On 14 December 2022, a Dutch court of appeal requested the Court of Justice of the EU (CJEU) for guidance on which costs a foreign recipient of a Dutch dividend can take into account when determining its Dutch corporate income tax, in comparison with the obligations of Dutch tax resident companies. If the Dutch corporate income tax burden is less than the Dutch dividend tax withheld, the foreign company should be entitled to a (partial) tax refund.

The case involves a UK portfolio investment company that concluded contracts with pension funds and employers (i.e. clients), on the basis of which the UK company invested monies paid by the pension funds and employers for their risk and account in one or more so-called units. Each unit consists of securities (listed shares, bonds, etc.) with a certain risk profile. Depending on the risk profile, the monies were invested in securities. The contract with the clients did not include an insurance element. In its commercial accounts, the UK company valued the portfolio investments as well as the corresponding liability vis-à-vis its clients at their fair-market value. The UK company earned only an investment management fee (a percentage of the value of the investments).

From 2003 to 2010, the UK company invested also in Dutch listed shares. During this period, the UK company received dividends on which 15 percent Dutch tax was withheld. The UK company could not credit the Dutch dividend withholding tax against its UK corporate income tax. As a consequence, the Dutch dividend tax resulted in a cost.

A Dutch tax resident company that would have carried out the same activities as the UK company would, however, be able to fully credit the Dutch dividend withholding tax against its Dutch corporate income tax, meaning that the Dutch company would receive a Dutch tax refund to the extent the Dutch dividend tax exceeded the Dutch corporate income tax. On that basis, the UK company was of the view that it should also be entitled to a Dutch tax refund so as to create a level playing field, and the UK company accordingly filed a refund request. The request was however rejected by the Dutch tax authorities (DTA). The UK company appealed to the district court against this decision. The district court confirmed the DTA’s decision, and the UK company appealed against the court’s decision.

First, the court of appeal assessed whether the UK company was entitled to the Dutch dividends, which was answered affirmatively. Second, the court assessed whether the UK company was also the beneficial owner of the dividend. The clients of the UK company did not have the right to demand payment of the Dutch dividend received by the UK company, and the UK company could therefore freely avail over the dividend. The UK company was only obliged to pay the clients upon termination of the united-linked investment agreement. The court therefore took the view that the UK company is the beneficial owner of the Dutch dividends.

The UK company and the DTA both agreed that the freedom of capital movement is at stake as meant in article 63 of the EU treaty. The court reconfirms that this is correct.

The DTA took the position that the case at hand is best comparable with the decision of the CJEU in the Société Générale case (C-17/14). In that case, the CJEU determined that to compare the tax burden between a resident and nonresident, the source state Is only obliged to take into account the costs that are directly linked to collecting the dividends. Those collecting costs are generally modest and do often not provide a material benefit for the foreign company.

After the Société Générale case, the CJEU dealt with similar questions related to tax burden comparisons, in particular for resident and nonresident pension funds. In those cases, the CJEU ruled that the costs that must be taken into account to compare the tax burden include the liabilities of the pension funds vis-à-vis its beneficiaries. In such case, the tax burden comparison usually results in a material refund of the dividend tax. The UK company argued that on the basis of these CJEU cases, the Netherlands should also take into account future liabilities vis-à-vis the UK company’s clients.

The court is of the view that the various verdicts of the CJEU are inconclusive to answer the question raised in the case at hand. Although the court takes note of the fact that the pension fund cases included an insurance element, the court is of the view that this insurance element should not have a material impact on the answer because in both cases the recipient of the dividend has an equal amount of liabilities. The court therefore decided to put the case on hold and first ask the CJEU whether EU law allows a difference in the Dutch tax treatment of Dutch dividends received by a resident investment company (taxed on a net basis) and a nonresident investment company (taxed on a gross basis).

Our observations

The Dutch tax system has been amended effective as per 1 January 2021, in the sense that a Dutch resident company cannot (fully) reclaim Dutch dividend tax withheld on portfolio dividends if its Dutch income tax burden in that tax year is insufficient. The nonrefundable Dutch dividend tax is then carried forward. Therefore, the above case may only impact dividends received by nonresident companies up to including tax year 2020.

A refund claim can be made for up to five years preceding the current tax year. Therefore, in this year (2023), Dutch dividend tax refund claims for the 2018 tax year (and later) can still be filed. If your company is in a comparable position as the UK company, a Dutch dividend tax refund request should be considered. We would be pleased to assist you therewith.