On November 7th, 2024, the ECJ rendered its decision in a request for a preliminary ruling from the Dutch High Tax Court of Den Bosch on whether the Dutch dividend tax treatment of a non-resident insurance company violates the free movement of capital in the EU treaty. The case is known as the "XX case"(C-782/22).

Facts of the case 

XX is a UK resident insurance company that has concluded so-called "unit-linked insurance contracts" with its clients, which mainly consist of UK resident pension insurers. Under these contracts, XX invests the pension premiums received from its clients, that are then allocated to investment pools which issue units to XX’ clients. 

XX’s clients are allocated a value equal to their number of units, multiplied by the value per unit at the moment at which they are entitled to distribution. That moment commonly coincides with the moment at which XX’s clients must pay pension benefits to the insured persons that have concluded their pension insurance. XX receives a remuneration for its investment activities, that is a percentage of the capital invested which is partly dependent on the return on investment.  

XX has invested the pension premiums in, among others, Dutch publicly traded securities from which it received dividends. A 15% Dutch dividend withholding tax was withheld on the gross dividend amount. As XX is not able to credit the Dutch dividend withholding tax in the UK, XX submitted a request for refund of the Dutch dividend withholding tax.

Legal proceedings of the case 

After the Dutch tax authorities rejected XX’ refund request, and the Dutch lower tax court rejected XX’s appeal, XX appealed with the High Tax Court of Den Bosch, which referred the case to the ECJ for a preliminary ruling. 

In its referral document, the High Tax Court clarified that if XX would have been tax resident in the Netherlands, it would only have been subject to (corporate) income tax over the remuneration of its services (the percentage of the capital invested on behalf of its clients).

However, the taxable basis for Dutch dividend income received would be nil because, under Dutch tax law, expenses arising from the increase in XX's obligations to pay its clients under the unit-linked insurance contract are considered when calculating the taxable basis. This means that the expense offsets the income, resulting in no taxable income for that dividend.

Request for preliminary ruling from the ECJ 

The High Tax Court then referred the following question to the ECJ for a preliminary ruling: 

‘Does Article 63(1) TFEU (free movement of capital) preclude legislation such as that at issue, according to which dividends paid by listed and unlisted companies established in the Netherlands to a company established in another Member State that has invested, inter alia, in shares in those listed and unlisted companies to cover future payment obligations are subject to withholding tax at the rate of 15% on the gross amount of those dividend payments, whereas the tax burden on dividend payments to a company established in the Netherlands in otherwise similar circumstances would be nil, because the calculation of the basis of assessment for the tax on profits to which that company would be subject takes into account the costs that are incurred as a result of an increase in the future payment obligations of the company, which increase corresponds almost entirely to a (positive) change in the value of the investments, even though the receipt of dividends does not as such lead to a change in the value of those obligations?’ 

Restriction of the free movement of capital 

The ECJ has now answered this question in the affirmative: the free movement of capital does indeed preclude a provision such as the one in Dutch tax law under which resident insurance companies are not taxed on Dutch source dividend income whereas non-resident insurance companies are. 

In its decision, the ECJ determines that the Dutch provisions on taxation of dividends, in cases such as XX's, treat non-resident insurance companies less favourably than resident insurance companies, which constitutes a prima facie restriction of the free movement of capital. The question then arises as to whether the restriction can be justified on the grounds that the cross-border situation is not objectively comparable to a purely domestic (Dutch) situation, or if it can be justified by overriding public interest reasons. 

Objective comparability 

On the matter of objective comparability, the ECJ refers to its established case law (a.o. Commission v Finland C-342/10, Miljoen C-10/14, and College Pension Plan C-641/17). The Court states that residents and non-residents are in an objectively comparable position when it comes to expenses (e.g., business expenses) that are directly linked to an activity generating taxable income in a Member State. This means that, from a tax perspective, both residents and non-residents should be treated similarly with respect to expenses incurred in generating taxable income within that Member State, regardless of their residency status.

The ECJ then considers that, although it may not be possible to directly link the increase in obligations to clients with the actual receipt of dividends, this fact alone does not justify the conclusion that the situations of resident and non-resident dividend recipients are not comparable under the Netherlands' legislation at issue in the main proceedings. In light of the case law cited, the Court suggests that the lack of a direct link between the obligations and the dividend receipt does not automatically mean that the two groups (residents and non-residents) are in objectively different situations for tax purposes.

The ECJ follows by reiterating its primary considerations from the College Pension Plan case, where it concluded that the non-resident pension fund was considered objectively comparable to German pension funds under German tax law. In that case, resident pension funds enjoyed a complete or nearly complete exemption from tax on dividends received, provided there was a causal link between the receipt of dividends and the expenses arising from the obligations tied to the funds' activities. The Court emphasized that, even for non-residents, the situation could be regarded as objectively comparable if the same conditions applied, particularly the connection between dividend income and related expenses.

Finally, the ECJ concludes that, should the national legislation acknowledge a direct link between the dividends received by resident companies and changes in their customer commitments—which is for the referring court to establish—then a non-resident company would also have to be considered in an objectively comparable situation to a resident company.

Overriding reasons in the public interest 

After establishing objective comparability, the ECJ considered whether any overriding public interest could justify the difference in treatment. 

The Dutch government and other member states invoked two main justifications: 

1. Preservation of Taxing Powers and Avoidance of Double Deductions

The Dutch government argued that allowing non-residents to claim deductions similar to residents would compromise the allocation of taxing rights between member states and potentially result in double deductions. 

However, the ECJ emphasized that these concerns do not justify discriminatory taxation. If a member state opts to tax dividends received by both residents and non-residents, it must treat both groups comparably and cannot impose a disproportionate burden on non-residents under the guise of preserving taxing powers. 

2. Coherence of the National Tax System
This justification also centers around maintaining the coherence of the Dutch tax system. The government argued that the benefits afforded to resident companies on dividend income correlate with the taxes on other income derived from the same economic activities.

However, the ECJ rejected this justification, noting that the coherence of a tax system cannot excuse unfavorable treatment if the non-resident taxpayer is in an objectively comparable situation to the resident taxpayer. In essence, if a resident company could receive dividend tax relief due to obligations to policyholders, the same rationale must extend to non-resident companies meeting comparable obligations, regardless of where they are taxed. 

Our view on the ECJ ruling 

There are a number of important takeaways from this decision.  

First, the ECJ seems to reverse its more restrictive decisions in the referenced prior rulings (such as Commission v Finland and Miljoen) under which it appeared as if only expenses directly related to the collection of dividend income should be taken into account when determining objective comparability. It is now clear that also the expenses following from obligations that correspond with the dividend income must be taken into account. Or perhaps this was always the case, and this latest ruling is not a reversal of prior rulings but an important nuance.  

Second, it emphasizes that the German Tax Court of Munich has made an incorrect decision following the ECJ’s ruling in the College Pension Plan case, by denying College Pension Plan’s reclaim. The Tax Court of Munich effectively held that College Pension Plan is not objectively comparable to German pension funds because it does not account for pension liabilities in its financial statements in the same way or using the same methodology as Germany pension funds. If it wasn’t clear already, it should be clear now that this is a much too narrow application of the ECJ’s College Pension Plan ruling, at the disadvantage of the claimant, and all other claimants that are seeing their reclaims rejected on the basis of this Munich tax court decision. 

Read the complete XX ruling here.