Global Tax Alert | 6 September 2016
Dutch Lower Court requests Dutch Supreme Court to reconsider its case law on withholding tax reclaim requests filed by foreign investment funds
On 1 August 2016, the Dutch Lower Court of Breda (the Lower Court) requested the Dutch Supreme Court (the Supreme Court) to clarify its current case law in which it rejected Dutch dividend withholding tax reclaim requests filed by foreign investment funds based on an infringement of EU law.1 The Supreme Court ruled in 2015 that foreign investment funds are not comparable to a Dutch fiscal investment institution (FBI), as they are not withholding agents for Dutch dividend withholding tax upon redistribution. As such, the Supreme Court ruled that EU law does not require the Netherlands to refund Dutch dividend withholding tax incurred by foreign investment funds on their Dutch dividend income.
In the current two cases before it, the Lower Court requests the Supreme Court to answer whether it agrees with the arguments to reconsider its 2015 ruling, and how certain specific aspects of the two cases should be ruled on. The preliminary questions seem to cast doubt on the earlier unfavorable ruling of the Dutch Supreme Court. This confirms that a final verdict in the case of reclaims of Dutch dividend withholding tax incurred by foreign investment funds is still forthcoming, and that it may still be viable to continue with existing reclaim requests, and to file new reclaims where the applicable statute of limitation requires.
Dutch Supreme Court ruling of 10 July 2015
The Supreme Court ruled on 10 July 20152 that a foreign investment fund cannot obtain a refund of Dutch dividend withholding tax incurred on its dividend income as it is not comparable to a Dutch FBI. This comparability is required to establish an infringement of EU law.
Because foreign investment funds are not withholding agents for Dutch dividend withholding tax upon redistribution, in the view of the Supreme Court, those funds are not comparable to a Dutch FBI. The Supreme Court held that a refund of Dutch dividend withholding tax incurred by foreign investment funds would result in a more favorable position for foreign investors investing through the foreign investment fund, as no levy of Dutch dividend withholding tax would remain on its Dutch dividend income. In the view of the Supreme Court, foreign investment funds are thus not entitled to a refund of Dutch dividend withholding tax based on an infringement of EU law.
EU law developments
In the joined cases Miljoen, X, and Société Générale SA,3 the European Court of Justice (ECJ) ruled on the comparability analysis that should be applied in the case of two non-Dutch resident individuals and one ordinarily taxed non-Dutch entity that incurred Dutch dividend withholding tax on dividends from their direct Dutch portfolio investments. In short, the ECJ ruled that the dividend withholding tax paid by a foreign portfolio investor should be compared to the combined dividend withholding tax and income tax paid by a Dutch portfolio investor. The ECJ also provided guidance on how this comparison should be made.
The ECJ’s ruling differs from the comparability analysis made by the Supreme Court in its 2015 ruling, in which it only took into account the Dutch dividend withholding tax position of the foreign investment fund and its foreign investors. Although the joined cases before the ECJ and the 2015 Dutch Supreme Court ruling are not fully comparable, they provide a strong indication that the comparability analysis applied by the Supreme Court may not be correct.
Preliminary ruling request
As of 1 January 2016, it is possible for Dutch lower courts to request a preliminary ruling from the Supreme Court. The Lower Court’s current ruling request acknowledges that the Supreme Court’s 2015 ruling is clear, but states that opinions in tax literature and the recent case law of the ECJ raise questions on its ruling.
In its ruling request, the Lower Court provides arguments why the recent ECJ decision in the joined cases Miljoen, X, and Société Générale SA could be interpreted as to require a different comparability analysis than the analysis originally made by the Supreme Court. Subsequently, the Lower Court has requested the Supreme Court to provide answers to the following questions:
- Whether the Supreme Court would reconsider its earlier ruling in light of the recent ECJ decision and related commentary
- If not, whether the tax position of Dutch investors in foreign investment funds should be taken into account in a comparability analysis
- Insofar as it is relevant in considering the answers to the previous questions, to what extent the Dutch FBI requirements are relevant in a comparability analysis between a foreign investment fund and a Dutch FBI, specifically with regard to the redistribution requirements and the shareholder requirements.
In its ruling request, the Lower Court states that approximately 1,500 similar cases are already pending with the Lower Court, and that a further 2,000 to 3,000 cases are expected. The Lower Court requests the Supreme Court to provide guidance how to process these cases.
The preliminary questions are significant, as they seem to cast doubt on the earlier decision of the Supreme Court.4 The Supreme Court will have to reassess its earlier ruling in light of recent case law from the ECJ, which could lead to a more favorable outcome for foreign investment funds. As a part of the procedure, the Dutch Supreme Court also allows third parties to submit their observations in writing. EY is able to assist with such submissions. Furthermore, the preliminary ruling request from the Lower Court may itself trigger the Supreme Court to refer the case to the ECJ with a further preliminary ruling request. The Supreme Court is obliged to refer a case to the ECJ if it is of the opinion – as the Lower Court appears to be – that there is uncertainty on the application of EU law in this case.
The preliminary ruling request from the Lower Court confirms that a final verdict in the case of reclaims of Dutch dividend withholding tax incurred by foreign investment funds is still forthcoming, and that it may still be viable to continue with existing reclaim requests, and to file new reclaims where the applicable statute of limitations requires. Foreign investment funds should contact their local tax advisor or one of the contacts below to address the impact on this preliminary ruling request on their current Dutch dividend withholding tax position.
1. Lower Court Zeeland/West-Brabant 1 August 2016, no’s. 15/6759-6762 and no’s. 12/29, 12/30, 12/152-154.
2. Dutch Supreme Court 10 July 2015, no. 14/03956, BNB 2015/203.
3. CJEU 17 September 2015, joined cases C-10/14, C-14/14 and C-17/14, Miljoen, X, and Société Générale SA.
4. It should be noted that the possibility to refer questions for a preliminary ruling to the Dutch Supreme Court exists since 1 January 2016 for tax procedures.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Daniel Smit
+31 88 407 8499
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Arjo van Eijsden
+31 88 407 8411
- Ben Kiekebeld
+31 88 407 8457
- Bouke van der Werf
+31 88 407 8690
Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York
- Philip Mac-Lean
+1 212 773 0396
EYG no. 02697-161Gbl