Global Tax Alert (News from the EU Competency Group) | 24 December 2013

Dutch Supreme Court asks CJEU to address EU compatibility of Dutch dividend taxation of French bank

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Executive summary

On 20 December 2013, the Dutch Supreme Court issued its decision in a case involving a French bank (X SA) that received Dutch portfolio dividends during the years 2000-2008. These dividends were subject to Dutch dividend withholding tax on a gross basis at a rate of 15%. The French taxpayer argued that the levy of Dutch withholding tax is contrary to the free movement of capital as guaranteed under Article 63 TFEU (Treaty on the Functioning of the European Union). According to the taxpayer, a lower amount of tax would have been due if the taxpayer were established in the Netherlands. The Dutch Supreme Court has now asked the Court of Justice of the European Union (CJEU) to answer the question of how the tax burden in a comparable domestic situation must be determined. In addition, the Supreme Court has asked the CJEU to clarify its decision in Amurta where the CJEU held that a discriminatory withholding tax may be justified if the restrictive effects of the withholding tax are fully neutralized under the applicable tax treaty in the residence state of the shareholder.

Detailed discussion

Facts of the case

The taxpayer (X SA) is a bank established in France that carries on a banking business in the Netherlands and a securities business in France. X SA received Dutch portfolio dividends during the years 2000-2008 in the context of the French securities business. These dividends were subject to Dutch dividend withholding tax at a rate of 15%, resulting in a total tax amount of more than € 80 million. On the basis of the free movement of capital as laid down in Article 63 TFEU, the taxpayer asked for a refund of this amount. According to the taxpayer, the dividends would have been subject to Dutch corporate income tax at a higher rate, but on a net basis, were the taxpayer established in the Netherlands. On balance, this would result in a lower amount of tax due. The taxpayer has been able to credit the Dutch dividend tax against its French tax liability in the years up to and including 2007. In 2008, there was no possibility to credit the Dutch withholding tax due to the fact that the taxpayer was in a loss-position in that year.

Decision of the Dutch Supreme Court

The Supreme Court first addressed the question of whether the taxpayer would have been subject to a lower effective taxation if it were located in the Netherlands. In this regard, the Supreme Court established that in a purely domestic situation, the Dutch dividends would equally have been subject to Dutch dividend withholding tax on a gross basis. However, such dividends would subsequently be subject to Dutch corporate income tax which is calculated at a higher rate, but on a net basis, and against which the withholding tax could be credited. The Supreme Court has asked the CJEU whether the Dutch corporate income taxation must be taken into account as well when comparing the Dutch taxation of nonresident shareholders with resident shareholders.

Assuming that indeed that Dutch corporate income tax must be taken into account, the subsequent question is which expenses one can take into account when comparing the gross dividend taxation in the cross-border situation with the net dividend taxation in the domestic situation. The taxpayer has suffered various transaction and currency losses on its portfolio investments. He argues that not only the expenses directly attributable to the Dutch portfolio shares, but also these losses must be taken into account when comparing the gross dividend taxation with the net taxation in a domestic situation. The Supreme Court has decided to refer this question to the CJEU as well.

Finally, assuming that indeed the Dutch dividend taxation on a gross basis is less favorable than the taxation on a net basis in a domestic context, the question arises whether the discriminatory withholding tax is neutralized under the tax treaty between the Netherlands and France. It is not disputed that the taxpayer has been able to fully credit the Dutch dividend tax against its French tax liability in the years up to and including 2007. In 2008, by contrast, there was no possibility to credit the Dutch withholding tax due to the fact that the taxpayer was in a loss-position in that year. In Amurta, the CJEU has already decided that a discriminatory withholding tax may be justified if the restrictive effects of the withholding tax are fully neutralized under the applicable tax treaty in the residence state of the shareholder. The Supreme Court considered that the taxpayer has been able to factually credit the full Dutch dividend tax against its own tax liability. At the same time, however, the Supreme Court established that the tax treaty does not guarantee, legally speaking, that any Dutch withholding tax is always fully credited in France. The Supreme Court has therefore asked the CJEU whether a discriminatory withholding tax is neutralized in the meaning of the Amurta case if the taxpayer is factually entitled to a full credit or whether, by contrast, the CJEU requires that the tax treaty legally speaking guarantees that any discriminatory withholding tax is always fully credited in France. Finally, as concerns 2008, the Supreme Court has also asked whether possible carry-forward possibilities in the shareholders residence state must be taken into account as well when determining whether a discriminatory withholding tax is factually neutralized in the shareholder’s residence state.

Implications

The Supreme Court’s ruling once again demonstrates the significant impact that the EU Treaty freedoms, especially the free movement of capital, have on Member States’ withholding tax systems. This is evidenced by the fact that the Supreme Court has decided to refer two other withholding tax cases involving individuals to the CJEU as well on the same day. In these cases as well, the main question is how the tax burden between resident and nonresident shareholders must be compared when assessing whether a restriction of the free movement of capital exists. Institutional investors, such as investment funds, insurance companies and banks, investing into the Netherlands or other EU Member States, are therefore recommended to investigate the possibilities to mitigate their withholding tax liability and to take appropriate action.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Ben Kiekebeld
    +31 88 4078457
    ben.kiekebeld@nl.ey.com
  • Daniël Smit
    +31 88 407 84 99
    daniel.smit@nl.ey.com
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Dr. Klaus von Brocke
    +49 89 14331 12287
    klaus.von.brocke@ey.com

EYG no. CM4059