On August 3, 2010, the District Court of Haarlem decided a case in which a French company had claimed a partial refund of Dutch dividend withholding tax on the grounds that the tax levied was contrary to the EU freedom of capital principle contained in the Treaty on the Functioning of the European Union. While the Court rejected the claim on the facts of the case, its judgment clearly supports the legal principle on which the taxpayer based its claim, often referred to as the net taxation argument.
The net taxation argument is based on case law of the European Court of Justice (“ECJ”) that, briefly stated, requires directly related expenses to be taken into account when imposing withholding taxes on non-residents if such expenses would be taken into account in taxing a comparable resident taxpayer.
Background and issue
In the current case, during the years in question (2000-2008), Dutch withholding tax was withheld on portfolio dividends paid to a French financial institution. While the case involved a number of issues, this memorandum focuses on the French company's claim for a partial refund of the withholding tax. This was based on the argument that a Dutch resident taxpayer would have suffered less tax than the 15% withheld from the dividends it had received, because a resident shareholder would have been able to credit the withholding tax against its corporate income tax liability, the latter being computed on a net basis, i.e. after deduction of the expenses in question, and any excess withholding tax then refunded.
Discrimination
The court appears to have accepted the taxpayer's basic argument that such different treatment of a non-Dutch resident shareholder is in principle in breach of EU law. It also rejected the tax authorities' argument that the different treatment was permissible because it involved different types of tax (withholding tax v. corporate income tax).
Time limits for filing claims
The taxpayer's claim was rejected with regard to the years 2000-2002 on the grounds that it was out of time. The court took the view that, although the legislation did not lay down a specific time limit for filing such claims, a time limit of five years from the end of the relevant calendar year was reasonable.
Credit in shareholder's country of residence
The court further held that for the years 2003-2007 the taxpayer's claim also failed because the Dutch withholding tax was fully credited against the shareholder's French corporate income tax liability. This part of the court's decision is based on ECJ case law to the effect that an EU Member State can 'neutralize' a discrimination arising under its domestic law by way of a bilateral tax treaty concluded with another EU Member State, in this case the treaty between the Netherlands and France.
No credit in shareholder's country of residence
For the year 2008 no Dutch withholding tax was credited in France because of losses incurred in the shareholder's French business. The court accordingly addressed the factual question of whether the costs that were related to the dividends were high enough that they would have reduced the corporate income tax on such dividends, had they been received by a Dutch resident shareholder, to below the 15% tax that was actually withheld. The court held that the taxpayer had not sufficiently demonstrated that this was the case.
In determining what expenses should be taken into account for these purposes the court had recourse to the double tax relief provision in the bilateral tax treaty between the Netherlands and France as well as ECJ case law. On the basis of this the court confirmed that only "directly related" costs may be taken into account. In this regard, the court rejected the taxpayer's argument that, because of the nature of the taxpayer's business, expenses related to other shares than the Dutch shares in question should also be taken into account.
KPMG Meijburg & Co comment
Although the court rejected the taxpayer's claim, this was largely based on the facts. The reasoning of the decision, however, generally supports the net taxation argument. It may be recalled that the Attorney-General (“AG”) to the ECJ recently expressed similar support for the argument in an infringement procedure brought against Portugal involving net taxation. Although the ECJ rejected the Commission's claim in that case, it is clear that the AG agreed with the basic principle that imposing withholding tax on non-residents on a gross basis is contrary to EU law where residents are taxed on a net basis. This accords with the position KPMG Meijburg & Co has been advocating and that has led to similar infringement claims being submitted in several Member States by KPMG.