In response to a request for a preliminary ruling from the Supreme Court of Netherlands, the Court of Justice of the European Union (Seventh Chamber) (“CJEU”) delivered its opinion on the 30 January 2020, regarding the important issues between, on the one hand the autonomy of Member States’ power to impose taxes and on the other hand the requirement to ensure that the fundamental freedoms laid down within Article 63 TFEU[1] are adhered to.

The request to the Court in the present case was made in proceedings between Köln-Aktiendfonds Deka (“KE Deka”) and the State Secretary for Finance, Netherlands concerning the refund of dividend tax withheld from KA Deka in respect of share dividends received from companies established in Netherlands.

By means of background, the Netherlands regime relating to fiscal investment enterprises (“FIEs”) is intended to enable natural persons and small investors to make collective investments in certain type of assets. The aim of this regime is to bring the tax treatment applicable to private individuals who invest through an FIE in line with the tax treatment of private individuals who make investments on an induvial basis. For this purpose, FIEs are subject to a zero corporation tax rate and also benefit from the refund of dividend tax withheld on dividends received in the Netherlands. The FIE regime is regulated by a particular law in the Netherlands which states that an FIE is to meet certain conditions in order for an investment undertaking to qualify as an FIE, one of those conditions being the obligation on the investment undertaking to distribute income to its shareholders or participants within a certain time period.

The dispute which arose in the main proceedings of this case, and the questions which were referred to the CJEU for a preliminary ruling related to the fact that KA Deka, an investment fund constituted under German Law, had received dividends which were distributed by companies established in Netherlands, which dividends were subject to a tax of 15% which was withheld at source. KA Deka, unlike an investment fund established in the Netherlands meeting the conditions enabling it to qualify as an FIE, was not able to benefit from the repayment of that tax.

KA Deka applied to the Netherlands tax authorities for a refund of the 15% tax deducted from its dividends, however the Netherlands Inspector of Taxes rejected the application and KA Deka proceeded with bringing an action before the District Court for a ruling on the legality of the decision – arguing that its situation could be compared to that of an investment fund established in the Netherlands which has the same status of an FIE and that it was therefore entitled to a refund of the dividend tax.

The District Court was uncertain whether the KA Deka was objectively comparable to an FIE and for this reason decided to refer the question to the CJEU for a preliminary ruling.

The principle of tax autonomy between Member States was highlighted by the CJEU, stating that it is for each Member State to organise, in compliance with EU law, its system for taxing distributed profits and to define the tax base and the tax rate which applies to individuals, and in this case to shareholders receiving dividend income. Member States are free to provide for a specific tax regime applicable to undertakings and to dividends received by them, and to apply and define any conditions which must be satisfied to benefit from a specific tax regime.

The CJEU also highlighted the fact that restrictions on the movement of capital, including those which are such as to discourage non-residents from making investments in a Member State or to discourage that Member State’s residents from doing so in other States are prohibited in terms of Article 63 TFEU.

The CJEU further delved into the issue of whether the FIE tax regime and the conditions imposed within that regime would give rise to unfavourable tax treatment. The CJEU noted that the requirements imposed by the FIE tax regime are imposed equally on resident investment fund and also on non-resident investment funds, therefore the refusal to grant a non-resident investment fund a refund of a dividend tax which it had paid, on the ground that the investment fund had failed to establish sufficiently that it has met the necessary conditions does not constitute unfavourable treatment to a non-resident investment fund. To the extent that those conditions do not de facto disadvantage the non-resident investment funds, and provided that the tax authorities require proof of compliance relating to the satisfaction of those conditions within the tax regime, with those conditions to be provided also by resident investment funds, is not to be precluded within the legislation of a Member State.

The CJEU further noted that in the absence of harmonisation at EU level, each Member State is free to determine whether to provide for a specific tax regime applicable to the use of collective investment undertakings, and to define any conditions which must be complied with to benefit from such tax regime.

The CJEU, in its determination of the question at hand, further stated that the free movement of capital cannot be understood as meaning that a Member State is required to adjust its tax rules on the basis of those of another Member State in order to ensure that taxation removes all disparities arising from national tax rules, given that the decision made by a taxpayer as to whether or not to invest in another Member State may be to the taxpayer’s advantage, or not depending on particular circumstances.

The refusal by a Member State to grant a non-resident investment fund, on the ground that it does not distribute the proceeds of its investments to its shareholders, a refund of the dividend tax that it has paid in that Member State, whereas in the Member State in which that fund is established the proceeds of its investments which have not been distributed are deemed to have been distributed as thought that profit had been distributed, would constitute a restriction on the free movement of capital.

Such a restriction is permissible only if it is justified only by overriding reasons in the public interest, if it is appropriate for ensuring the attainment of the objective that it pursues and does not go beyond what is necessary to attain it.

The CJEU concluded by stating that Article 63 TFEU must be interpreted as precluding legislation of a Member State which provides that a non-resident investment cannot be granted a refund of dividend tax on that ground that it has not met the legal conditions for that refund, namely that it does not distribute the proceeds of its investment in full to its shareholders, where in its Member State the proceeds of its investment which have not been distributed are deemed to have been distributed, and it can therefore be concluded that such a fund is in a comparable situation to that of a resident fund which benefits from the refund of that tax

This article was first published in The Malta Independent, 4 March, 2020.