On 25 July 2024, the European Commission published its decision to initiate an infringement procedure against the Netherlands via a letter of formal notice (INFR 2024/4017).
In this formal notice, the Commission objects to the infringement of the fundamental freedom of the free movement of capital under Art. 63 Treaty on the Functioning of the European Union (TFEU) and Article 40 of the European Economic Area Agreement due to the Dutch tax law WHT reduction regime, which is available only to Dutch investment funds, not to foreign investment funds, which are comparable to Dutch fund vehicles.
The infringement procedure may force the Netherlands to reconsider their discriminatory taxation practice with regard to the taxation of foreign investment funds, especially for investment funds with multiple fund investors, which has been in place for years. This matter was covered in the past by WTS in different newsletters (see the most recent publication in this connection in our WTS Global FS Infoletter #25).
Dutch tax law context
The initiation of the infringement procedure follows landmark decisions by Dutch national courts after the CJEU ruling in the Köln Aktienfonds DEKA case (CJEU case C-156/17, decision dated 30 January 2020), which established the current status quo of taxation of foreign investment funds in the Netherlands. Specifically, the Dutch Supreme Court (Hoge Raad der Nederlanden) ruled on April 9, 2021, that foreign investment funds are not entitled to a refund of Dutch WHT.
Under Dutch law, domestic investment funds de facto receive a reduction of Dutch WHT on dividend income through the possibility to offset the WHT paid by the distributing Dutch company. However, this offset mechanism is not available to foreign investment funds under current Dutch tax law. This discrepancy makes non-Dutch investment funds less attractive to Dutch investors and investments in shares of Dutch companies less attractive to the foreign investment fund.
Nevertheless, the Dutch Supreme Court in its much-criticized decision found that the Dutch taxation regime, which grants WHT refunds to Dutch domestic funds only through a reduction mechanism, does not constitute a restriction of the freedom of capital because the court deemed as not objectively comparable the tax situations of Dutch and foreign funds.
Potential impact of the infringement procedure
The infringement procedure may force the Netherlands to reconsider its stance on the taxation of foreign investment funds, potentially leading to significant changes in the current taxation practice.
Infringement proceedings can be initiated by the European Commission under Article 258 TFEU when the Commission identifies potential breaches of EU law through investigations or com-plaints. A formal infringement procedure begins if a Member State fails to rectify an alleged breach, such as not fully adapting national legislation to an EU directive. The Commission issues a letter of formal notice, to which the Member State must respond within a set period. If the Member State does not comply, the Commission can issue a reasoned opinion and eventually refer the case to the European Court of Justice (CJEU).
The CJEU then examines whether a Member State has objectively violated its obligations under EU law. If the CJEU rules against the Member State, the Member State must take measures to comply with the judgment. Non-compliance can result in the Commission seeking financial penalties under Article 260 para. 2 TFEU. The formal notice requires the Netherlands to respond and address the Commission’s concerns within two months. Failing a satisfactory response, the Commission may issue a reasoned opinion.
Recommendation
This new development significantly increases the chances of success of a WHT reclaim in the Netherlands by foreign multi-investor investment funds. WTS recommends the timely filing of fund-level applications in the case of multi-investor funds and re-evaluating WHT threshold amounts when determining in which cases an application should be filed. WHT refund applications for the WHT-year 2021 must be submitted by the end of 2024 to avoid being time-barred.
For further assistance regarding this matter, please do not hesitate to contact our colleagues at WTS Germany (contact details available in the upper right corner of this publication).
