and the redistribution requirement remained.
4. CJEU decision
The CJEU notes that that the free movement of capital is applicable in the case at hand. The outcome of this procedure is therefore in principle also relevant to non-EU investment funds, unless the Dutch tax authorities can invoke the so-called ‘standstill-clause’. The Dutch Court of Appeal raised in another case, whereby a US fund (“US Case”) (ECLI:NL:GHSE:2019:7) requested a refund of Dutch dividend withholding tax, a preliminary question on the applicability of the standstill-clause. The Dutch Supreme Court stayed this case in anticipation of the CJEU.
The CJEU notes that the shareholders requirement is a requirement which is applicable to both residents and non-residents (i.e. a measure with no distinction). However, national legislation which applies without distinction to residents and non-residents may still constitute a restriction on the free movement of capital. It follows from CJEU case law that even a differentiation based on objective criteria may de facto be disadvantageous for cross-border situations. That is the case if conditions or obligations - which are, by their nature or in fact, specific to the national market, in such a way that only operators present on the national market are capable of complying with those conditions – are included in legislation. The CJEU mentioned that the Dutch Supreme Court should review whether this is the case. Should this not be the case (i.e. no discrimination), then the CJEU rules that the shareholders requirement is not contrary to EU law as member states are allowed to require certain information before they grant a tax advantage. The fact that a taxpayer (KA Deka) cannot provide information on its shareholders due to the chosen trade system (e.g. global stream system) is at the expense of the investment fund, unless such information is also not requested from FBIs (to be investigated by the Dutch Supreme Court).
The CJEU notes that the Dutch Supreme Court should investigate what the purpose of the redistribution requirement is. If the purpose lies principally in the taxation of profits made by a shareholder in an investment fund, a non-resident investment fund whose profits are not distributed but are deemed to have been distributed and are taxed as such in respect of the shareholder in that fund, must be regarded as being in an objectively comparable situation (i.e. in both cases, the level of taxation is transferred from the investment fund to the shareholders). In such case the redistribution requirement is contrary to EU law assuming the fund distributed or is deemed to have distributed income for tax purposes. It is not clear in what timeframe this (deemed) distribution should occur.
5. Preliminary observations
The CJEU has given guidance to the Dutch Supreme Court. It is however still up to the Dutch Supreme Court to investigate several items. Due to the somewhat open character of the CJEU answers (i.e. several items are to be investigated by the Dutch Supreme Court), it is to date uncertain whether non-resident investment funds that do not meet the shareholders and/or redistribution requirement can indeed be comparable to a Dutch FBI and invoke similar tax advantages based on EU law.
Based on parliamentary history on the distribution requirement it is expected that the Dutch Supreme Court will conclude that the (main) purpose of the redistribution requirement lies in taxing participants (i.e. profits should be realized (and taxed) at the level of the participants). That may then lead to the conclusion that a formal distribution within eight months cannot be required, but that a deemed distribution from the investment fund may also suffice. We should of course await the Dutch Supreme Court ruling in this respect.
From the CJEU ruling it follows that the Netherlands did not rely on overriding reasons in the public interest (that allow certain restrictions assuming they are appropriate and do not go beyond what is necessary). As noted above, the Dutch dividend withholding system changed in 2008 from a refund regime to a credit regime. In the US Case that covers more recent years, the argument was made that should the rule be discriminating, this is justified by the overriding reasons of public interest. It is therefore uncertain whether a positive outcome would also be positive for the legislation which is in force as from 2008.