The Court of Justice of the European Communities has the power to settle disputes between Member States, EU institutions, businesses and individuals. If the tribunal confirms that a State has breached its obligations, it is obliged to bring the breach to an end without delay. When withholding taxes cannot be deducted from the tax payable by a non-resident (as in the case of offshore funds), they become a final charge. EU funds are generally treated differently from offshore funds in the home state of the dividend-paying company. EU legislation and regulations have had an increasing impact on the EU`s tax framework. An increasing number of natural and legal persons in the EU are using EU law to challenge the legal validity of EU Member States` tax rules. The outcome of these challenges does not stop at the EU border, but also extends to companies established outside the EU. Based on recent case law of the Court of Justice of the European Union, companies domiciled outside the EU, including (offshore) investment funds investing in EU securities, can claim withholding tax on dividend income from EU securities. If successfully pursued, it could lead to tax refunds.
Although the concept of abuse of EU law is not new, the Court considers that the T-Danmark cases can be regarded as landmark cases, further clarifying what constitutes an abuse of EU law. As the Court of Justice of the European Union had not yet delivered its judgment in T-Danmark before the distributions were made in the present case, the General Court held that, at the time of the distributions, the withholding tax had reasonably concluded that it was not required to withhold tax on dividends. Even if this conclusion was wrong. The court ruled that the underpayment of withholding tax on dividends was unintentional and annulled the Dutch tax authorities` decision to impose penalties for underpayment of dividend tax. There have been a number of landmark judgments of the European Court of Justice that have paved the way for further recovery of withholding tax that goes beyond contractual claims. The premiss of these cases was that foreign funds should not be taxed less favourably than comparable local funds, as this would be contrary to the principles of free movement of capital set out in Article 63 of the Treaty on the Functioning of the European Union. The cases initially concerned different EU Member States, where it was decided that a difference in treatment between comparable mutual funds from EU Member States (and third countries) would constitute unjustified discrimination. For example, given that French investment funds do not pay withholding tax on dividends from France, it is necessary to examine whether the taxation of the same dividends in the hands of comparable foreign investment funds is discriminatory. The analysis is based on precedents established in these various court cases. Nevertheless, it is important to file claims to protect the investor`s right to a withholding tax refund, as these claims are time-barred and could potentially lapse. In this case, the CJEU found that the discrimination between the tax treatment of resident and non-resident UCIs is clear, since the former is exempt from corporate tax (i.e.
not subject to WHT), while the latter is subject to corporate tax (via WHT, it is a final tax paid in Portugal). The General Court therefore concluded that this unfavourable tax treatment could discourage non-resident UCIs from investing in Portugal. The withholding tax office and the tax inspector can always appeal the court`s decision. The CJEU`s decision is largely in line with its previous case law on the taxation of dividends abroad. In view of the finding that the contested measure infringed EU law, the CJEU decided not to answer the referring court`s question on the proportionality and effectiveness of the German legislation. It would have been particularly interesting to see whether the Court would have followed the Advocate General`s reasoning on this issue, given that the Prosecutor General stated that Member States should not take a formalistic approach, but should rather accept other evidence presented by taxpayers. These cases have given rise to an increasing number of actions by funds for the recovery of discriminatory withholding taxes. Although most claims were mainly taken into account only by EU-based funds, the Dutch tax authorities received a notice at the end of last year agreeing to reimburse the withholding tax of a non-EU resident portfolio investor. 4. In May 2022, the Dutch District Court of West Brabant ruled that the interposition of a Luxembourg holding company by a non-European private equity fund to hold a 15.3% stake in a Dutch company constituted an abuse of EU law. The court based its decision on the indicators of abuse as observed in the T-Danmark cases (C-116/16 / C-117/16, see also our news alert.
The CJEU has already ruled in several previous court cases (concerning other EU jurisdictions) that it is contrary to EU law to treat dividends distributed to non-resident companies less favourably than the tax treatment of dividends distributed to resident companies. The role of the Court of Justice of the European Union is to interpret EU law and ensure that it is applied uniformly across the 27 EU countries. To that end, the Court confirms the lawfulness of the action of the EU institutions, ensures that the Member States comply with their obligations and interprets EU law at the request of national courts. On 18 June 2009, the Court of Justice of the European Union (CJEU) ruled that Articles 43 and 48, 56 and 58 of the EC Treaty give the right to objectively comparable persons to equal treatment for tax purposes. Consequently, an investment fund structure such as the Luxembourg SICAV must be regarded as `comparable` to the company and/or national mutual funds in order to support the argument that the different treatment of withholding tax is discriminatory. The CJEU ruled in favour of Aberdeen and rejected all the Finnish government`s arguments. This case was particularly significant because it was the first time that the comparability of foreign funds was taken into account and would pave the way for future cases and judgments. On 10 April 2014, the Court of Justice of the European Union (CJEU) confirmed that the non-payment of WHT at source of dividends by the Polish tax authorities constitutes a restriction on the free movement of capital.
The Court noted that if the Polish authorities are able to verify comparability between US and Polish funds through bilateral agreements, withholding tax refunds and national exemptions may be granted. In the Netherlands, a dividend tax of 15% is levied through a withholding tax on any Dutch company that distributes profits (i.e. the “withholding tax”). The withholding tax must ensure that dividend tax is withheld and paid to the Dutch tax authorities, even if the beneficiary of the dividend is the taxpayer. In the event of insufficient payment of the withholding tax, an additional tax notice may be imposed on the withholding tax. However, if it is established that the insufficient payment of tax is due to the taxpayer`s failure to comply with the provisions of Netherlands tax legislation, the additional tax must be levied directly by the taxpayer. Both EU and third-country pension funds (including clearly offshore) and investment funds that have received EU dividends subject to withholding tax may take these claims into account. It is clear that the presentation of claims will incur costs depending on the number of dividends, the number of EU Member States involved, etc.