Pension funds investing in European markets face significant challenges and opportunities when reclaiming excess withholding tax. With recent legal developments and rulings from the European Court of Justice, it’s crucial to understand the landscape and how to leverage these opportunities effectively.
Current Landscape and Legal Developments
1. Sweden: The Keva Case (C-39/23)
In its decision on 29 July 2024, the Court of Justice of the European Union (CJEU) ruled that imposing withholding tax on dividends from Swedish companies to foreign public pension institutions, while exempting similar dividends to Swedish public pension institutions, violates the principle of free movement of capital.
Consequently, the Swedish laws are in breach of EU law. As a result, foreign public pension institutions should be entitled to request a full refund of the withholding tax paid or receive Swedish-sourced dividends. Apart from its immediate relevance, the case holds significance beyond the Swedish context.
Notably, it is among the first where one of the questions referred to the CJEU concerned the criteria which should be considered when assessing whether foreign pension funds are in an objectively comparable situation. In this context, the CJEU, aligning with the Advocate General’s opinion, determined that differences of a purely technical nature should not be decisive in assessing comparability.
2. Germany: College Pension Plan of British Columbia
Germany has faced accusations of contravening EU law concerning withholding tax reclaims. The College Pension Plan of British Columbia case has brought to light issues of discrimination against foreign pension funds.
Following the German Federal Tax Court decision in November 2022, foreign pension funds have seen their claims being assessed and rejected by the German Tax Authorities if they cannot demonstrate the creation of an accounting provision for future pension liabilities (Deckungsrückstellung).
Nonetheless, foreign pension funds that are objectively comparable to German pension funds, despite their differences in accounting principles, may have the opportunity to challenge these judgments. The main point of contention is that the Federal Tax Court’s decision in the British Columbia case placed significant emphasis on formal or technical requirements when assessing comparability.
3. Netherlands: Domestic Exemption Challenges
The Netherlands provides a full exemption from withholding tax on Dutch dividends paid to foreign pension funds that meet certain requirements as laid down in Dutch law. These requirements essentially require the foreign pension fund to demonstrate that it would have been considered exempt from tax in the Netherlands had it been established there.
The Dutch Tax Authorities have consistently maintained strict standards in assessing comparability requirements. Recently, some pension funds, particularly Canadian ones, have faced clawbacks of previously granted refunds. The Dutch Tax Authorities argue that these foreign pension funds do not qualify for the exemption because, in some foreign pension plans, pension (death) benefits can, under certain circumstances, be paid to designated beneficiaries who are not family members, and lump sum payments may occur in situations other than the commutation of small pensions.
There are ongoing discussions that the Dutch domestic exemption criteria may be too stringent and possibly in contravention of EU law. This situation presents both a challenge and an opportunity for pension funds to challenge the Dutch tax authorities’ stance based on EU principles.
What do These Cases Have in Common?
When assessing restrictions on the free movement of capital, it is crucial to determine whether the foreign entity is in an objectively comparable situation to its local counterpart. This comparability assessment should consider the objective and purpose of the national provisions in question. Typically, national courts are responsible for evaluating whether the situations are comparable.
Over time, two distinct approaches have emerged in national court assessments. Some courts adopt a strict approach, focusing on formal requirements and seeking nearly identical comparisons. Others take an approach more aligned with the spirit of the Treaty on the Functioning of the EU, evaluating comparability based on essential characteristics
Such discriminatory tax practices undermine the credibility of European capital markets and the reliability of the EU legal and tax system. It is crucial that Member States ensure their tax laws do not contravene the free movement of capital within the EU by imposing unfair taxes on non-resident entities compared to resident entities in similar situations.
How Can WTax Help?
At WTax, we are dedicated to helping our clients navigate the complexities of international tax reclaims. Our expertise in ECJ claims, combined with our deep understanding of local tax laws and recent legal developments, positions us uniquely to assist pension funds in maximising their reclaim opportunities. Here’s how we can support:
- Monitoring Legal Developments: We keep a close eye on ECJ rulings and national court decisions that impact withholding tax reclaims, ensuring our clients are always informed about the latest opportunities.
- Strategic Claim Filing: We develop tailored strategies for each jurisdiction, leveraging our knowledge of recent cases and legal principles to maximise the chances of successful reclaims.
- Advocacy and Representation: Our team of experts advocates on behalf of our clients, challenging discriminatory practices and interpretations that contravene EU law.
- Comprehensive Support: From initial claim preparation to ongoing litigation support, we provide end-to-end services to ensure our clients receive the refunds they are entitled to.
Conclusion
The evolving legal landscape in Europe presents both challenges and opportunities for pension funds. By staying informed and strategically leveraging ECJ rulings and local legal developments, pension funds can reclaim excess withholding tax more effectively. WTax remains at the forefront of these issues, providing the expertise and support needed to optimise reclaim outcomes.
Interested in learning more? Speak to a withholding tax specialist today.
