Dutch High Court ruling casts further doubt over EU dividend withholding taxes

An important Dutch case whereby the Dutch High court opined that a dividend distributed by a Dutch company to a Luxembourg private company owning 2.25% of the shares in the Dutch company should be paid without the imposition of Dutch DWT. This case is similar to another Dutch case which the Gerechtshof of Amsterdam has referred to the European Court of Justice.

On 9 September 2005, a Dutch High Court ruled on the compatibility of Dutch dividend withholding tax (DWT) with European Union (EU) law. The court opined that a dividend distributed by a Dutch company to a Luxembourg SARL (a private company owning 2.25% of the shares in the Dutch company) should be paid without the imposition of Dutch DWT. The court agreed with the Luxembourg company’s assertions that the imposition of DWT, in circumstances where a Dutch shareholder would not be subject to the withholding tax, was a breach of free movement of capital rules under European law.

If the Dutch Supreme Court upholds the High Court decision, dividends received by European Economic Area (EEA) corporate shareholders from Dutch companies will in many instances no longer be subject to Dutch DWT. While a decision of the Dutch court is clearly not binding on other Member States, it serves as a reminder that there are a number of DWT regimes throughout Europe that do not appear to be compatible with EC Treaty obligations.

The European Court of Justice (ECJ) has not yet decided on the tax treatment of foreign shareholders with respect to outbound dividends, although some parallels existed in the Metallgesellschaft/Hoechst case. The ECJ will get the opportunity to consider the tax treatment of foreign shareholders when it hears the Denkavit case, a referral concerning French withholding taxes imposed on dividends paid to a Dutch parent company. The issue will also likely arise when the ECJ considers next month a referral emerging from UK group litigation that questions the non-payment of UK tax credits to non-UK shareholders. In that case, the claimants are arguing that Articles 43 and 56 EC Treaty require that the tax credit available to UK residents (and some non-residents by virtue of tax treaties) should be given to EU resident shareholders in receipt of UK dividends.
The aspects of European law considered by the Dutch High Court have already been considered by another European court. The EFTA (European Free Trade Association) Court in the Fokus Bank case has already opined against a system whereby Norwegian shareholders were granted a tax credit in respect of dividends paid by Norwegian companies, while non-resident (German and UK) shareholders were denied a tax credit and suffered a withholding tax.
While Norway is not part of the EU, the European Economic Area (EEA) Agreement extends certain EU freedoms to three EFTA States, namely Norway, Iceland and Liechtenstein. Article 40 of that Agreement contains a free movement of capital provision similar to that contained in the EC Treaty and considered by the Dutch court. In arriving at its conclusion that the Norwegian rule breached Article 40, the EFTA Court applied ECJ case law in relation to free movement of capital.

Impact on dividend payments within the EU
If the ECJ takes a similar view to the EFTA Court, it will have an impact in many European jurisdictions.

Ireland introduced DWT on 6 April 1999. However, there are a significant number of exemptions, both for dividend payments to certain categories of residents and for dividend payments to non-residents. In most circumstances, dividend payments to residents of EU Member States should not attract DWT if the appropriate declarations/certificates, etc. are put in place. This is so irrespective of the size of the shareholding, although if the shareholder meets the requirements of the EC Parent Subsidiary Directive (5% holding required since 1 January 2004) there is no advance paperwork to be completed. The only circumstance when an EU resident corporate shareholder cannot obtain an Irish domestic exemption from DWT is where the company receiving the dividend is ultimately controlled by Irish residents (assuming the Parent Subsidiary Directive does not apply).

Certain non-corporate entities are entitled to a domestic exemption from DWT. These include Irish Revenue-approved employer pension schemes and charities established in Ireland. On the basis of the Fokus Bank decision, it would appear that pension funds and charities based in other EU Member States might be in a position to reclaim DWT if a suitable double taxation agreement was not accessible. It is worth noting that under the Ireland/UK tax treaty, certain UK pension funds and charities are already exempt from Irish withholding tax on dividends received.

Any Irish repayment claims must be made within four years of the end of the year for which the claim arises.

Irish companies (or indeed entities such as pension funds) in receipt of dividends from other EU Member States may also need to consider their position. Ernst & Young has already identified instances throughout the EU where local DWT is operated in circumstances where comparable domestic shareholders would not be liable to such a tax. Depending on the facts, Ernst & Young have identified that dividends from companies resident in Belgium, Finland, France, Germany, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal and Spain may be susceptible to some form of challenge.

However, strict time limits for making repayment claims or lodging appeals may need to be observed.

Impact on dividend payments to non-EU Member States
Dividend payments from Ireland to some EEA companies — i.e. those based in Iceland (payments pre 1 January 2005) and Liechtenstein — generally suffer DWT unless such companies are controlled by residents of an EU or treaty country. The imposition of DWT in these instances would appear to be discriminatory based on the decision in the Fokus Bank case.

The free movement of capital provisions contained in the EC Treaty extend to transactions between EU Member States and third countries, although this freedom is ‘without prejudice’ to restrictions with third countries in existence at 31 December 1993. The Dutch measure under examination existed at that time. However, DWT was introduced in Ireland in 1999. While claims by non-EU shareholders are considerably more complicated than claims by EU shareholders, arguably dividends paid to a corporate resident of any country, irrespective of its shareholder status, should not attract Irish DWT.

This case is similar to another Dutch case which the Gerechtshof of Amsterdam has referred to the ECJ.

What to do now
Companies, charities and pension funds in receipt of dividends from companies resident in EU Member States should ascertain:

• if withholding taxes have been imposed on the dividends;
• whether a comparable domestic shareholder would have had no liability; and
• if the withholding tax represented a tax cost because of insufficient tax capacity to absorb the tax credit for the withholding tax or because no credit was available (such as where the shareholder availed of a participation exemption).

In such circumstances, the merit of lodging a repayment claim with the relevant EU Member State should be considered.