In Europe, a large number of countries offer exemption from withholding tax on dividend payments to their own pension funds, in purely domestic situations.

In recent years, the European Court of Justice (ECJ) ruled, more than once, that limiting eligibility for withholding tax exemption to domestic situations only, infringes on the freedom of capital (one of the fundamental freedoms within the EU), as it discourages foreign pension funds from investing in that country. As the free movement of capital applies not only to intra EU situations, but also to capital movements from EU countries to “third countries", withholding tax exemptions that apply in EU member states in domestic situations can now generally be claimed by pension funds in other  countries (both EU and non-EU) as well.

Most EU countries have by now adapted their the tax laws, such that an exemption extends to EU/EEA resident pension funds. And as a result, often clear procedures are in place that describe how EU pension funds can obtain exemption from withholding tax. However, in spite of the fact that, according to the ECJ, third countries should also be eligible for exemption, many EU member states still have not extended their exemptions to third countries.

As a result of Brexit, the UK has become a third country. Consequently, in many EU countries, UK pension funds have lost access to withholding tax exemptions. Without a clear legal exemption and procedures, paying- and withholding agents are  likely to no longer offer services for relief at source, nor for reclaims in arrears. For example, recently Clearstream Bank informed its UK clients that it will stop with certain tax relief procedures.

UK pension funds now will have to obtain their withholding tax benefits themselves by directly engaging with local tax offices and objecting to the tax withheld, invoking the free movement of capital and the underpinning ECJ case law. Or by invoking the bilateral tax treaties that the UK has concluded with EU member states. But those treaties often do not provide for a full exemption or refund of dividend withholding tax for pension funds.

Similarly, as a result of Brexit, UK UCITS and AIFs are facing a higher withholding tax as - strictly speaking - they are no longer eligible for relief from withholding tax in countries that provide relief to funds if they are regulated under the two EU directives (for UCITS and AIFs). Although many of such UK funds will still be comparable to UCITS and AIFs, they too are likely to become dependent on claiming withholding tax in arrears and invoking the free movement of capital and ECJ case law.

UK pension funds and UCITS/AIF's that would like to get a better understanding of this issue and what it means for their withholding tax position are welcome to leave us a message at [email protected].