On December 23, 2011, two judgments were published in cases involving dividend distributions by Dutch companies to 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 incorporated under Dutch-Antilles law and resident on Curaçao. Pursuant to the Tax Regulations for the Kingdom of the Netherlands (Belastingregeling voor het Koninkrijk, “BRK”) 8.3% dividend withholding tax was withheld and remitted.
In both cases, the parent companies argued that the dividend withholding tax was contrary to the free movement of capital under the Treaty on the Functioning of the European Union (“TFEU”), that, subject to certain conditions, is also applicable 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, should 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 has rejected similar positions in a number of its judgments. However, more recent European Court of Justice (“ECJ”) case law and a preliminary ruling requested by an English court earlier this year, has caused the Supreme Court to question whether its case law on this issue is correct. It therefore decided to request the ECJ for a preliminary ruling in both cases.
Scope of free movement of capital
The first question asked of the ECJ 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 ECJ 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 resident in a jurisdiction falling under Overseas Countries and Territories (Landen en Gebieden Overzee, “LGO”) (in this case, the British Virgin Islands). These jurisdictions can be connected with EU Member States, despite the fact that the LGO does not form part of the territory of the European Union and EU law is not directly applicable. In the Prunus case, the British Virgin Islands has a connection with the United Kingdom.
The question raised by the Supreme Court is whether the free movement of capital also applies in internal situations whereby a company resident in an LGO (i.e. the former Dutch Antilles) has invested in an EU Member State with which it is associated (i.e. the Netherlands).
Freedom of establishment or free movement of capital
According to the Supreme Court, of importance in both cases is the fact that a 100% participation is involved. The Supreme Court has always taken the position that in respect of such participations the freedom of establishment takes precedence over the free movement of capital. However, as the freedom of establishment does not extend to third countries, companies resident on the Netherlands Antilles having a decisive influence on a company resident in the Netherlands are not entitled to claim the application of the withholding exemption. In April 2011, the ECJ was asked to rule on the correctness of this assumption.
Stand still provision
Also of importance is the fact that pursuant to the stand still provision contained in the TFEU, a Member State may continue applying a restriction that existed on December 31, 1993, in its capital transactions with third countries. The question that the Supreme Court has asked the ECJ to rule on in this respect involves the amendment to the BRK that took effect as of January 1, 2002. As of that date a new maximum withholding tax rate applies for participation dividends: 8.3% in respect of a shareholding of 25% of more; 15% for a shareholding of less than 25%.
Until 2002, the maximum dividend withholding tax rate was linked to the Dutch-Antilles profit tax rate applicable to the dividend: if the Dutch-Antilles parent company was subject to tax on the dividend at the 2.4%-3% tax rate, then the maximum Dutch dividend withholding tax was 7.5%; if the tax rate was at least 5.5%, then the Dutch dividend withholding tax was not allowed to exceed 5%.
One of the questions posed by the Supreme Court is whether the proposed amendment to the BRK means that the Netherlands cannot invoke the stand still provision in respect of the application of the 8.3% tax rate. In addition, the Supreme Court has asked whether it is of importance that under Dutch-Antilles profit tax rules the participation exemption has, since 2001, applied to dividends received from the Netherlands, where previously 2.4%-3% or 5% profit tax was payable on that dividend. In many cases, these tax rates were calculated over a restricted tax base as a result of a deemed cost deduction allowed under Dutch-Antilles tax rulings. These tax rulings often resulted in the situation that at year-end 1993 the total effective tax on a dividend received from a Dutch resident subsidiary was lower that the current 8.3%.
Consequences for the Netherlands
The dismantling of the Netherlands Antilles has not changed the status of these former territories in relation to the European Union. ECJ case law is therefore still of importance for the current constitutional relationships within the Kingdom of the Netherlands.
The case law resulting from the interim Supreme Court judgment could mean that, if the ECJ and/or the Supreme Court rules in favor of the taxpayers, the Netherlands can no longer levy dividend withholding tax, or levy less dividend withholding tax, on dividends distributed to a Netherlands-Antilles parent company, if the participation over which the dividend is distributed qualifies for the participation exemption or the participation set off had the parent company been resident in the Netherlands.
It could also mean that an entitlement to a refund of dividend withholding tax could arise in those cases where Dutch dividends have been distributed to a legal entity resident in Curaçao or one of the other territories forming part of the Kingdom of the Netherlands, for example, a pension fund that is exempt from profit tax in the territory where it is resident and that would also have been exempt from corporate income tax in the Netherlands had it been resident there. Under current law, this already applies to such legal entities resident in the EU or the European Economic Area. As of January 1, 2012, this will also apply to such legal entities that are resident in a third country with which the Netherlands has concluded a treaty providing for the exchange of information, even if only in respect of portfolio dividends. This last condition could therefore possibly be too strict.
Furthermore, the outcome of such cases could also have consequences for the dividend provisions contained in the new tax regulations between the Netherlands and Curaçao, and the Netherlands and Aruba, for which general agreements were recently announced.