Dear FS professional,

Every other month you receive an update from us on developments in the Financial Services sector. In this edition of the FS Tax Newsletter we have summarized the outcome of the joined cases Miljoen, X and Société Générale concerning Dutch withholding tax  on non-resident portfolio individual and corporate shareholders and whether this is contrary to EU law. We also include a summary of a recent judgment by the Court of Appeals Arnhem-Leeuwarden, in which it ruled that a pension fund is entitled to deduct the VAT charged on costs that are recharged to the employer. This judgment appears to have broadened the entitlement to recover input tax for pension funds.  Lastly, we included the proposal of the Netherlands to adopt BEPS Action 13 based on Country-by-Country Reporting and documentation requirements.

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Partner, Financial Services Tax Group

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Table of Contents

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1. CJEU decision in the joined cases Miljoen, X, and Société Générale

On September 17, 2015 the Court of Justice of the European Union (CJEU) ruled in the joined cases Miljoen, X and Société Générale on whether Dutch withholding tax (WHT) on non-resident portfolio individual and corporate shareholders is contrary to EU law. The Société Générale case concerns a corporate taxpayer, whereas the Miljoen and X cases concern individual taxpayers who all have invested in shares in Dutch companies.

In the joined cases, the CJEU concluded that the WHT was contrary to EU law if the burden on the non-resident corporate shareholder is greater than for a resident corporate shareholder. In this respect, the comparison should take the corporate income tax position of residents into account, since they can credit or obtain a refund of the WHT. In comparing this tax burden, only costs that are directly related to the collection of the dividends may be taken into account. A provision in a tax treaty can neutralize the breach of EU law if it results in a credit of the full amount of the WHT. 

Background and CJEU’s decision
The Société Générale case concerned Dutch WHT levied on dividends distributed to corporate portfolio shareholders and whether this was contrary to the free movement of capital. Although the WHT is, in principle, levied at the same domestic rate on both resident and non-residents, for non-residents the levy is final whereas residents can credit the WHT against their corporate income tax liability or otherwise obtain a refund.

The CJEU was asked the following questions:

  • Should the corporate income tax position be taken into account when comparing the two situations?
  • How should the WHT on non-residents be compared with the income tax on residents (in particular since this was based on deemed rather than actual income from shares).
  • What costs could be taken into account in comparing the relative tax burdens?
  • Can the Dutch tax treatment of the dividends be neutralized – and thus remove the discrimination – by providing a tax credit in the state of residence of the dividend recipient under the double taxation relief provisions of the applicable tax treaties?

The CJEU ruled that in comparing the tax treatment of resident and non-resident shareholders in a Dutch company, the corporate income tax payable by resident shareholders should be taken into account. In other words, the comparison should be between the dividend WHT on non-residents and the ultimate tax burden on residents. The CJEU dismissed the argument that the difference in treatment was simply a question of different taxing mechanisms for taxpayers in different situations.

Moreover, the CJEU ruled that only the costs that were directly related to the collection of dividends could be taken into account in comparing the tax burden of residents and non-residents. In particular, hedging costs incurred in relation to the shareholder’s arbitrage activities could not be taken into account. The same applied to financing costs, as these relate to the holding of shares. Pre-acquisition dividends are also excluded, as these relate to the adjustment of the acquisition price and are not considered as collection of dividends.

On the question whether a difference in treatment, if established, could be neutralized by an applicable tax treaty, the CJEU noted that in the case of a corporate shareholder, where a tax treaty only provides for an ordinary credit, it is possible that the tax credit does not fully neutralize the Dutch WHT. This question has been referred back to the Dutch court.

Comment Meijburg & Co
Corporate shareholders will be disappointed that the only costs that can be taken into account are those relating to the collection of dividends. We expect that this aspect will be heavily criticized. On the question of neutralization of a different tax treatment, the CJEU now seems to have made clear that this is possible even if a tax treaty only provides for an ordinary credit, provided this leads to neutralization in the case at hand.

Please feel free to contact Robert van der Jagt if you wish to discuss this topic  in more detail.

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2. Extension of VAT deduction for pension funds

The Court of Appeals Arnhem-Leeuwarden (hereinafter: the Court) recently ruled that a pension fund is entitled to deduct the VAT charged on costs that are recharged to the employer. This judgment appears to have broadened the entitlement to recover input tax for pension funds.

The case concerned a company pension fund that administered the pension plans of the employer (who provides VAT-taxable services). At a certain point in time it was decided to dissolve the company pension fund and transfer the pension entitlements to an industry-wide pension fund. The company pension fund incurred transaction costs on the transition, the majority of which were recharged − with VAT − to the employer in accordance with what was agreed. The company pension fund deducted the VAT on the incoming costs.

In its judgment, the Court confirms that the recharging of costs by a company pension fund to the employer must be regarded as payment for a VAT-taxable service. In addition, the Court rules that the VAT on incoming costs could be deducted, insofar as they are recharged to the employer.

The judgment of the Court confirms for the first time that the VAT on incoming costs may be deducted by way of recharging costs to the employer. The Dutch tax authorities have now appealed this judgment to  the Supreme Court. If the Supreme Court follows the Court, the recharging of costs will offer a way to reduce the VAT burden on pension funds. Assuming that the employer is fully entitled to deduct input VAT, the VAT will not be a cost item for either party.

In light of the possible financial impact of this case, we recommend – in anticipation of the Supreme Court judgment – examining the possibility to recharge costs in more detail. If you do not administer a pension plan, but your business is also not entitled/only has a limited entitlement to recover VAT,  it would be advisable to review your VAT position as well. Please feel free to contact Gert-Jan van Norden or Irene Reiniers if you wish to discuss the recharging of costs in more detail.

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3. Request for preliminary ruling from CJEU on VAT exemption for cost-sharing groups

The Court of Appeals Arnhem-Leeuwarden (hereinafter: the Court) recently ruled that a pension fund is entitled to deduct the VAT charged on costs that are recharged to the employer. This judgment appears to have broadened the entitlement to recover input tax for pension funds.

In three different cases, the Court of Justice of the European Union (CJEU) has been asked to render preliminary rulings on the scope and conditions of the VAT exemption for cost-sharing groups. The questions posed by the Polish court appear to be the most relevant for the Dutch pension administration practice. The other questions concern the interpretation of the exemption for cost-sharing groups in general.

Questions posed by the Polish court
The Polish court has requested the CJEU to interpret the requirement that application of the exemption for cost-sharing groups must not lead to a serious distortion of competition. In addition, the Polish court also asks how this requirement should be applied in cross-border situations.

In the Netherlands, the Ministry of Finance has used the requirement that the exemption for cost-sharing groups must not distort competition to exclude pension administration services from applying this exemption. Our experience is that the correctness of this measure is often questioned and that taxpayers enter into discussions with the Dutch tax authorities on this issue. The CJEU judgment in the Polish case can therefore have a major impact on the Dutch pension administration practice.

As background information: we understand from our Polish colleagues that the case concerns an European Economic Interest Grouping (EEIG, in Dutch: EESV) that is part of an international insurance group. Lower Polish courts ruled that the services provided by the EEIG do not lead to a “real” distortion in the competition with commercial providers of these services, given the fact that the EEIG is part of a group and provides services at cost. The fact that no commercial provider could be identified that offered the same services played a role in this conclusion. The highest Polish court has now asked the CJEU to interpret this requirement. Our current assessment of the potential impact of the CJEU judgment in this Polish case on the aforementioned discussions within the Dutch pension administration practice is that it will be considerable.

Other questions
The other two cases for which preliminary rulings on the exemption for cost-sharing groups were requested (case no. C-326/15 - DNB Banka AS and case no. C-274/15 - Commission/Luxembourg) do not appear to directly affect the Dutch national pension administration practice. At issue in these cases is the legal form of the cost-sharing groups (DNB Banka AS) and the requirement that the services of cost-sharing organizations are directly necessary for the VAT-exempt or non-taxable services of the members (Commission/Luxembourg). These are not aspects which the Dutch tax authorities appear to be overly concerned with, but are nevertheless generally relevant for the interpretation of the exemption for cost-sharing groups. In the action brought before the CJEU in the DNB Banka AS case, reference is also made to the potential distortion in competition, but then in the context of the provision of cross-border services that are regarded as VAT-taxable by one Member State, while the other Member State applies the exemption for cost-sharing groups.

Please contact Gert-Jan van Norden or Karim Hommen if you wish to discuss these cases or the application of the cost sharing exemption in more detail.

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4. Netherlands to adopt BEPS Action 13 based Country-by-Country Reporting and documentation requirements

The Dutch government presented its main plans for the year ahead on September 15, 2015 during the annual Budget Day (Prinsjesdag). Included in the plans is a new section to be added to the Dutch Corporate Income Tax Act 1969 (CITA) regarding ‘Additional transfer pricing documentation requirements’ i.e. Country-by-Country (CbC) Reporting and documentation requirements. Essentially, this means that the Netherlands will incorporate the proposed guidance of BEPS Action 13 on CbC Reporting in the Dutch CITA. The Netherlands will also incorporate documentation requirements following the master file and local file concept for multinational enterprises (MNEs) that have a consolidated group turnover larger than EUR 50 million. The proposed changes are expected to be incorporated in the Dutch CITA as of January 1, 2016.

The proposed CbC Reporting and documentation requirements constitute a ground breaking change from the current Dutch documentation requirements. Not only does the proposed legislation provide more detail on the documentation required as such, but it also introduces a penalty regarding CbC Reporting and enacts a strict filing deadline for documentation.

Country-by-Country Reporting
A key objective of the BEPS Action 13 is to increase transparency through improved transfer pricing documentation standards, including through the use of CbC Reporting. CbC Reporting obliges MNEs to provide tax administrations information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group.

According to the current wording of the proposed law, as from January 1, 2016, parent companies of Netherlands based multinationals with a turnover of a minimum of EUR 750 million will be required to file the new CbC Report within 12 months following fiscal year end closing. The first CBC reports would be filed in 2017 and can be filed in either English or Dutch.

The proposed law is in line with the CbC Reporting Implementation Package as issued by the OECD in June 2015. This requires tax payers to disclose per country information on revenues, profit before income tax, corporate income tax paid, corporate income tax as included in the annual accounts, stated capital, accumulated earnings, number of employees, and tangible assets other than cash and cash equivalents. Also, the following information needs to be provided for all the constituent entities of the MNE group: constituent entities resident in the tax jurisdiction, tax jurisdiction of organization or incorporation if different form tax jurisdiction of residence, and main business activity(ies). Additional guidance will follow regarding the form and content of the CbC Report.

BEPS Action 13 proposes automatically exchanging the CbC Reports filed in the jurisdiction of the (surrogate) parent with the tax authorities of all jurisdictions in which the MNE operates. In line with the recommendations in BEPS Action 13, the proposed Dutch law obliges constituent entities in the Netherlands to file the CbC Report for the whole MNE should the CbC Report not be exchanged with the Netherlands by the country of the (surrogate) parent.

Non-compliance due to intentional or gross negligent behavior of the reporting entity regarding its obligation to file the CbC-Report could lead to a penalty up to EUR 20,250 or criminal prosecution.

More stringent Dutch documentation requirements
In addition to the introduction of CbC Reporting the Dutch government announced more stringent documentation requirements for MNE group entities that are tax resident in the Netherlands and are part of a group that has a consolidated turnover exceeding a threshold of EUR 50 million. The group entity will be required to file a master file that provides an overview of the MNE as a whole, including the nature of its activities, its general transfer pricing policy, and its global allocation of income and economic activities. A local file also needs to be in place, which reflects information that is relevant for the transfer pricing analysis relating to transactions between the tax payer and related parties in other tax jurisdictions. Both files can be filed in either English or Dutch. The current wording of the proposed law is in line with the master file and local file as described in the BEPS Action 13 report, whereas additional guidance regarding the form and content of the documentation is announced in the draft law.

An important and new requirement is that the master file and the local file need to be part of the entity’s administration prior to filing the tax return. This is a major change from the current practice which requires the tax payer to provide transfer pricing documentation within two months after a formal request has been issued by the Dutch Tax Administration. Non compliance with the documentation requirements results in the reversal of the burden of proof.

Conclusion
Since the new regulations are proposed to enter into force as per January 1, 2016, entities that are part of an MNE group which has a consolidated turnover exceeding the threshold of EUR 50 million should start preparing for the upcoming changes in the documentation requirements. Furthermore, MNEs with a turnover exceeding EUR 750 million should be ready to file CbC Reports.

In order to assist multinationals in preparing themselves to comply with the proposed CbC Reporting and documentation requirements, Meijburg & Co has developed the Diagnostic Review to assist MNEs in assessing their BEPS readiness.

For further questions and assistance, please contact Jaap Reyneveld.

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