EU Investment Funds Can Expect Withholding Tax Refunds

by Ulrika Lomas, Tax-News.com, Brussels

01 February 2010

Investment funds across the European Union who are challenging unlawful application of withholding taxes levied on dividends can expect refunds of millions of euros following the Norwegian government's recent decision to refund withholding taxes to a Luxembourg SICAV, according to PricewaterhouseCoopers (PwC).

In June 2009 the European Court of Justice (ECJ) issued its final judgment in the Aberdeen Property Fininvest Alpha Oy (Aberdeen) case in favor of the taxpayer, ruling the application of withholding tax on dividends paid to non-resident investment funds, while exempting domestic investment funds, as discriminatory and in breach of Articles 43, 48, 56 and 58 of the EC Treaty.

PwC notes that this ruling has set the wheels in motion for victory for the taxpayer in other cases where withholding tax on dividends has been levied, as demonstrated by this Luxembourg SICAV case.

Teresa Owusu-Adjei, UK asset management tax leader, PwC, said: “The refund runs into tens of millions of Euros, plus interest for the Luxembourg SICAV which is a significant win for the fund."

"The current economic climate is challenging, and reclaiming overpaid tax on funds will be most welcome to those investors who find they have been unlawfully treated.”

Other European countries such as France, Germany, Italy, Spain and Belgium apply withholding tax on dividends paid to funds, while exempting their domestic funds from such taxes. This week’s settlement sets a precedent for other fund claimants to come forward with a case of unlawful treatment under EU law.

Indeed, on January 28, the European Commission threatened to take Belgium and Greece to the ECJ unless both governments moved to correct discriminatory dividend tax regimes.

In the case of Belgium, dividends distributed by domestic companies to a Belgian investment fund are exempted from withholding tax under certain conditions, whereas dividends paid by their foreign counterparts are taxed at a 25% or 15% rate. Similarly, a Belgian investment fund meeting certain legal obligations related to its investments and investors is exempt from withholding tax on revenues deriving from money deposits performed in Belgium, whereas revenues of their foreign counterparts are taxed at a 15% rate.

Greek law, meanwhile, subjects dividends from non-Greek companies to income taxation in Greece, whereas dividends from domestic companies are exempted from tax.

Belgium has two months to tell the Commission how it intends to change its legislation before its possible referral to the European Court. Greece faces its second referral to the ECJ over the matter.

Owusu-Adjei added: “Both the Aberdeen ECJ ruling and this settlement with the Luxembourg SICAV will have a significant impact on the current withholding tax on dividends regimes applied in EU and EEA jurisdictions, ensuring a level playing field for all funds."

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