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ECJ Rules On Overseas Territories' Dividend Taxation

by Lorys Charalambous, Tax-News.com, Cyprus

13 June 2014


On June 5, 2014, the Court of Justice of the European Union handed down a joint ruling concerning two Dutch companies' objections to the imposition of withholding tax on dividends paid to their respective holding companies based in the former Netherlands Antilles.

In X BV, TBG Limited vs Staatssecretaris van Financien (C-24/12 and C-27/12), the CJEU ruled that the imposition of 8.3 percent dividend withholding tax distributed by the two Dutch companies to their parent in the Netherlands Antilles was compatible with the European Union's (EU) principle of free movement of capital.

The two companies had pleaded that the dividend withholding tax was contrary to the EU principle of the free movement of capital, given that the Netherlands Antilles was at that time an overseas country and territory (OCT).

The CJEU pointed out that EU law does mention the Netherlands Antilles as part of the Kingdom of the Netherlands, but that the relevant provision does not refer to the application of the free movement of capital principle.

The Court noted a European Community (EC) decision concerning OCTs, which "prohibits, among others, restrictions on the payment of dividends between the European Union and OCTs." However, according to the CJEU, because the withholding tax on dividends to the Netherlands Antilles was "intended to prevent excessive capital flow towards the Netherlands Antilles and to counter the appeal of that OCT as a tax haven," it should be allowed, provided that the national court finds that the withholding tax is "combating tax avoidance in an effective and proportionate manner."

"European Union law must be interpreted as not precluding a tax measure of a Member State which restricts movements of capital between that Member State and its own OCT whilst pursuing the objective of combating tax avoidance in an effective and proportionate manner," the CJEU ruled.

Netherlands Antilles has, since the payment of dividends, been divided into two separate countries, St Maarten and Curacoa, with the islands of Bonaire, Saba, and Sint Eustatius returning to direct control by the authorities in the Netherlands.

TAGS: court | tax | business | holding company | Netherlands | tax avoidance | law | Curaçao | tax planning | transfer pricing | withholding tax | Netherlands Antilles | dividends | trade | Europe

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