The First Memorandum of Amendment of the bill on the Other Tax Measures Act 2013, has proposed amending the remittance reduction in respect of dividend withholding tax for fiscal investment institutions (fiscale beleggingsinstellingen), to take effect as of January 1, 2013. This amendment could have significant consequences for fiscal investment institutions in which pension funds participate.

A brief outline of the current rules
According to the current rules, fiscal investment institutions can deduct Dutch dividend withholding tax and foreign withholding tax withheld on dividends and interest received by the investment institutions from the dividend withholding tax withheld on its dividend distributions and which is to be remitted by the investment institution (“remittance reduction”).

If exempt entities, such as Dutch or foreign pension funds, invest in a fiscal investment institution, they can, pursuant to the Dividend Withholding Tax Act, request the Dutch tax authorities to refund the dividend withholding tax that has been withheld on distributions made by that fiscal investment institution. However, this refund is limited to the extent that the investment institution has applied the remittance reduction in respect of foreign withholding tax. This seeks to avoid that by investing through a fiscal investment institution, the Dutch tax authorities give (economic) relief for foreign withholding tax to these exempt entities. However, the Netherlands has concluded various tax treaties which provide that the Netherlands will not levy dividend withholding tax on pension funds resident in the other contracting state. These tax treaties enable a foreign pension fund to apply for a full refund of dividend withholding tax withheld, even if the fiscal investment institution has applied the remittance reduction.

The proposed rules
This issue is dealt with in the bill. According to the proposed rules, exempt entities, such as pension funds, will no longer be limited in the amount of Dutch dividend withholding tax to be refunded. This will be replaced by a limitation at the level of the fiscal investment institution, which can no longer apply the remittance reduction to foreign withholding tax insofar as exempt entities participate in the investment institution.

As stated above, the proposed amendment will result in the limitation at the level of the shareholders being shifted to the level of the investment institution. This means that the return achieved by the other shareholders can be impaired to the benefit of the exempt entities. This was also the case for the predecessor of the remittance reduction ? the concession for foreign withholding tax. The proposed amendment will therefore have consequences for fiscal investment institutions in which pension funds participate. They will no longer be able to include the full amount of foreign withholding tax in the remittance reduction.

In conclusion
The amendment raises the question as to when an investment institution needs to test its shareholder base in order to determine which part of the foreign withholding tax may not be included in the remittance reduction. If this test has to be carried out at the moment the dividends are received, this will result in a significant increase in the administrative burden. Investment institutions do not always know who their shareholders are, for example stock exchange listed investment institutions.