On September 14, 2011, the Breda District Court rendered judgment in the case of a Belgian resident who had requested a partial refund of Dutch dividend withholding tax. The Belgian resident argued that under European law the withholding was contrary to the free movement of capital. Although this judgment was rendered on September 14, 2011, it was only recently made public. The District Court ruled in favor of the taxpayer insofar as the Dutch dividend withholding tax exceeded the amount of personal income tax a comparable Dutch resident shareholder would owe in box 3.
Background and dispute
In 2007, a Dutch resident company distributed dividends totaling EUR 107,732 to a Belgian resident with the Dutch nationality, who held a 1.2% interest in this company. The company withheld and remitted Dutch dividend withholding tax of EUR 16,106 on the dividend distributions. The shares did not represent a substantial interest for the shareholder, but were held as an investment. In 2007, the average value of the investment was EUR 1,298,245. The shareholding had not been financed with debt, and there were no costs directly attributable to the dividend. The shareholder had to pay personal income tax on the dividend in Belgium, which was calculated on the dividend’s net value: EUR 107,732 minus EUR 16,106 = EUR 91,266 at a 25% tax rate; the tax owed in Belgium therefore amounted to EUR 22,816.50. It was not possible to credit Dutch dividend withholding tax against this amount, as Belgian legislation did not provide for this.
The dispute
One of the points in dispute was whether levying dividend withholding tax was contrary to EU law, due to the fact that the taxpayer was not able to credit the dividend withholding tax, while domestic taxpayers were able to this. An alternative point of dispute was whether the withholding should be limited to 8% of the dividend.
The court’s judgment
The taxpayer argued that they were being discriminated against in relation to domestic taxpayers, because the latter are able to credit Dutch withholding tax, or otherwise claim a refund. Referring to European Court of Justice (“ECJ”) case law, the court concluded that in order to correctly compare domestic and foreign shareholders the total Dutch tax had to be taken into account, i.e. including the personal income tax in box 3.
The court subsequently looked at how much tax a domestic shareholder would have owed if the Dutch withholding tax had been fully credited or had been refunded. The domestic taxpayer would then have owed a net amount of: 1.2% x EUR 1,298,245 = EUR 15,579. The court rejected the tax inspector’s argument that the distributed dividend should also be included in the tax base, because it was plausible to assume that this had already been included in the value of the shares as at the beginning of the year.
The interim conclusion reached was that, because the dividend withholding tax was not able to be credited in Belgium, the tax treatment of the Belgian shareholder was less favorable than that of domestic shareholders. This makes it less attractive for Belgian residents to invest in Dutch shares. The court concluded that this restricted the European principle of the free movement of capital.
The court subsequently looked into whether there were any arguments that could justify the unfavorable treatment adopted by the Netherlands. The court concluded that the sentence in the tax treaty between Belgium and the Netherlands which states that the State of residence − in this case, Belgium − must credit the dividend withholding tax, does not qualify as a justification; the Netherlands does not thereby ensure that the, on balance, higher Dutch tax is neutralized in Belgium. This was already apparent from the fact that Belgium does not provide for a credit.
However, the court saw no reason for a full refund of the dividend withholding tax, as argued by the taxpayer, despite the fact that there were no other justification grounds. According to internationally accepted fundamental assumptions, it is not the source State that must provide double tax relief, but rather the State of residence must provide double tax relief for its residents, in this case Belgium. The court concluded that there was an argument for a tax refund insofar as Dutch legislation provided, on balance, for a less favorable tax treatment of the taxpayer than would be the case for a domestic shareholder taxed in box 3. The court determined the difference at EUR 527 (EUR 16.106 minus EUR 15.579), thereby ruling in favor of the taxpayer on the abovementioned second point in dispute, and entitling the taxpayer to a refund of this amount.
Commentary KPMG Meijburg & Co
The Dutch tax regime’s unfavorable treatment of non-resident private individuals in respect of dividends received from investments in Dutch companies is the result of the various methods of taxation. For box 3, a tax rate of 30% applies to 4% of the total capital, while the dividend withholding tax rate of 15% applies to the actual dividend distributed. This means that where a return of more than 8% has been earned, a foreign shareholder will be worse off than a domestic shareholder. The court has now concluded that this disadvantage forms a prohibited restriction within the meaning of the free movement of capital. Moreover, a foreign shareholder can be adversely affected if the shareholding is financed by a debt for which interest must be paid. In that situation, the disadvantage is the result of the fact that the debt can be deducted from the capital on which the domestic shareholder must pay tax in box 3. The corresponding interest is however non-deductible for purposes of the dividend withholding tax paid by the foreign shareholder.
This subject matter is similar to that ruled on by the Haarlem District Court in August 2010. In that case, the disadvantage to the shareholder/company resident in France was the result of the non-deductibility for the purposes of Dutch dividend withholding tax, of the costs related to the dividend received. However, for Dutch resident shareholder companies these costs are, primarily for the purposes of corporate income tax, deductible, and the dividend withholding tax can be credited against the corporate income tax. In an infringement procedure initiated by the European Commission against Portugal, the Advocate General at the ECJ issued a positive opinion in March 2010 on this way of calculating withholding tax on a net basis.
Foreign private individuals can also be adversely affected as a result of the taxable capital in box 3 being reduced by tax-free amounts, while this reduction does not apply to dividend withholding tax. To what extent this last distinction is permissible is currently being argued before the Dutch Supreme Court. It should be noted that the Advocate General has issued a negative decision on this issue.
At present, it is not clear whether the judgment rendered by the Breda District Court, that was published on October 26, 2011, has been, or will be, appealed.