On 9 April 2021, the Dutch Supreme Court (“Hoge Raad der Nederlanden” or “HR”) ruled in a landmark case that will decide all pending cases where foreign investment funds claim the refund of Dutch dividend WHT suffered in years starting from 2008.
The case concerned a refund request from a US fund with respect to Dutch WHT that the fund suffered on dividends paid on Dutch portfolio investment shares.
The HR had parked the case until it would have received answers from the CJEU regarding the Deka-case (CJEU case C-156/17) that concerned the previous legislation until and including 2007.
Under the ‘old’ pre-2008 legislation, a Dutch FBI fund could claim a refund of dividend WHT, independent from the amount of WHT it would have to levy on its own profit distributions to investors. To be eligible for a refund under the old legislation, a foreign fund had to accept the concept of a “replacing payment” (generally 15% of the fund’s annual profit) which aims 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. The fictional replacing payment was deducted from the dividend tax actually suffered by the foreign fund in the book year concerned. If a positive amount remained, it was to be refunded to the foreign fund. Additionally, a foreign fund had to prove that it meets the shareholder requirements for FBI-status as well as the annual profit distribution requirement, which can also be met via a deemed distribution in the country of residence of the foreign fund.
In comparison, under the current system from 2008, the Dutch FBI fund can claim a reduction of the dividend WHT it has levied and must remit to the Dutch State (“remittance deduction”). The reduction is in principle equal to the dividend WHT and similar foreign taxes suffered, though there are some restrictions. Briefly, under the current system the WHT suffered is refunded insofar, as there is dividend WHT payable on the fund’s profit distributions.
In the 9 April case, the HR declared that a refund is not possible for foreign funds under the current system, because a Dutch and a foreign fund are not objectively comparable. In essence, the HR decision rejects that the current system of remittance reduction is also a refund system, only using a different mechanism.
In short, the HR denies that the remittance reduction system is a restriction of the freedom of capital.
It is questionable, whether the Dutch legislator intended to employ a systematic change with the new dividend WHT scheme in 2008. From the Parliamentary discussions and documents, it appears more convincing, that the legislator wanted the current system to have the same effect as the previous one, i.e. (full) compensation at fund level of Dutch and foreign WHT suffered on (dividend) income.
This assumption is not altered by the fact that the schemes employ different mechanisms for achieving this goal. The fact remains that the amount of the allowance is primarily determined by the dividend tax and other WHT charged to the fund. Only the amount of the compensation differs over time, because in the pre-2008 refund scheme the entire amount is returned each year (at least for the dividend tax) and in the case of the current remittance reduction system, the amount is annually limited by the tax withheld from the profits distributed by the investment fund. However, the right to compensation is not cancelled out, but can be redeemed in a later year. This reduces the difference to a timing difference. In the end, both mechanisms achieve the same result: (complete) relief from the WHT. Accordingly, the conclusion should be the same – i.e. that the freedom of capital is arbitrarily restricted – under both, the old and the new Dutch system.
However, as the HR is the highest court of the Netherlands in tax matters, it is to be expected that the Dutch tax authorities and courts will follow the decision named and consequently deny all refund claims for years starting in 2008.
Should it become clear in the future that the ruling of the HR is contrary to EU law, then claims that were denied might – under certain circumstances – be eligible for redress.
In March 2021, the Dutch Ministry of Finance started a public consultation with respect to draft legislation concerning the qualification of entities for tax purposes.
It was initially expected that the introduction of the legislative proposal to Parliament would be in September 2021 and that the bill would enter into force per 1 January 2022. On 2 June, however, the Dutch Government announced that due to the many reactions to the consultation they will postpone the further legislative process to the coming winter. No intended (new) date of entry into force was communicated, but the most likely date seems to be 1 January 2023.
The draft legislation concerns the Dutch method of qualifying foreign entities for Dutch tax purposes. In a nutshell, this method requires that a foreign entity is compared to a domestic entity and, if sufficiently comparable, will then be treated the same as its domestic look-alike for Dutch tax purposes. A change to this comparison-of-types method is proposed with respect to special situations where the result appears flawed:
If the legislative change is implemented, far-reaching consequences for certain fund structures and other investment structures are likely.
Currently, limited partnerships (Dutch: “CV” – “Commanditaire Vennootschap”) can qualify as either “closed” (transparent for Dutch income tax purposes) or “open” (non-transparent for Dutch income tax purposes), depending on whether the entry of new partners or transfer of ownership of CV shares is subject to the consent of the other partners. If the consent of all partners is required, then the limited partnership is regarded as closed. In all other cases, the partnership is deemed to be open. An open CV is deemed to have a capital divided into shares concerning all Dutch taxes levied by the central government.
It is now proposed to erase the difference in tax treatment between closed and open limited partnerships. In the future, all limited partnership will be treated as transparent entities for Dutch tax purposes.
Dutch mutual funds (“FGR” – “Fonds voor Gemene Rekening”) can also be either “closed” or “open”. The difference in qualification is linked to the transferability of the participation in such a fund. Funds are regarded as open, if the participations can be transferred without consent from other participants.
The proposed legislation changes this criterion to distinguish between closed and open funds. In the future, an open fund is a fund that collects capital for collective investment against the issuance of participations in the fund. The participations must either be traded on a stock exchange or similar platform, or the fund must have the obligation to redeem its participations upon demand by its participants.
A fund that is not regarded as open will be treated as closed.
Foreign but Dutch resident entities that do not have a comparable Dutch counterpart, will be qualified as non-transparent for Dutch tax. If not a Dutch resident, the foreign entity will be qualified by following the qualification for income tax purpose of its home jurisdiction.
Where the proposed legislation changes the qualification of an entity, this can have far-reaching consequences. In case an entity is a Dutch taxpayer (either resident or non-resident) and changes into a transparent entity, such change will in principle trigger exit taxation in the Netherlands. With respect to open CVs (and foreign open CV look-a-likes), specific transitional measures are included in the proposed legislation. These specific rules aim to ensure a tax neutral treatment in case the limited partners in the CV transfer their shares in a share-for-share merger transaction to a non-transparent entity that will in fact replace the CV. In case the partners do not restructure this way, they are deemed to have taken over the business of the CV, which can also be done in a tax neutral way. Certain conditions (that are mostly similar to those currently applicable to tax neutral legal mergers) need to be fulfilled in order to be eligible for the transitional tax neutral measures. Should the tax neutral treatment, for whatever reason, not be claimed, then it would be allowed to pay the resulting taxation over a ten-year period.
It is noteworthy that the draft bill focuses solely on the corporate income tax consequences, though with respect to dividend WHT (“dividendbelasting”) and the special WHT on certain payments to certain tax haven companies (based on the “Wet bronbelasting 2021”) the open CV will no longer be required to withhold these taxes. The effect of the legislation for other taxes (like Real Estate Transfer Tax) were not mentioned.
It is advisable to anticipate possible negative consequences of the proposed legislation by reviewing structures involving partnerships and funds that are Dutch (resident or non-resident) taxpayers or are in any way connected to Dutch investments.
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