On April 9th, 2021, the Dutch Supreme Court decided that foreign investment funds are not entitled to refund of Dutch dividend withholding tax based on the free movement of capital (art 63 EU Treaty).
Free movement of capital
Article 63 of the EU treaty says that all restrictions on the free movement of capital between EU member states and between an EU member state and a non-member state are prohibited. In certain situations, taxes may qualify as restrictions on the free movement of capital. The question then arises whether or not they are justified.
Not being eligible for a refund of Dutch dividend withholding tax under domestic tax law or the tax treaty, a US regulated investment company (“RIC”) had submitted requests for refund of Dutch dividend withholding tax paid in the year 2007 through 2011 under the free movement of capital. The Dutch district tax court had rejected the claims. Upon appeal, the Dutch court of appeals referred the case to the Dutch Supreme Court for guidance as to whether not refunding the Dutch dividend withholding tax violates the free movement of capital. The Supreme Court has now ruled that it does not, and that the US RIC is not entitled to refund of Dutch dividend withholding tax.
Relevant provisions of Dutch dividend withholding tax
Until 2008, qualifying Dutch investment funds were eligible for refund of Dutch dividend withholding tax, while foreign investment funds were not. The tax discrimination was perceived to be potential violation of the free movement of capital. It was therefore decided to replace the refund provision for investment funds with a so called remittance reduction (“afdrachtvermindering”) in 2008. Under the remittance reduction, Dutch investment funds were no longer entitled to a refund of Dutch dividend withholding tax on dividends received. Instead, they became entitled to a reduction of the remittance of their withholding of Dutch dividend tax on dividends they distributed to qualifying investors. The net bottom line result for many investors in the fund is the same. As foreign investment funds are not subject to Dutch dividend withholding tax on the distributions to their investors, the remittance reduction cannot be effectuated.
The Supreme Court has ruled that the remittance reduction does not discriminate between Dutch or foreign investment funds. In both situations there is no entitlement to refund. The difference in tax treatment upon distribution by the investment fund is caused by the fact that Dutch investment funds are subject to Dutch dividend withholding tax while foreign investment funds are not. If foreign investment funds are not eligible for a relief mechanism like the remittance reduction in their residence country this is the result of the application of the tax regime of the residence country of the foreign investment fund. Adverse effects from the parallel application of tax regimes by two different tax jurisdictions (also known in ECJ case law as a “disparity”) do not constitute a tax discrimination prohibited by the free movement of capital.
Pre 2008 claim years
In a recent decision in a comparable case, the Supreme Court ruled that the pre 2008 refund mechanism does violate the free movement of capital and could result in refund eligibility for foreign investment funds for Dutch dividend withholding tax suffered before 2008. However, the discrimination requires objective comparability between Dutch and foreign investment funds. The Supreme Court has set the bar for objective comparability extremely high. It is unlikely that many foreign investment funds will meet the conditions (provided that they timely filed protective claims in the first place, since the state of limitations has long expired for pre 2008 claim years).
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