Context
For resident taxpayers, Dutch dividend withholding tax acts as an advance levy on corporate income tax. The tax paid on dividends can be fully offset against their corporate income tax liability, with any excess refunded. This means resident investors subject to corporate income tax are taxed only on the net income from their investments after deducting certain costs.
For non-resident investors, Dutch dividend tax is generally a final levy. However, following the CJEU’s 2015 ruling in C-17/14, Dutch dividend tax rules allow non-residents to claim a refund if they can show they are taxed more heavily than comparable resident investors. This involves comparing the dividend tax paid with the hypothetical corporate income tax burden on the dividend income. Then it becomes relevant what costs can be deducted from the (hypothetical) tax base. In accordance with the latter ruling, foreign investors can only consider costs directly related to receiving the dividend, such as bank fees associated with the dividends. In most cases this is a minor amount relative to the income, leaving claimants ineligible for refunds.
Consequently, dividends received by non-resident investors are generally subject to a 15% tax on the gross amount, whereas resident taxpayers who receive the same dividends are taxed on the basis of their net income.
On 14 December 2022, the Dutch Court of Appeal of ‘s-Hertogenbosch asked the CJEU for a preliminary ruling on the interpretation of the CJEU’s 2015 ruling in C-17/14 and its general relevance to investors rendering cross-border dividend income from EU Member States.
The CJEU ruling
The case concerns a UK-based life insurance company receiving dividend income from the Netherlands in the context of its ‘unit-linked’ insurance contracts. The dividend income was subject to 15% Dutch dividend withholding tax, for which the life insurance company requested a refund. The taxpayer argued that if it had been a resident of the Netherlands, the Dutch tax burden on the dividend income would have been nil. This is because, when determining profit, the dividends are matched by a corresponding increase in commitments to customers under unit-linked insurance contracts. Therefore, it argued, the corporate income tax due on the income would be nil, so that the dividend withholding tax paid must be refunded.
Even though the increase in commitments to unit-linked policies cannot fit in the definition of ‘directly linked’ costs of the C-17/14 precedent, the court rules that the situations of resident and non-resident dividend recipients may nevertheless be comparable in the light of the Netherlands legislation at issue. The court thereby refers to its November 2019 ruling in C-641/17, in which it had considered in the case of a non-resident pension fund that uses dividends income to cover pension obligations, the increase in future liabilities should be recognised when determining a hypothetical tax burden on the dividend income.
In this new ruling, the court held that if resident taxpayers are not taxed on dividend income due to the specific purpose of their investment activities, non-resident companies in similar situations with dividends from Dutch sources are in an objectively comparable situation, provided their activities are the same and the dividends received change the level of customer commitments.
The need to preserve the allocation of taxation powers among Member States and the coherence of the national tax system were found not to justify the restriction of the free movement of capital in the proceedings. On this topic, the German government weighed in with certain possible justifications relevant also for the German tax context.
Relevance for other taxpayers
The CJEU ruling is particularly relevant for financial institutions having a specific purpose for their investment activities, such as the required allocation of dividends to cover future obligations towards third parties. The test applied by the CJEU for objective comparability confirms a broader principle that could be fulfilled in cases of pension funds and other (life) insurance companies. However, it is noted that these investors have slightly different business models, legal frameworks, and customer bases. Therefore, the link between dividend income and obligations may not be as clear as in unit-linked contracts, making it uncertain if Dutch courts will extend the CJEU’s argumentation.
The referring Dutch court must now decide on the frontrunner case of the UK-based unit-linked insurer, implementing the CJEU preliminary ruling. This decision should provide further guidance for other investor cases currently on hold at the Dutch tax administration and District Courts.
Contact
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