A Luxembourg investment fund received Dutch portfolio dividends on which Dutch dividend withholding tax was levied and it was exempt from tax in Luxembourg. The fund claimed a full refund of the Dutch dividend tax withheld on its investment in Dutch companies. The fund considered itself to be comparable with a fiscal investment institution (“FBI” ). An FBI is effectively tax exempt in the Netherlands and entitled to a credit/refund of the dividend withholding tax incurred on its investments when it pays out dividends to its participants. Therefore, an FBI does not suffer a Dutch dividend withholding tax burden.
The Luxembourg investment fund claimed that the difference in tax treatment results in an infringement of the free movement of capital (Article 63 TFEU) as it was not entitled to a refund. The Dutch Supreme Court did not rule in favor of the Luxembourg investment fund and denied the request for a refund of the Dutch dividend withholding tax.
The Supreme Court argued as follows. Dutch dividend withholding tax is a final tax for a non-resident individual investing in Dutch shares. If a Luxembourg investment fund would be entitled to a refund of the Dutch withholding tax incurred on its Dutch investments, the participant in the Luxembourg fund would pay less tax than if he would have invested directly in Dutch shares. In the latter case there is a 15% Dutch withholding tax, whereas there is no Dutch or Luxembourg withholding tax on dividends distributed by the Luxembourg fund. Therefore, the Luxembourg fund is not objectively comparable with a Dutch FBI.
The outcome of this case is disappointing as it does not resolve the distortion within the internal market of the EU. The reason for this is illustrated by the following example:
Dutch resident investors - who are taxed on the dividends they receive - will be less inclined to invest through a non-Dutch investment fund. In the event of a dividend of 100 and 15% Dutch withholding tax, the Dutch investor would be taxed on 100 dividend and entitled to a tax credit of 15. If he invests through a foreign fund he is taxed on 85 but has no tax credit of 15. The outcome is the same in the event of participants resident in another Member State of the EU, where the withholding tax is creditable against the personal or corporate income tax.