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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

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Foreign investment funds inching closer to Dutch dividend withholding tax refunds

The Dutch Supreme Court’s assessment whether the shareholder and distribution requirements for fiscal investment institutions (FII) in the Netherlands are compatible with EU law is keenly awaited, following the guidance given by the ECJ in Case C-156/17 Köln-Aktienfonds Deka. The outcome of the case before the Dutch Supreme Court will likely decide the fate of many thousands of claims for refunds of Dutch dividend withholding tax filed by foreign investment funds. So, what did the ECJ say?


KA Deka, a German-resident undertaking for collective investment in transferable securities, had applied for a refund of Dutch tax withheld from dividends paid to KA Deka by companies in the Netherlands between 2002 and 2008. When the application was refused by the Dutch tax authorities, KA Deka claimed that it was eligible for the refund on the basis that it was comparable to an FII (although it did not meet two of the conditions to qualify as an FII).

The Dutch Supreme Court requested a preliminary ruling from the ECJ on the question whether tying the eligibility for a withholding tax refund to fulfilling the relevant conditions in the Dutch FII legislation was compatible with the free movement of capital. The relevant condition were:

  • certain shareholder requirements
  • the obligation to distribute profits within eight months after the end of its financial year

ECJ decision

The ECJ reiterated that EU Member States are free to provide specific tax regimes to encourage the use of collective investment undertakings, and to define conditions which must be met to make use of such regimes. This includes rules on how the burden of proof for entitlement to the regime is allocated.

These national conditions, however, violate EU law if they, whilst theoretically applicable to all taxpayers, are in practice unlikely to ever be met by non-residents. The ECJ reviewed the shareholder requirement and distribution requirement for FIIs in light of these considerations.

Shareholder requirement

The ECJ reaffirmed that measures discouraging non-residents from investing in a Member State are prohibited under EU law as a restriction of the free movement of capital. The questions to be determined by the Dutch Supreme Court following the ECJ’s decision are:

  • whether the shareholder conditions applicable to FIIs are likely to discourage non-resident investment funds from making investments in the Netherlands. In this respect, the ECJ stated that, even if FIIs and non-resident investment funds are subject to the same shareholder requirements, these requirements are not compatible with EU law if, in practice, they are unlikely to be met by non-resident investment funds
  • whether the evidence to be provided by non-resident investment funds to demonstrate eligibility for the regime discourages them from making investments in the Netherlands. In this respect, the ECJ confirmed that Dutch legislation may require taxpayers to prove that the conditions for a favourable tax regime have been met. In the case at hand, KA Deka had been unable to prove the shareholder requirement because the system in which its shares were traded made it impossible for KA Deka to identify its shareholders. The ECJ noted that this was not the result of the Dutch legislation, but of the choice of share trading system. Therefore, provided that FIIs whose shares are traded in a similar system are treated in the same way as KA Deka, the shareholder requirement will not violate EU law

Requirement to distribute profits within 8 months of financial year end 

The ECJ held that such a requirement may, depending on its objective, violate EU law. If the objective is to tax the FII's profits at shareholder level, the requirement violates EU law, if profits of a foreign investment fund are – irrespective of whether distributions are made – taxed shareholders level. The Dutch Supreme Court must now determine what the objective of the distribution requirement is.

What does the ECJ’s ruling mean?

Whilst this had previously been established in respect of other areas of law, it is the first time that the ECJ has held in a direct tax case that EU law may be breached if residents of other Member States, although legally in the same position, are unlikely to be able to claim the same treatment in practice. This makes clear that the ECJ draws no distinction between tax law and any other area of law when judging its compatibility with EU law.

Despite the ECJ’s clear guidance to the Dutch Supreme Court, a number of issues remain. For example: if KA Deka has German participants who are required to recognise undistributed income, and non-German participants who recognise income only when distributed, is it still comparable to an FII? If a foreign investment fund is not obliged to distribute, but makes distributions as a matter of general fund terms, is it comparable to an FII?

With regard to the shareholder requirement, it will be interesting to see where the Dutch Supreme Court will draw the line, given that FIIs that are publicly traded in the Netherlands have no practical means of identifying their shareholders. Instead, they rely on provisions in the articles of association and the fund terms to ensure compliance with the shareholder requirement.

Next steps

It is now up to the Dutch Supreme Court to determine whether the shareholder and distribution requirements infringe the free movement of capital. There are currently c.7,000 similar cases pending in the Netherlands.

Albeit proceedings at a snail's pace, it seems that the end of the KA Deka proceedings are finally in sight - but it may take many years before all remaining questions are resolved.

The ECJ draws no distinction between tax law and any other area of law when judging its compatibility with EU law


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