The past year showed some interesting developments with respect to Dutch WHT on dividends (‘dividend tax’) on portfolio dividends received by foreign investment funds.
Dutch Supreme Court sheds light on transparency of single investor funds
On 24 January and 18 December 2020, the Dutch Supreme Court answered questions posed by a lower Appeals Court with respect to single investor funds. The questions concerned the same case as had already been subject to questions answered by the European Court of Justice in the “A-Fund” case (CJEU case C-598/17). The Netherlands knows the ‘FGR’ (or ‘Fonds voor Gemene Rekening’), which translates as ‘Mutual Investment Fund’ and is a contractual investment fund. In the case at hand, it concerned a German contractual fund (Sondervermoegen) which is deemed similar to a Dutch FGR. The fund had only one investor, which gave rise to the thought that the fund may be disregarded for dividend tax purposes as a transparent fund.
The Supreme Court gave a clear answer in that respect: a fund is only an FGR if it intends to invest for the joint account of two or more participants and if the fund actually has more than one investor. However, the Court added that an investment fund does not lose its character as a mutual fund if it has only one participant for a short period of time. Whether a fund is indeed a mutual fund requires an analysis based on all facts and circumstances of the case, viewed in conjunction with each other. This analysis must include not only the wording of the agreements governing the establishment and functioning of the investment fund, but also the intention of the founder(s) of the investment fund and the actual situation.
This means that the qualification of a fund vehicle - as either a mutual (FGR-type) fund or as a ‘private’ fund - is a matter of fact and not a matter of law which requires examination of all the facts in conjunction with each other; in principle each case has to be examined separately. However, if a fund has had the same single investor since its formation for years, and there is no proof that it was intended for other investors to join the fund, it can be expected that the fund is regarded as transparent.
Practical implications and consequences for single investor fund cases
The transparency of a single investor fund means that any Dutch dividend tax suffered by the fund can be reclaimed only by the single investor of the fund, and not on the level of the fund. Single investor funds should therefore be vigilant in this respect.
In certain jurisdictions, like France, contractual fund forms exist that require at least two participants. In order to meet this requirement, but still have in fact the same effect as a private fund, it is then common practice for the intended single investor to find a second investor which participates for a small part, like 0.5%. Maybe, the doctrine of the Dutch Supreme Court regarding private funds also extends to such cases, where it is really the intention to create a private fund and not a collective investment vehicle.
It may therefore be prudent to consider filing dividend tax reclaims at both fund level and the level of the ‘virtual’ single investor, instead of only at fund level.
In that respect, we would like to mention that many (life) insurance companies, in particular in Germany, invest via single investor funds that can be deemed ‘private’ (and therefore transparent) funds for Dutch tax purposes. In such cases, it can be argued that the investment income of the fund is almost exclusively for the account of the insurer’s clients (the insured persons), it may be worthwhile for the insurance company / single fund investor to consider filing a dividend tax refund claim based on a reasoning similar to the so-called CPP case (CJEU case C-641/17, College Pension Plan of British Columbia). The argument would be that Dutch insurance companies get a full credit for Dutch dividend tax, even if they hardly make any profit or if they even incur a loss, so that in fact they only pay tax on a small amount of income, which virtually amounts to an exemption. It can be expected that the Dutch tax authorities will contest this reasoning.
WTS Netherlands specializes in preparing, filing and defending dividend tax refund claims. WTS Netherlands is currently involved in numerous cases that cover the entire palette of complexity and argumentation found in this field of tax law.
Dutch Supreme Court ruling concerning the Deka case (CJEU case C-156/17)
Koeln-Aktienfonds Deka, a German Sondervermoegen, comparable to a Dutch contractual fund, suffered Dutch dividend WHT on its equity investments and filed a refund claim for that tax. The case concerned a period before 2008, when Dutch mutual funds - that profited from a special regime (‘FBI’-regime or Fiscale beleggings Instelling regime) in fact fully exempting the funds from tax - would get a refund for Dutch dividend WHT. The German fund requested equal treatment and, when its claim was rejected by the Dutch tax authorities, filed a law suit. The lower court posed a a request for a preliminary judgement to the Dutch Supreme Court, which in turn asked questions of the European Court of Justice (“CJEU”). On 30 January 2020, the CJEU ruled in this case and on 23 October 2020 the Dutch Supreme Court ruled by answering the questions posed by the lower court. The case at hand concerns the legislation as it stood before 2008, which considerably differs from the current legislation.
In a nutshell, the interesting take-away is as follows.
First of all, the Supreme Court recognizes that Dutch and foreign funds suffering Dutch dividend tax are in a comparable situation. The Supreme Court therefore creates a possibility for foreign funds to claim a refund. However, to be eligible, the foreign fund must first accept that it must make a ‘replacing payment’ that tries to capture the dividend tax that the fund should have paid on the profits distributed to its investors if it would have been a Dutch fund, so the Supreme Court. If the concept of the replacing payment is accepted by the foreign fund, no actual payment is necessary, it just needs to be calculated and then subtracted from the dividend tax that was actually suffered in the book year concerned. If, in the end, a positive amount remains, this amount must be refunded to the foreign fund. The replacing payment is in principle calculated as 15% of the fund’s annual profit according to Dutch standards, minus certain adjustments to provide relief from non-Dutch withholding tax suffered by the fund.
On top of that, a foreign fund must still prove that it meets the shareholder requirements for ‘FBI’-status as well as the annual profit distribution requirement, where the latter can also be met if there is no actual distribution but a deemed distribution in the country of residence of the foreign fund. A complication in that respect is that the (deemed) distribution must be equal to the profit amount determined according to Dutch standards, which may pose a distinct hurdle that cannot be overcome in many cases. In that respect, it seems that the shareholder requirements may be the less complicated hurdle, provided that funds can prove that the composition of their shareholders / investors stays within the bounds of the FBI-regime. For UCITS funds who have only small investors, this prerequisite should not be an issue.
Anyway, it seems that the Supreme Court tried to create a WHT refund system that in practice aims to protect the Dutch Treasury from any substantial ‘bloodletting’.
An interesting question is what the Supreme Court will decide in a case under current law, where Dutch funds can deduct their Dutch and foreign WHT suffered on income from the dividend tax they have to withhold and pay to the Dutch Treasury on profits distributed to investors. In the former system until 2008, the fund must claim a refund, while in the current system the refund is packaged as a credit against dividend tax payable. The refund is then - by definition - either equal or less than the WHT on the annual profit distribution. Should a similar solution be proposed as for the old years (pre 2008), then again by definition the replacing payment (in fact the WHT on the annual profit) would either be equal or bigger than the WHT suffered by the fund. This Supreme Court judgement means that it would be impossible for a fund to actually obtain a refund.
We would like to add some remarks to the creative ‘solution’ invented by the Supreme Court. First of all, it appears that this solution may have the outcome that in practice it will be impossible for any foreign fund to get even one euro refunded. The question arises if a solution with many hurdles that in practice cannot be overcome, is acceptable for the CJEU. Under the current rules, the Supreme Court judgement cannot even theoretically lead to a refund.
Furthermore, the essence of the Dutch FBI-regime is that the fund is in fact tax-free because the taxation of its profit is pushed to the level of its investors. The judgement of the Supreme Court disregards this aspect. The fund is charged with the tax that normally should be borne by the fund’s investors, but this taxation is then not pushed to the level of the investors, for example by granting the investors a tax credit that they can offset against the income tax they pay in their country of residence.
The Netherlands creates possibility for dividend WHT refund in ‘Sofina’ cases
On 22 November 2018, the CJEU ruled in the Sofina case (CJEU case C-575/17) that French dividend tax legislation is in breach of EU law, because (French) dividend tax is levied on dividends received by a non-resident company, while dividends received by a resident company at the end of the financial year in which they are received are taxed only if the resident entity has been profitable in that financial year. This case concerned loss-making portfolio shareholders based in Belgium who received dividends from France.
On 4 December 2020, the Dutch Ministry of Finance published a Decree acknowledging that in certain cases the Dutch dividend WHT legislation would not be in accordance with EU law, based on the Sofina case.
This new development is of interest for foreign entities, resident in the European Economic Area or a cooperative third country that applies the international standard of information exchange, provided such entity would have been eligible for a dividend tax refund in case it would have been a Dutch resident entity.
Refund requests can be filed up to three years after the book year concerned.
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