Dutch tax authorities to claw back millions in ECJ reclaims.

Last week, the Dutch tax authorities have started a large scale re-examination of foreign pension funds’ entitlement to reclaims of Dutch dividend withholding tax based on the free movement of capital provision in the EU treaty, also known as “ECJ reclaims”. They intend to reassess (claw back) refunds wherever possible.

What are ECJ reclaims?

The free movement of capital in article 63 of the EU Treaty states that “all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited”. Based on established ECJ (European Court of Justice) case law, withholding taxes on cross border investment income in principle are such a restriction as they make it less attractive for foreign investors to invest in an EU member state. However, according to article 65 of the EU Treaty, EU member states are allowed “to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested”. Based on ECJ case law, this means that EU member states are allowed to levy withholding tax from foreign taxpayers while exempting or subjecting their own domestic taxpayers to a lower rate when foreign taxpayers are not in a situation that is objectively comparable to that of domestic taxpayers.

Who have filed ECJ reclaims?

Since the late ‘00’s (approximately since 2005), both EU investors and non-EU investors, private individual and institutional investors alike, have filed ECJ reclaims in various EU member states, arguing they had been subjected to a higher withholding tax burden by that EU member state than their peers while being in an objectively comparable situation. Investors would normally file ECJ reclaims when the applicable double tax treaty did not provide for a rate reduction or exemption equal to that for which they were eligible under the free movement of capital (and the amounts involved were substantial enough to warrant a claim).

What has happened to ECJ reclaims?

In a lot of EU member states, ECJ reclaims were initially ignored and later rejected. Litigation ensued in a lot of member states. First before the domestic courts, and ultimately before the ECJ, the highest court in Europe. ECJ case law since then has largely been in favor of claimants. As a result, a lot of member states have proceeded to refund ECJ reclaims. Other member states, like Germany, still dispute ECJ reclaims till this day.

Why are the Dutch tax authorities seeking to claw back millions of refunded ECJ reclaims?

The Netherlands exempts Dutch tax exempt entities (including pension funds) from dividend withholding tax. Levying withholding tax from foreign tax exempt entities is therefore a tentative infringement of the free movement of capital.

The Dutch tax authorities initially rejected ECJ reclaims from foreign tax exempt entities, based on various counter arguments. In 2007, however the Dutch Ministry of Finance acknowledged the eligibility for EU tax exempt entities (including EU pension funds) and introduced a refund provision for EU tax exempt entities. In 2012, it also introduced a refund provision for non-EU tax exempt entities. Since then, the Netherlands has refunded hundreds of millions of euros in withholding tax to foreign tax exempt entities, mostly foreign pension funds.

Now, the Dutch tax authorities are looking to re-examine those ECJ refunds. The reason is that foreign pension funds may not be objectively comparable to Dutch pension funds after all. Asked for examples, the Dutch tax authorities stated that under some foreign pension plans, it is possible to pay lumpsum pension benefits. Also, under some foreign pension plans the group of beneficiaries is wider than the group of beneficiaries allowed under the tax exemption rules Dutch pension plans. For Dutch tax exempt pension plans, the group of (potential) beneficiaries is limited to (former) employees, their (former) spouses or partners, their children or foster children below the age of 30.

Our view on this re-examination

This re-examination is quite surprising. First of all, ECJ reclaims by foreign pension funds have been filed, assessed and approved for over a decade now. It would be reasonable to expect that the Dutch tax authorities would have had ample time to subject the reclaims to proper scrutiny before approving the refunds. Secondly, under established ECJ case law on the interpretation of  objective comparability, it is not at all clear how the ability to pay lumpsum pension benefits or a allowing wider group of beneficiaries would make foreign pension fund objectively incomparable.

We strongly encourage all foreign pension funds confronted with this re-examination of their ECJ reclaims to file timely objections against any reassessment of Dutch dividend withholding tax they may receive. We believe there are strong arguments against the Dutch tax authorities’ position on objective incomparability.

Which years are in scope of this re-examination?

The Dutch statute of limitations for reassessment of dividend withholding tax refunds is five years after the end of the calendar year in which the refund was granted. This means that the statute for refunds granted in before 2017 has expired. Refunds granted in 2017 can be reassessed until the end of this year.

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