Supreme Court rules non-resident UCITS eligible for Dutch dividend tax refund
On 23 October 2020, the Dutch Supreme Court has published its judgement in the Köln-Aktienfonds Deka (“Deka”) case. In this long-anticipated judgement, the Supreme Court ruled that non-resident UCITS are in principle comparable to resident UCITS and therefore may be entitled – under stringent conditions – to a refund of Dutch dividend tax (”DWHT”) based on the free movement of capital under the TFEU. This judgement is relevant for non-resident funds in a similar position and notably for the numerous cases pending before the Dutch courts in which non-resident UCITS claim a refund of Dutch DWHT.
The current judgement applies the findings of the EU Court of Justice (“CJEU”) in regard of its rulings in Fidelity Funds (C-480/16) and the Dutch preliminary questions in Deka (C-156/17). We would like to refer to our Tax Flash of 30 January 2020 regarding the CJEU’s Deka ruling (link) and our EU Tax Alert regarding the Fidelity Funds case (link).
Position of non-resident UCITS
A principal issue the Supreme Court had to deal with, revolved around the question whether non-resident funds are comparable to resident Dutch UCITS qualifying as fiscal investment funds (fiscale beleggingsinstelling or “FBI”). FBI’s are in principle able to claim a refund of Dutch DWHT withheld from returns on their Dutch portfolio investments.
Historically, the Supreme Court ruled out comparability as non-resident funds themselves cannot act as withholding agent for Dutch DWHT with respect to its distributions to participants. This was ruled with a view to keep a balanced allocation of taxing rights and to safeguard the coherence of the Dutch tax system. However, in accordance with the Fidelity Funds judgement, the Supreme Court rules that denying refund of DWHT on this basis leads to an unjustified restriction on the free movement of capital.
Payment in lieu of Dutch dividend tax
The Supreme Court now rules that non-resident UCITS that meet the FBI regime’s requirements should be eligible for a refund of Dutch DWHT, though only after deduction of a payment in lieu of Dutch DWHT. This deduction is equal to the DWHT that the non-resident UCITS would have been required to withhold from distributions, if the UCITS and its participants were resident in the Netherlands. The Supreme Court lays down a complex framework for its calculation.
As such, the Supreme Court rules clearly that non-resident UCITS should pay Dutch DWHT (with respect to its redistributions) in order to be eligible for a refund of Dutch DWHT (with respect to its investment proceeds). In its Fidelity Funds judgement, however, the CJEU did not unequivocally rule out that a non-resident tax would suffice in this regard. Nevertheless, it is unlikely that this decision will be overthrown in the future.
Furthermore, non-resident UCITS are still required to meet the FBI requirements in order to be eligible for a refund of DWHT, after deduction of the payment in lieu of Dutch DWHT. The Dutch Supreme Court provides further rules on the application of the redistribution requirement (dooruitdelingseis) and the shareholder requirements (aandeelhouderseisen) based on the CJEU’s ruling in the Deka case of 30 January 2020.
The Supreme Court mitigates the strict qualitative application of the redistribution requirement in favor of non-resident UCITS but at the same time makes it hard to demonstrate fulfilment of this requirement. The redistribution requirement subjected UCITS to a strict factual test requiring it to distribute proceeds available for distribution to investors within 8 months after the relevant financial year. It will now be considered sufficient if proceeds are deemed to be distributed or are otherwise included in the investor’s tax base in the UCITS’ state of residence. However, the Supreme Court clarified that (deemed) distributions must also quantitively meet the redistribution requirement, effectively requiring a complex assessment of the amount that the UCITS would be required to distribute according to Dutch standards.
In line with CJEU findings in the Deka case, the Supreme Court considers that the shareholder requirements are not applied in a discriminatory manner and in principle do not violate EU law. Nevertheless, in the period before legislative changes as of 1 August 2007, lighter requirements applied for UCITS that were traded on the Amsterdam stock exchange. This aspect ‘de facto’ constituted a less favorable treatment of UCITS with a foreign listing. To mitigate this restrictive element, the Supreme Court ruled that a foreign listing will qualify non-resident UCITS for the lighter shareholder requirements during that period.
It should be noted that this case in principle only concerns the FBI regime that was in place until 2008. However, we could imagine that this judgment will also be applied to the current FBI regime, which is still pending before the Dutch court.
Furthermore, please do note that this case is not yet closed, as it served to answer preliminary questions raised by a lower court. The claimant may still decide to take the proceedings up to the Supreme Court again. However, it is not expected that this will result in a different outcome.
Based on this judgment of the Dutch Supreme Court, it could be worthwhile for non-resident UCITS to examine whether the election for an alternative payment would be beneficial.