Remittance reduction regime
Under Dutch law, qualifying investment funds can reduce their tax burden on dividends received from equity investments in the Netherlands and abroad. This reduction is implemented by offsetting the paid source taxes with the Dutch dividend tax due on redistribution of dividends to participants (remittance reduction). However, this remittance reduction scheme de facto only is available to Dutch investment funds. Based on a Supreme Court ruling of 9 April 2021 (ECLI:NL:HR:2021:506), foreign investment funds are denied access due to the alleged incomparability to investment funds based in the Netherlands. The main point of contention is the relevance of the fact that foreign investment funds do not withhold Dutch dividend tax on redistributions to their participants. Foreign taxes on fund redistributions were deemed insufficient. The tax authorities and courts since maintain that foreign investment funds cannot be objectively comparable to qualifying Dutch investment funds in the context of dividend tax relief.
Diverging view of the Commission
With this infringement procedure, it is clear that the Commission holds a diverging view on the matter. The Commission calls on the Netherlands to bring its rules on taxation of investment funds in line with EU law, arguing that the Dutch remittance reduction scheme may deter foreign investment management companies from offering their services to Dutch investors and from investing in shares of Dutch companies. The Commission believes this restriction hinders the free movement of capital, which is generally prohibited by Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area because the scheme discriminates against investment funds from other EU Member States and EEA States.
Expected impact
Several cases are currently pending before the Dutch Supreme Court on this matter, and recently the Dutch Advocate General issued an opinion therein. In the opinion, the Advocate General confirmed the Supreme Court’s 2021 ruling and rejected the relevance of foreign cases such as L Fund (C-537/20), adding that the Supreme Court should not be required to refer the case to the CJEU for a preliminary ruling.
The infringement procedure once again raises the question whether the Dutch Supreme Court should seek a preliminary ruling from the CJEU. Importantly, if the Supreme Court intends to maintain its stance on the remittance reduction in spite of the diverging line of the Commission, it will have to reason very clearly its deviation from the Commission's opinion. Considering previous CJEU case law, the Supreme Court as the national court of last instance should be particularly careful in its assessment whether there is any reasonable doubt as to the correct interpretation of the provision of EU law at issue. In our view, the Supreme Court is now pressured to at least acknowledge the Commission’s views and reconsider the need for a preliminary ruling in order to ensure the uniform interpretation of EU law.
Formal procedure
The Commission has initiated this infringement procedure against the Netherlands by issuing a formal notice. This is the first crucial step in the procedure. The Netherlands now has a two-month window to address the concerns raised in the Commission's letter. If these issues are not resolved, the Commission may advance to the second stage, which involves issuing a reasoned opinion. A reasoned opinion is a formal request for compliance with EU law, issued when the Commission believes a country is violating EU law. If the country fails to comply even after this, the Commission has the authority to escalate the matter to the CJEU, albeit that most cases are resolved before reaching this stage.
Contact
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