Dutch tax authorities reinterpret rules, affecting foreign pension funds' dividend withholding tax reclaims. Disputes arise over statute of limitations and objective comparability.
Foreign pension funds file DWT reclaims in the Netherlands based on the EU free movement of capital. However, in the past year, they witnessed unexpected rejections of their claims, and prior years undergoing reassessment.
The reason for this unanticipated wave of rejections and reassessments is that the Dutch tax authorities changed their interpretation of objective comparability, which serves as a core principle in any EU free movement of capital claim. In addition to objective comparability, there is a difference of opinions on the statute of limitations for issuing reassessments.
Dispute on the statute of limitations for issuing reassessments
The Dutch tax authorities are trying to reassess refunds as far back as possible. However, the Dutch statute of limitations restricts the period for issuing reassessments to 5 years.
So when does this period start to run? There are two interpretations:
From the end of the calendar year in which the dividend withholding tax was originally levied, or
From the end of the calendar year in which the refund was granted, which in practice is often one, two, sometimes almost three years after the year in which the tax was withheld (depending on how soon after the tax year the refund was applied for and granted).
Unsurprisingly, the Dutch tax authorities favor the latter view, which effectively extends the statute of limitations by at least one year, allowing them to reassess claims older than five calendar years. We support the former view, grounded in case law from the Dutch Supreme Court.
Dispute on objective comparability
For a reclaim based on the free movement of capital to succeed, there must be “objective comparability” between the foreign claimant and its domestic, refund-eligible peer.
In the context of foreign pension funds, the Dutch tax authorities seem to focus on differences between foreign and Dutch pension plans concerning the circle of beneficiaries and the option of lump sum payments.
In the Netherlands, pension (death) benefits can only go to family members, and lump sum payments are only possible in the event of redemption of small pensions (so-called “commutations of small pensions”). In some foreign pension plans, pension (death) benefits can, under certain circumstances, go to designated beneficiaries who may not be family members, and lump sum payments may occur in certain situations other than the commutation of small pensions.
We argue that the objective comparability test as applied by the European Court of Justice (ECJ) many times in its case law does not allow such a comparison of “minutiae”, particularly when those aspects are not relevant in light of the aim pursued by the exemption or refund provision.
What we know so far
The concept of legitimate expectations
Among the general principles of good public governance within Dutch (case) law, we find the principle of legitimate expectations. After consistently applying a specific tax treatment (such as withholding tax refunds) to a taxpayer for many years, it becomes more difficult for tax authorities to reassess, due to the creation of a legitimate expectation by the taxpayer. This intensifies the longer a certain tax treatment has been in place, becoming even stronger if the taxpayer’s reclaims are subject to periodic random audits (which they often have, sometimes via their custodian), or if they have been registered and accepted as a beneficiary for reclaims through the bulk electronic reclaim system established by the Dutch tax authorities in 2017.
Some of the first tax court appeals have been filed
After filing objections against reassessments and reclaim rejections with the tax authorities, the first appeals have now been filed with the tax court. Some of these cases are on hold by the tax court, as it awaits an anticipated ruling from the ECJ in a case referred to it by a Dutch tax court of appeals in December 2022. Surprisingly, the claimant in the aforementioned case is not a pension fund but an investment fund. However, the tax framework for investment funds differs significantly from that for pension funds, which is why the questions of objective comparability in that case may offer limited insight into the case of pension funds.
In conclusion
The landscape of foreign pension funds withholding tax reclaims in the Netherlands is facing unexpected challenges. The recent wave of rejections and reassessments stems from ongoing disputes, notably centered around the concept of objective comparability and the statute of limitations for issuing reassessments .
Amidst these challenges, the principle of legitimate expectations emerges as a crucial element in the discussion. Consistent tax treatment over time creates a legitimate expectation, potentially shielding taxpayers from reassessment, and adding a layer of protection.
As the disputes unfold, the first tax court appeals have been initiated, shedding light on the complex interplay between legal principles, case law, and the evolving landscape of tax regulations. The anticipated ruling from the ECJ in a case involving an investment fund may provide insights, even though the nuances of the tax framework for investment funds differ from those applicable to pension funds.
In navigating these complexities, the outcomes of these legal battles will likely shape the future landscape for foreign pension funds navigating the intricacies of DWT reclaims in the Netherlands. The resolution of these disputes will not only impact the involved parties but may also set precedents with broader implications for the interpretation and application of the free movement of capital in a withholding tax reclaims context.
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