The Dutch Supreme Court decided in the Köln Aktienfonds Deka (KA DEKA) case that foreign investment funds are eligible for a refund of Dutch dividend withholding tax paid, but only if certain very stringent requirements are met. 

Taking into account the ECJ's decisions in KA DEKA and Fidelity Funds, the Dutch Supreme Court - reversing its 2015 decision – ruled that foreign investment funds qualifying as Undertakings for Collective Investment in Transferable Securities (UCITS) are in principle objectively comparable with Dutch resident Fiscal Investment Institutions (FIIs). This means that, based on the EU principle of free movement of capital, foreign investment funds may be eligible for a refund of Dutch withholding tax paid on dividends derived from investments in shares in Dutch companies. This is conditional on these funds meeting the shareholder and distribution requirements that apply to Dutch FIIs. In addition, the foreign funds must agree to make a "substitute payment" to the Dutch tax authorities to qualify for an actual refund.

Distribution requirement 

An FII is required to distribute its profits within eight months after the end of its financial year. Taking into account the ECJ's decision, the Dutch Supreme Court has now decided that:

• the distribution requirement's objective is to tax the FII’s profits at the shareholder level;
• a foreign investment fund complies with the distribution requirement when taxation at the level of the shareholders is based on a deemed profit distribution or otherwise on the inclusion of fund income in the shareholders' tax base; and
• whether the amount of the distribution is sufficient to conclude that the foreign investment fund in question complies with the distribution requirement, must be assessed on the basis of Dutch rules.

Shareholder requirement

Taking into account the ECJ's decision, the Dutch Supreme Court has now ruled that a foreign investment fund must meet the applicable shareholder requirement in order to be eligible for a refund of Dutch dividend withholding tax, as this requirement is neither materially nor de facto applied in a restrictive manner.

Substitute payment 

According to the Dutch Supreme Court, if a foreign investment fund complies with the distribution and shareholder requirements, it is eligible for a Dutch dividend withholding tax refund. However, the court has mandated that as a condition for the refund, foreign investment funds must be prepared to make a "substitute payment", in the form of a reduction of the Dutch dividend withholding tax refund. The practical effect of the substitute payment is that a foreign investment fund will only apply for a refund of Dutch dividend withholding tax if and insofar as the refund is higher than that payment. With the introduction of the substitute payment, the Dutch Supreme Court intends to maintain the internal cohesion of the Dutch tax system in a proportionate manner.

The amount of the substitute payment must be calculated as follows. 

• First, one has to determine the "Amount A". This is the amount of Dutch dividend withholding tax that the foreign investment fund would have had to withhold on the distribution of all its distributable profits in the year of its refund request as if the fund and its shareholders/participants that reside in the same country as the foreign investment fund, had been established/resident in the Netherlands.
• Then one has to deduct from Amount A the amount of foreign (that is, non-Dutch) withholding tax paid. The result is the amount of the substitute payment.

To the extent that the claim for a refund of Dutch dividend withholding tax exceeds the amount of the substitute payment, the Dutch tax authorities will refund the excess to the foreign investment fund.

Is this the end of the discussion? 

The Dutch Supreme Court's ruling in the KA DEKA case provides the approximately 7000 foreign investors in pending Dutch court cases with the answer to the question of whether they are objectively comparable to a Dutch FFI. In addition, these foreign investment funds may be eligible for a Dutch dividend withholding tax refund if they meet the shareholder requirement and they are not bound to the Dutch domestic distribution requirement. Instead, it is sufficient if their profits are deemed distributed or otherwise taxed at shareholder level.

To validate a claim for Dutch dividend withholding tax refund, however, foreign investment funds will have to calculate the substitute payment. This will lead to a significant administrative burden. If the substitute payment exceeds the refund claim, Dutch dividend withholding tax will effectively be non-refundable. In addition, in order to prove that it meets the distribution requirement, a foreign investment fund will have to determine whether the amount distributed or deemed distributed by it is sufficient under Dutch tax rules. A deficit in distributions will cause the foreign investment fund to fail the distribution requirement. 

There is a question whether the requirements to make a substitute payment, and to comply with the distribution requirement as if the foreign investment fund were a resident in the Netherlands, meet the proportionality requirement under EU law. It is also possible that the substitute payment may cause double taxation as it is effectively a deduction from the Dutch dividend withholding tax refund. Finally, whether the method of calculating the substitute payment results in a proportionate measure is questionable.