Over the past few years there have been numerous developments in the withholding tax space, owing to several notable cases which have been brought before the Court of Justice of the European Union (CJEU), as well as the relevant EU Member States’ National Courts. The applicants in these cases range from investment funds to pension funds and the subject thereof covers mostly one important principle: the free movement of capital.
The CJEU’s Role in Shaping Withholding Tax Recovery
The CJEU has the responsibility of interpreting and ensuring the implementation of EU law across the European Union. One fundamental part of EU law is the principle of free movement of capital protected under Article 63 of the Treaty on the Functioning of the European Union. In terms of this principle, there should be no restrictions on investments between Member States of the EU, nor between Member States and third countries. When Member States impose a lower withholding tax on their domestic investment funds than on comparable foreign investment funds on the same type of income, this contravenes the principle of free movement of capital andprompting CJEU intervention. In these instances, a withholding tax recovery becomes possible.
However, the intervention by the CJEU does not guarantee that a Member State will change how they tax foreign funds because, at the end of the day, the foreign fund must be in a comparable situation to the domestic fund in question and, unfortunately, such a determination is essentially up to how the specific National Courts interpret such comparability.
Tracking Recent Developments: Where Are We Now?
Since 2020, there have been pivotal court cases, both before the CJEU and the national courts in certain EU Member States, that have paved the way for additional withholding tax recovery opportunities in these countries. We have summarised these developments below, indicating the current status of each territory:
Austria
Since the Austrian Supreme Court issued a landmark decision in 2020 on a withholding tax reclaim filed by a Canadian pension fund in the legal form of a corporation, non-EU/EEA corporations (excluding investment funds) may now benefit from the withholding tax exemption in Austria, provided that all the other requirements under the law are met. Refunds in this territory are, however, currently slow due to the complexity of such claims.
Finland
To rectify the discriminatory treatment of foreign investment funds, Finland amended its tax legislation by introducing a new withholding tax exemption as of 1 January 2020. Under the new legislation, a foreign investment fund will be exempt from withholding tax if certain requirements are met. In 2022, it was further clarified that the decisive factor for the exemption is whether the foreign investment fund carries out similar activities as a Finnish mutual investment fund. Therefore, the legal form of the investment fund should not preclude it from being comparable to a Finnish investment fund. The Finnish Tax Authorities are actively refunding claims where the investment fund demonstrates that it meets the requirements as set out in Finnish law.
France
Since France had updated their legislation to provide an exemption from dividend withholding tax to certain investment funds in 2012, uncertainty remained as to what criteria had to be met by these investment funds to benefit from this exemption, specifically for investment funds not resident in the EU or European Economic Area. Accordingly, in September 2020, the French Tax Authorities updated their guidelines to provide clarity on the criteria to be met by non-EU funds wanting to reclaim dividend withholding tax in terms of French national legislation, thereby removing such uncertainty. Since the publication of the guidelines, the French Tax Authorities are actively refunding claims where it has been clearly demonstrated that all the requirements have been met and the necessary documents have been provided.
Germany
On 27 April 2023, the CJEU confirmed that Germany’s tax legislation, in force until 31 December 2017, violated the freedom of movement of capital in that non-resident specialised property investment funds were subject to corporate income tax whilst German funds of the same nature were exempt from such tax. The impact of this recent judgment is likely to be seen across all non-resident investment funds which submitted dividend withholding tax reclaims based off EU law on income received before 1 January 2018.
The position in Germany for foreign pension funds, however, remains unclear despite a favourable CJEU judgement in November 2019. This is because of a recent ruling by the German Supreme Court on 1 December 2022, which dismissed a withholding tax reclaim on behalf of a Canadian pension fund, stating that the pension fund was not comparable to German pension fund. Currently, the German Tax Authorities are issuing requests for further information based on the aforementioned cases.
Italy
Since 2020, the Italian Courts, including the Supreme Court, have confirmed that the disparate tax treatment of comparable foreign investment funds is considered discriminatory and violates the principle of the free movement of capital. This has led to favourable changes to Italian domestic law, specifically for investment funds resident in the EU/EEA. Then, in April 2023, an Italian lower court ruled in favour of several US mutual funds and confirmed that the tax treatment of these funds breaches EU law. Therefore, non-EU funds are also starting to see favourable developments in Italy.
Poland
Following a reasoned opinion in 2009 by the European Commission requesting Poland to end discriminatory taxation of non-resident pension funds, investment funds and financial institutions, there has been great improvement in this market in respect of dividends withholding tax refunds. In 2011, the Polish Corporation Income Tax Act was amended to extend the tax exemption in respect of investment funds to EU/EEA funds which meet certain conditions. Furthermore, the 2014 Emerging Markets case opened the door for third-party investment funds to claim from Poland where they are in a comparable position to a Polish fund. The Polish Tax Authority is actively refunding claims for both qualifying pension funds and investment funds.
Portugal
The decision of the CJEU in the Allianz AEVN case in 2022 confirmed that the Portuguese legislation pertaining to withholding tax levied on dividends paid by Portuguese companies to non-resident undertakings for collective investment in transferable securities is contrary to the free movement of capital. Since the positive CJEU decision and given the strong likelihood of success of these claims at a judicial level, WTax has begun submitting claims on behalf of foreign investment funds in Portugal and will actively litigate the claims until they are refunded.
Spain
Spain has seen some positive developments recently for both EU and non-EU investment funds, particularly for alternative investment funds (AIFs) and United States Regulated Investment Companies (US RICs). In two separate, but equally important, Supreme and National Court cases, it was confirmed that Spanish national law discriminates against foreign investment funds by imposing a higher withholding tax on these funds than on their own domestic funds which are in a comparable position. Moreover, it was confirmed in these cases that such discrimination cannot be neutralised by a tax credit, which is an argument that has been made by the Spanish Tax Authorities in order to reject withholding tax reclaims.
Sweden
Since the Supreme Administrative Court judgement in 2020, which confirmed that a foreign investment fund with legal form does not prevent it from being in a situation that is comparable to a Swedish contractual investment fund, the Swedish Tax Authorities are actively refunding cases where the claimant demonstrates that it is comparable to Swedish investment funds.
Seizing Reclaim Opportunities: No Time Like the Present
Whilst some of these developments have yet to be proven favourable in practice, the overall impact of these cases has been positive for investment funds and pension funds globally. Not only have there been favourable judgements from the CJEU in recent years, certain countries have actively been improving and rectifying their domestic laws to account for these positive judgements. As a result of this, WTax have seen an increase in refunds from various Tax Authorities who previously may have presented difficulties.
Therefore, if there was ever a time to submit withholding tax reclaims on the basis of EU and National Law, now would be the best time to do so. That being said, these claims are highly technical and complex in nature and require a deep understanding of the relevant legislation and specific individual circumstances. Furthermore, in some countries further litigation may be required in order to secure successful refunds. Accordingly, investment funds and pension funds seeking refunds via EU and National Law reclaim mechanisms should consult WTax as a global withholding tax specialist in order to maximise their refund potential.
For more information on these developments and assistance with your EU or National Law reclaims, please get in touch with WTax’s regional specialists.
