Advocate General concludes former Netherlands dividend withholding tax exemption for intercompany dividend payments incompatible with EC law (Amurta)

Summary
On June 7, 2007 Advocate General Mengozzi of the European Court of Justice (‘ECJ’) issued his Opinion in the Amurta case (C-379/05) concerning the compatibility of the Netherlands dividend withholding tax on outbound dividends with the free movement of capital (Article 56 EC). Advocate General Mengozzi rejected the arguments presented by the Netherlands government and other EU Member States, based upon the discrepancy of the Netherlands and Portuguese domestic laws and fiscal coherence of the Netherlands tax system, and concluded that the disputed legislation is incompatible with Community law.

Facts and National Legislation
Under the national legislation in force at the time, intercompany dividend payments were exempt from the 25% withholding tax when such dividends were distributed by Netherlands resident companies to parent companies resident in the Netherlands, under the condition that the so called participation exemption was applicable (in short, 5% Nederlands shareholdings). In addition and along the lines of the Parent-Subsidiary Directive, intercompany dividends were also exempt from the Netherlands withholding tax when paid to parent companies resident within the EU, provided that they have a minimum shareholding of 25% in the Netherlands company.

Amurta Sociedade Gestora de Participações Sociais (‘Amurta’) was a Portuguese resident company which held 14% of shares in the capital of Retailbox BV (‘Retailbox’), a company resident in the Netherlands.  In 2002, Retailbox distributed dividends to its shareholders and withheld Netherlands dividend tax on the payment made to Amurta. The Parent-Subsidiary Directive did not apply to this case because Amurta held less than 25% of the shares in the capital of Retailbox BV. Nevertheless, had Amurta been a company resident in the Netherlands, it would have been entitled to the dividend withholding tax exemption.

Opinion Advocate General
In reply to the first preliminary question referred by the Court of Appeals at Amsterdam, Advocate General Mengozzi endorsed that the unfavourable tax treatment applicable to dividend payments made to a non-resident parent company which holds between 5 and 25% of the shares in a Netherlands distributing company amounts to a restriction of the free movement of capital. The Advocate General upheld that the Netherlands must extend the relief for economic double taxation, i.e. the dividend withholding tax exemption, to EU cross border situations.

The referring Court also submitted a second preliminary question, inquiring whether the fact that Portugal granted a “full credit” for the Netherlands dividend tax was of relevance for the answer to the first question. However, as the Advocate General noted, the referring Court did not specify the basis of its claim that Amurta would be entitled to a full credit. During the proceedings, Amurta denied that that was the case and the lack of more factual data on the subject rendered the answer to the second question merely theoretical in the Advocate General’s opinion. The Advocate General further stated that, even if a “full credit” based on Portuguese domestic law was available to Amurta, that would have no bearing on the determination of the compatibility of the disputed legislation with Community law.

The Advocate General further discussed whether the application of the bilateral tax treaty entered into between Portugal and the Netherlands would serve to overcome the effects of the discrimination at issue. Advocate General Mengozzi reached a different conclusion from the one upheld for the effects of the application of only Portuguese domestic legislation. If under the applicable bilateral tax treaty, Portugal had agreed to grant a full credit for the withholding tax levied in the Netherlands, the discriminatory effect would have been overcome and it might be presumed that the disputed legislation would not have been held to be contrary to Community law. However, in the case at issue, the fact that under the bilateral tax treaty, Portugal has only undertaken to relieve double taxation by granting an ordinary credit leads to the conclusion that the application of the tax treaty is insufficient to ensure that the discriminatory effects of the Netherlands dividend withholding tax would be overcome. Therefore, the Netherlands could not rely on the applicable tax treaty to claim that any discriminatory effects of its legislation would be overcome by its application and hence maintain its compatibility with Community law.

Preliminary Comments
It is clear that this Opinion of Advocate General Mengozzi – if followed by the ECJ – will have significant implications for withholding tax regimes within the EU.

With regard to the consequences in the Netherlands, we can comment that the Netherlands made an important step forward in the 2007 tax reform by broadening the dividend withholding tax exemption for EU resident corporate taxpayers owning a shareholding in a Netherlands company. These amendments have brought the relevant dividend withholding tax exemption more in line with the dividend withholding tax exemption available in comparable domestic situations. However, judging from the Opinion of Mengozzi, the Netherlands legislator still has some work to do, especially with respect to non-resident corporate shareholders owning a less than 5% shareholding in a Netherlands company and non-resident private shareholders.