On 7 November 2024, the Court of Justice of the European Union (CJEU) delivered a significant ruling in Case C-782/22, addressing the discriminatory nature of the Dutch dividend withholding tax regime concerning non-resident unit-linked insurance companies. This decision underscores the EU's dedication to upholding the free movement of capital under Article 63 TFEU, particularly in matters related to dividend withholding tax.
Case Background
The case concerns a United Kingdom-registered insurance undertaking, which primarily serves institutional pension insurance companies and employers, by offering unit-linked insurance contracts. Between 2003 and 2010, the company was subject to a 15% Dutch withholding tax on dividends.
While Dutch resident companies could offset withholding tax against corporate tax or claim a refund under Dutch Law, non-resident companies, such as the UK insurer, were excluded from these benefits.
The UK insurer contended that this disparity in tax treatment violated the EU principle of equal treatment and restricted the free movement of capital under Article 63 TFEU. It argued that the heavier tax burden on non-residents created an unequal playing field, placing them at a disadvantage in cross-border investment scenarios.
The CJEU’s Judgment
1. Discriminatory Treatment
The CJEU has reaffirmed the existence of discriminatory taxation practices in the Netherlands. While resident companies benefit from net basis taxation—allowing them to deduct costs tied to increased client obligations under unit-linked policies—non-resident entities are taxed on gross dividends. This creates an unequal financial burden, disadvantaging non-residents.
2. Objective Comparability
Drawing on principles from the College Pension Plan of British Columbia case (C-641/17), the CJEU determined that the UK insurer was in an objectively comparable position to Dutch-resident companies.
The CJEU essentially ruled that a non-resident pension fund utilizing dividend income to fund future pension obligations is in a comparable position to a resident pension fund that increases its future liabilities through similar mechanisms. Consequently, if Dutch law acknowledges a direct connection between dividends and the rise in obligations for resident entities, this principle must equally extend to non-residents.
3. Rejected Justifications
Furthermore, the CJEU rejected justifications based on the need for a balanced allocation of taxing rights and preserving the coherence of the tax system, stating these did not warrant the discriminatory impact on non-resident investors.
Practical Implications for Unit-Linked Insurance Contracts
This ruling is significant for financial institutions with unit-linked insurance products as the decision clarifies that non-resident insurers investing in Dutch equities may reclaim withholding tax on dividends if they can demonstrate that dividends are used to meet policyholder obligations.
Companies engaged in similar business models should consider reviewing their tax positions and exploring withholding tax refund opportunities in the Netherlands. This is especially relevant for institutions with substantial cross-border investments.
Broader Impact: Similar Cases Across the EU
The CJEU’s decision in this case is part of a growing trend in addressing discriminatory withholding tax regimes across the EU, particularly involving unit-linked insurance contracts.
As mentioned above, the College Pension Plan case involved a Canadian pension fund seeking a withholding tax refund in Germany, arguing it was unfairly taxed on dividends compared to domestic entities managing similar policyholder-driven liabilities.
The CJEU ruled that Germany’s withholding tax regime violated EU law by imposing stricter refund conditions on non-residents, emphasizing that cross-border investors should not face discriminatory barriers.
In addition to the above, the European Commission has sent formal letters to both Belgium and France, scrutinizing their withholding tax systems that impose a disproportionate burden on foreign life insurance companies compared to domestic insurers.
In Belgium, foreign insurers face withholding tax on gross investment income at rates of up to 30%, without the ability to offset liabilities or reclaim excess withholding tax, whereas domestic insurers are taxed on net income and can benefit from credits and reimbursements.
Similarly, in France, dividends paid to unit-linked insurance companies established in other EEA Member States are taxed at gross rates, while domestic insurers benefit from provisions allowing tax deductions and credits, effectively reducing their tax burden to zero.
These disparities have been flagged as violations of the free movement of capital under Article 63 TFEU and Article 40 of the EEA Agreement.
These cases underscore an upward trend in legal challenges against withholding tax regimes, compelling Member States to reconsider their tax frameworks for cross-border investments involving unit-linked insurance and pension-related funds. However, navigating these developments requires specialized expertise to ensure compliance and maximize recovery opportunities.
Given the rising scrutiny of discriminatory tax regimes across the EU, now is the time to act – whether you're an insurer, pension fund, or investment entity, partnering with experts like WTax will ensure you're not leaving valuable recoveries on the table.
For detailed information on the impact of the recent ruling, we encourage you to promptly get in touch with WTax’s regional specialists.
