Context

Due to changes in Dutch tax law, the compatibility with EU law is assessed differently for periods before and after 2008. Before 2008, a straightforward refund regime applied. From 2008 onwards, the current remittance reduction regime applies, which provides for offsetting paid domestic and foreign source taxes with Dutch dividend tax due on redistributions to participants. Both relief schemes have only been available to resident investment funds qualifying for the FBI regime.

Numerous public investment funds, generally qualifying as UCITS under the EU Directive 2009/65/EG, as well as multi-investor Alternative Investment Funds (AIF) from various jurisdictions have challenged this relief ineligibility in Dutch courts and up to the EU Court of Justice. The Dutch Supreme Court’s preliminary rulings in 2020 and 2021 granted conditional relief under the pre-2008 regime but found no EU law incompatibility with the remittance reduction regime. With an eye on achieving a level playing field, litigation by foreign investment funds has continued, with cases like L Fund (C-537/20) and the European Commission’s pending infringement procedure against the Netherlands raising further doubts about the Dutch dividend tax system.

Refund scheme (years prior to 2008)

For the years before 2008, the Supreme Court ruled in 2020 that for foreign investment funds to be comparable to Dutch investment funds, and make a successful claim to refund, they must agree to paying a substitute payment to the Netherlands. The Supreme Court as such offered relief for Dutch withholding tax paid by foreign investment funds, to an amount of the withholding tax minus the substitute payment. A claim to such relief can however only be effectuated if the foreign investment fund also meets the specific requirements for the FBI regime. Further, given that the substitute payment is calculated on the worldwide income of the fund, the Supreme Court ruling in the end generally does not result in an actual refund.

The 6 September 2024 Supreme Court ruling essentially maintains the 2020 ruling. Moreover, the Supreme Court sees no reasonable doubt regarding the compatibility of its judgment with EU laws based on EU case law rendered since 2020, thus rejecting a new referral to the European Court of Justice. The Supreme Court reiterates that the substitute payment must be a tax paid to the Netherlands and therefore not the fund jurisdiction or investor jurisdiction. If the fund does not agree with the substitute payment, the fund is disqualified for a refund on that ground alone. Additionally, the Supreme Court held that foreign investment funds are objectively incomparable due to the fact that the fund jurisdiction (in this case Germany) does not tax all the fund’s participants on fund redistributions, whereas the Netherlands levies a universal withholding tax.

Remittance reduction scheme (years from 2008)

The 13 September 2024 Supreme Court ruling deals with years after the introduction of the remittance reduction in Dutch tax law (years since 2008). In 2021, the Supreme Court deemed the remittance reduction scheme fundamentally different from the refund scheme, leading to different rulings. Unlike the refund scheme, the remittance reduction relief mechanism and calculation method entail that the relief amount never matches the Dutch dividend tax withheld at source. Additionally, it was found decisive that foreign investment funds do not declare and withhold Dutch dividend tax on redistributions to participants. Since the remittance reduction is a reduction of declared Dutch dividend tax, no reduction is possible without such a tax liability. The Supreme Court also noted that redistributions by foreign investment funds to participants do not involve a cross-border element concerning the Netherlands, so the freedom of capital movement does not apply. Furthermore, EU law does not require the Netherlands to ensure that foreign investment funds receive similar tax reductions for Dutch dividends in their country of establishment. The absence of such local relief cannot be held against the Netherlands.

In the 13 September 2024 ruling, the Supreme Court reiterates its earlier decision that foreign investment funds are denied access due to incomparability with Dutch investment funds, as foreign investment funds do not withhold Dutch dividend tax on redistributions to their participants. Similar to the 6 September ruling, the Supreme Court sees no reasonable doubt regarding the compatibility of its judgment with EU laws, rejecting a referral to the European Court of Justice.

Domestic investors

The Supreme Court specifically addressed Dutch participants in foreign investment funds with Dutch portfolio investments (domestic investors). It acknowledged that under EU law, the Netherlands must ensure that dividends from foreign investment funds to Dutch residents are not taxed more heavily than similar dividends from Dutch funds qualifying for the FBI regime. If these dividends are subject to economic double taxation, the Netherlands should prevent this.

However, the Court noted that foreign investment funds have no rights against the Netherlands in this matter, as they are not directly disadvantaged. Additionally, domestic investors cannot claim a credit for Dutch withholding tax since no Dutch tax is formally levied on dividends redistributed to them by foreign investment funds. Instead, domestic investors should seek relief through a credit against Dutch taxes for any tax withheld in the fund's jurisdiction on redistributed dividends.

Our assessment

The Supreme Court's recent rulings are undoubtedly negative for foreign investment funds seeking to reclaim Dutch dividend tax. The Supreme Court upheld its previous stance, ignoring developments in EU case law, such as the L Fund case, subsequent German Bundesfinanzhof rulings, doubts from a Dutch Court of Appeal and in literature, as well as the European Commission's pending infringement procedure for not extending the remittance reduction regime to foreign funds. For more on the infringement procedure, see our website post from 26 July 2024.

In our view, the Supreme Court ruling is sparsely reasoned, particularly regarding why it refuses to refer the cases to the European Court of Justice for a preliminary ruling. For now, the Supreme Court rulings highlight that in general foreign UCITS and multi-investor AIFs cannot expect positive rulings from Dutch courts on reclaim of dividend tax suffered.

Attention now shifts to the infringement procedure. If the infringement procedure results in a ruling of the EU Court of Justice deviating from the Dutch Supreme Court, foreign funds might seek a review with the Dutch tax authorities, following the Kuhne & Heitz precedent set by the EU Court of Justice on 13 January 2004 (C-453/00).

Dividend tax reclaim applications in the name of non-resident UCITS and other multi-investor AIFs can be expected to be rejected by both the Dutch tax authorities and the Dutch Courts. However, fund management companies may consider filing dividend tax reclaim applications and maintain filed applications to preserve their claims in view of potential future developments, including the infringement procedure.

Contact

We will keep you informed on further developments. Should you have any questions or need assistance in discussions with the tax authorities on this topic, please contact your trusted Loyens & Loeff adviser or a member of our team mentioned below.

Disclaimer

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