The Advocate General of the Court of Justice of the European Union (CJEU) in Luxembourg has recently issued an opinion in two joined cases that both involve profit distributions made by Dutch companies to their respective parent companies resident on Curaçao. At issue in both cases was a dividend distribution made in 2005, respectively 2006, by a Dutch company to a 100% parent company – a public limited company incorporated under Netherlands Antilles law and established on Curaçao – from which 8.3% dividend withholding tax was withheld and remitted pursuant to the Tax Regulations for the Kingdom of the Netherlands (Belastingregeling voor het Koninkrijk, “BRK”). In both cases, the parent companies argued that the dividend withholding tax liability was contrary to the free movement of capital under the EC Treaty (“ECT”) that, subject to certain conditions, also applies to capital transactions from and to third countries. As such, the withholding exemption that applies if the dividend is paid to a Dutch or EU parent company, could possibly also apply to a parent company resident in the former Netherlands Antilles.
In both cases, this argument was rejected by the Haarlem District Court and the Amsterdam Court of Appeals. Advocate General Wattel also concluded that the position adopted by the parent companies in both cases should be rejected. In the past, the Supreme Court also rejected similar positions in a number of its judgments. Later CJEU case law and a preliminary ruling requested by an English court in 2011, have led the Supreme Court to ask whether these judgments were correct. The Advocate General at the CJEU has now stated that they are not correct and has advised the CJEU to rule that the 8.3% tax is not permissible in every case.
This could in some cases mean that a notice of objection and/or a notice of appeal will need to be filed against the remittance of tax, pending the judgment of the CJEU and the final judgment of the Supreme Court. This memorandum addresses the scope of the movement of capital and the application of the standstill provision, the consequences for the Netherlands and which action needs to be taken.
Scope of free movement of capital
For the purposes of assessing its own case law in light of European legislation, the Supreme Court referred a couple of preliminary questions to the CJEU. The first question concerns the scope of the free movement of capital: as of January 1, 1994, the free movement of capital is also applicable to capital transactions from and to third countries. In May 2011, the CJEU ruled in the Prunus case that the free movement of capital also encompasses investments made in an EU Member State (in this case, France) by a company established in a jurisdiction falling under Overseas Countries and Territories (“OCT”). This jurisdiction is linked to a different Member State (in this case the United Kingdom). The question now raised by the Supreme Court is whether the free movement of capital also applies in internal situations whereby a company established in a OCT (i.e. the former Netherlands Antilles) has invested in an EU Member State to which it belongs (in this case the Netherlands).
The Advocate General at the CJEU answered this question affirmatively: the Netherlands Antilles, including Curaçao, must also be considered a third country in relation to the Netherlands for the application of the free movement of capital. Despite the fact that the Netherlands Antilles and the Netherlands both form part of the same Kingdom, they are still two territories with different statutes as regards the application of EU law. That is why it does not involve a purely domestic situation: the external border of the European Union runs through the Kingdom as it were.
Freedom of establishment or free movement of capital
Both cases involve 100% participations. The Supreme Court has always taken the position that in respect of such participations the freedom of establishment has preference over the free movement of capital. However, as the freedom of establishment does not extend to third countries, companies established on the Netherlands Antilles having a decisive influence on a Dutch resident company are not entitled to claim the application of the withholding exemption. However, the CJEU ruled in November 2012 that the free movement of capital could also apply when EU resident entities derive taxable benefits from majority interests held in companies resident in third countries. This is the case when the tax legislation in question is of a general nature. The Advocate General at the CJEU has not commented on this, nor has the Supreme Court asked any questions about it.
Of importance is also the fact that, pursuant to the standstill provision contained in the ECT, a Member State may continue to apply a restriction that existed on December 31, 1993 to its capital transactions with third countries. The CJEU preliminary ruling requested by the Supreme Court concerns the amendment of the BRK as at January 1, 2002: as of this date a new maximum withholding tax rate of 8.3% applies to participation dividends that are linked to a participation exemption on the Netherlands Antilles. Up until 2002, the maximum withholding tax rate on dividends was linked to the Antillean profit tax rate on those dividends. If a profit tax rate of 2.4%-3% applied to the dividends at the Antillean parent company, then the maximum Dutch dividend withholding tax rate was 7.5%. If the Antillean profit tax rate was at least 5.5 %, then a maximum Dutch dividend withholding tax rate of 5.5% applied. In this case, the application of the standstill provision means that no more tax may be levied on dividends than was agreed between the governments of the Netherlands and the Netherlands Antilles at the end of 1993. This raises the question whether only the level of Dutch dividend withholding tax should be taken into consideration or, that the Antillean tax on the dividends should be included.
The Advocate General advises the latter. According to him, the BRK must be regarded as a bilateral tax treaty, and therefore the current CJEU case law is relevant. This means that a domestic Court can take the BRK as well as the relevant Antillean tax rate into account when assessing the presence of a restriction. It is therefore important that under the Antillean profit tax legislation a participation exemption applies as of 2002 to dividends distributed by Dutch resident companies, which were previously subject to a 2.4%-3% or 5.5% profit tax rate on that dividend. The Antillean rulings practice as it applied at the end of 1993 must be taken into account, because, according to the Advocate General, the benchmark has to be the effective tax rate charged on the distributions to the shareholders. The profit tax rate was often calculated on a reduced tax base under the old Dutch-Antillean rulings practice by allowing a deemed interest deduction. This rulings practice often resulted in a substantially lower total effective tax burden on dividends received from a Dutch resident subsidiary than the current 8.3%.
The opinion rendered by the Advocate General will generally mean that the current tax rate of 8.3% is higher than the combined effective tax burden as it applied at the end of 1993. As such, the Netherlands cannot rely on the standstill provision for the application of the 8.3% tax rate, and applying the higher rate to the surplus would be unjust.
However, the Advocate General goes even further: according to CJEU case law a standstill provision can only be relied on if the current provision is, in substance, identical to the legislation as it applied at the end of 1993 or is limited to reducing or eliminating the obstacle. By contrast, if the existing regulation is based on an approach which is different from that of the previous regulation and establishes new procedures, it cannot be regarded as legislation existing at December 31, 1993.
As such, the Advocate General considers that the current legislation is based on a different approach than the previous legislation. After all, under the previous legislation, the Dutch dividend withholding tax was at the same level as the profit tax of the Netherlands Antilles and the effective tax rate was reduced by individual rulings. As of 2002, the maximization of the Dutch withholding tax is linked to the participation exemption of the Netherlands Antilles. Even if the government intended the same effective tax rate to be maintained, the Supreme Court has established that the new approach has lead to a higher effective tax burden on dividends.
The Dutch government has argued that the revenue it gathers from the 8.3% tax rate is transferred to the Government of the Netherlands Antilles. The Dutch dividend withholding tax would, in economic terms, be regarded as a tax of the Netherlands Antilles: the Netherlands simply collects it. This means that an exemption actually applies in the Netherlands, and the dividends distributed by the Netherlands to the Dutch Antilles should be treated in the same way as dividends distributed to a Dutch resident company. Since the Supreme Court has not raised the question whether the Netherlands can apply the standstill clause or not, the Advocate General has not discussed the point further.
This is a shame, because the Advocate General did state in his opinion that the combined level of taxation is decisive, and, according to the Supreme Court, the effective tax rates are higher than before. As such, it is hardly relevant whether these are levied by the Netherlands or by the Netherlands Antilles. We will have to wait and see whether the CJEU will pursue this matter further, as it is a valid point. However, if the CJEU follows the initial position adopted by the AG in this respect in its preliminary ruling, this does not necessarily have to be followed by a comparison of the effective burden at the end of 1993; the Netherlands should instead apply the withholding exemption under the requirements of the year in question, since the Netherlands would not be able to apply the standstill provision.
Consequences for the Netherlands
The dismantling of the Netherlands Antilles has not affected the status of countries that previously formed part of the Netherlands Antilles in their relations with the European Union, which means CJEU case law is therefore relevant under the current constitutional relationships within the Kingdom. The case law resulting from this case could result in the Netherlands having to bring the tax rate level for qualifying dividends back to the effective tax burden as it applied at the end of 1993. It could even mean that the Netherlands will no longer be able to levy dividend withholding tax on dividends distributed to a parent company in the Dutch Antilles if the participation on which the dividends are distributed would qualify for the participation exemption, or the participation set-off in the corporate income tax, had the parent company been resident in the Netherlands.
It could also result in an entitlement to a refund of dividend withholding tax if a legal entity resident on Curaçao or in another country in the Kingdom, e.g. a pension fund, is exempt from profit tax and would also be exempt from corporate income tax had it been resident in the Netherlands. Under existing law, this already applies to such legal entities, if they are resident in the European Union or European Economic Area, and as of January 2012, also to such legal entities resident in a third country with which the Netherlands has concluded a treaty that provides for the exchange of information, be it only for portfolio dividends. This latter condition could turn out to be too strict.
Case law could also affect the dividend provisions in the new tax regulations that were recently concluded with Curaçao. The exact details of these regulations have not yet been made public.
Actions to be undertaken
In cases involving dividends distributed by a Dutch resident subsidiary to a parent company resident on Curaçao or in one of the other countries of the Kingdom – whereby dividend withholding tax has been withheld or remitted pursuant to Article 11(3) BRK – a notice of objection and/or appeal will need to be filed against the remittance pending the judgment of the CJEU and the final Supreme Court judgment. The judgment in the case at hand could also affect other cases, for example those involving participations of 5%-25%, depending upon the decisions in the individual cases.
The same applies to legal entities that are exempt from profit tax on Curaçao or in one of the other countries of the Kingdom, and would not be subject to corporate income tax had they been resident in the Netherlands.
Even though there are no legal remedies available against the taxation of dividend withholding tax, it might be possible in the cases at hand to claim a refund of the dividend withholding tax remitted on the basis of CJEU case law. This means that a taxpayer would need to request an official reconsideration from the tax inspector by relying on a CJEU judgment that corrects an ‘incorrect’ judgment of the highest national court that has failed to request a preliminary ruling. However, these requests for the correction of a highest court judgment will need be filed ‘immediately’ following the judgment of the CJEU. This judgment is expected to be rendered in a few months.