English investment fund cannot be compared to Dutch investment funds
A UK based investment institution cannot be compared to Dutch investment institutions for dividend withholding tax relief purposes.
13 December 2017
Provided the related conditions are met, certain companies (including private and public limited liability companies) can be classified as fiscal investment institutions. A fiscal investment institution is taxed at a rate of 0%. The objective is to avoid having the investment institution bear the tax burden. Instead it should be imposed on investors with an interest in the investment institution. Collective investors, who use a fiscal investment institution to make investments, should thus be treated the same as individual investors, who invest directly in the same assets. One of the conditions for applying the fiscal investment institution regime is that investment institutions make available their profits to their shareholders within eight months after the financial year (distribution requirement).
In addition to the 0% corporate income tax rate, fiscal investment institutions are granted a dividend withholding tax relief. This allows them to deduct the previously imposed dividend withholding tax for dividends received from the dividend withholding tax they have to withhold when redistributing the profits received.
Recently, the Den Bosch Court of Appeal dealt with a case in which the interested party, an open ended investment institution incorporated under UK law and established there, claimed a refund of dividend withholding tax. The interested party took the position that it can be compared to a Dutch fiscal investment institution and should thus obtain the same dividend withholding tax relief.
According to the Court of Appeal, though, the interested party cannot be compared to a Dutch investment institution. Although the interested party is indeed subject to a type of distribution requirement in the United Kingdom, the Court of Appeal considers this obligation to only relate to UK resident shareholders. According to the Court of Appeal a foreign investment institution can only then be comparable to a Dutch fiscal investment institution when it meets the distribution requirement as regards all shareholders.
European law aspects
Earlier this year, the Supreme Court submitted requests for a preliminary ruling with the Court of Justice of the European Union involving two similar issues. It involved the question whether the tax relief is contrary to European law, since it is granted to Dutch fiscal investment institutions but not automatically to foreign investment institutions. One of those questions likewise involved a dividend distribution to a UK based fund.
The interested party in this case had requested the Court of Appeal to stay the proceedings until the CJEU had ruled on this. Still, in the opinion of the Den Bosch Court of Appeal the outcome of the European case would not affect the case at hand and it pronounced its own judgment.
Should this case be brought before the Supreme Court, it will be interesting to see whether our highest court will even await the judgment of the CJEU. Whatever will happen, it will be worthwhile to analyse the CJEU’s judgment and its possible consequences for Dutch taxation relating to investment institutions, particularly in respect of dividend withholding tax.
Source: Den Bosch Court of Appeal 24 November 2017, 16/03761 through 16/03770, ECLI:NL:GHSHE:2017:5170