Taxology

European Commission formally asks Sweden and France to stop applying a higher withholding tax to foreign pension institutions and insurance companies

MARCH 9, 2021 | TAX NEWS

From the European Commission’s February 2021 infringement package: Sweden and France requested to stop applying a higher dividend withholding tax to foreign pension institutions and insurance companies respectively.

France

The European Commission formally asks France to change its withholding tax rules on dividends paid to “unit linked insurance policies” (“ULIPs”) offered by foreign insurance companies established in the  EU or EEA. A ULIP is a life insurance scheme where the premiums paid by the policy-holder are used to purchase units in investment funds selected by that person, and where the dividends paid out by the funds are passed on by the insurer to the policy-holder. Insurance companies established in the EU or EEA are required to pay a final withholding tax on French dividends received in relation to ULIPs. However, insurance companies established in France either pay no withholding tax on dividends in relation to ULIPs, or can credit the withholding tax paid against French corporation tax, which amounts to zero. This is because the dividends received constitute deductible provisions or technical reserves. The Commission deems that these rules infringe on the free movement of capital (Article 63(1) of the TFEU and Article 40 of the EEA Agreement). France has two months to reply to the arguments raised by the Commission. Otherwise, the Commission may decide to send a reasoned opinion.

Sweden

The European Commission formally asks Sweden to look at a potential incompatibility of its legislation with EU law on taxation of dividends paid to public pension institutions. Swedish public pension funds are, as government agencies, entirely exempt from tax liability. Dividends paid to equivalent non-resident public pension institutions are subject to a withholding tax, commonly at a reduced rate of 15% as provided for in the tax treaties concluded between Sweden and other EU/EEA countries. The Commission considers that such a fiscal scheme under which dividends paid to foreign public pension institutions are subject to less favorable treatment than similar distributions in purely domestic situations may infringe the free movement of capital (Article 63(1)of the TFEU and Article 40 of the EEA Agreement). Sweden has two months to reply to the arguments raised by the Commission after which the Commission may decide to send a reasoned opinion.

Source: https://ec.europa.eu/commission/presscorner/detail/en/INF_21_441

If you have any questions what these procedures may mean for your organization, please do not hesitate to send your questions to info@taxology-global.com

On May, 28th the German Parliament accepted a proposal to centralize the filing of dividend withholding tax reclaims based on the free movement of capital (also commonly referred to as “ECJ claims” or “Fokus Bank claims”). The proposal had been tabled serveral times before over the past years but has now finally been accepted.

Free movement of capital based reclaims of dividend withholding tax can be feasible when the applicable double tax treaty between Germany and the foreign investor’s residence country does not exempt or refund dividend withholding tax. Important conditions are that the foreign investor is objectively comparable to its German peers which, unlike the foreign investor, are entitled to full exemption or refund under German tax law.

Until today, there were no rules in Germany as to which tax administration was competent or responsible for processing free movement of capital based dividend withholding tax reclaims. As a result, foreign investors seeking to reclaim German dividend withholding tax on the basis of free movement of capital had to file every claim on three levels. Or at least they should have, if they wanted to minimize or eliminate the risk of such claims being rejected as inadmissible. Or as not filed with the competent tax office. They had to file with the federal tax office, with the local tax office where the Germany company paying the dividend resided, and with the tax office where the foreign investor held its most valuable investment. The latter means filing with the local tax office where the German dividend paying company resides that makes up for the largest share investment of the claimant, as compared to the claimants investments in other German companies. For foreign large (institutional) investors, this practice meant that they had to file their claim with dozens of different tax offices

As of today, it is clear that the federal tax administration is responsible for processing these claims. So now, foreign investors can file their claim with the federal tax office only, which will save an enormous amount of time and effort. The new centralized filing procedure is said to have immediate effect, meaning that claims timely filed in the past that have not yet been processed will now be handled by the federal tax administration.

Would you like to learn more about the possibility to reclaim German dividend withholding tax based on the free movement of capital? Please send your request to info@taxology-global.com

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