EU Infringement Procedure v Netherlands Fund Tax Rules – Introduction
The European Commission has initiated an infringement procedure against the Netherlands, challenging its current tax regime that provides a withholding tax (WHT) reduction exclusively to domestic investment funds, while excluding foreign funds..
This development may compel the Netherlands to reassess and potentially amend this discriminatory practice to align with EU law.
Implications for Foreign Investment Funds
The infringement procedure enhances the likelihood that foreign multi-investor investment funds could successfully reclaim WHT paid in the Netherlands.
WHT refund applications for the 2021 tax year must be submitted by the end of 2024 to avoid being barred by the statute of limitations.
On 25 July 2024, the European Commission announced its decision to initiate this infringement procedure against the Netherlands through a letter of formal notice (INFR 2024/4017).
Details of the Infringement Procedure
In the formal notice, the Commission challenges the Dutch WHT regime, which is seen as infringing upon the fundamental freedom of the movement of capital as outlined in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and Article 40 of the European Economic Area Agreement.
The issue lies in the Dutch tax law that grants WHT reductions solely to domestic investment funds, excluding foreign funds that are otherwise comparable to Dutch investment vehicles.
This procedure could force the Netherlands to reconsider its approach to taxing foreign investment funds, particularly those with multiple investors, a practice that has been in place for many years.
Dutch Tax Law Context
The infringement procedure follows significant decisions by Dutch national courts, which were influenced by the Court of Justice of the European Union (CJEU) ruling in the Köln Aktienfonds DEKA case (CJEU case C-156/17, decision dated 30 January 2020).
In a ruling on 9 April 2021, the Dutch Supreme Court (Hoge Raad der Nederlanden) decided that foreign investment funds are not entitled to a refund of Dutch WHT.
Under current Dutch law, domestic investment funds effectively receive a reduction in Dutch WHT on dividend income through an offset mechanism applied to the WHT paid by distributing Dutch companies.
However, this offset is not available to foreign investment funds, creating a discrepancy that makes non-Dutch investment funds less appealing to Dutch investors and investments in Dutch companies less attractive to foreign funds.
Despite criticism, the Dutch Supreme Court upheld this regime, arguing that the tax situations of Dutch and foreign funds are not objectively comparable, and therefore, the regime does not constitute a restriction on the free movement of capital.
Potential Outcomes of the Infringement Procedure
The European Commission’s infringement procedure could lead to significant changes in the Netherlands’ taxation of foreign investment funds.
Infringement proceedings are initiated under Article 258 TFEU when the Commission identifies potential breaches of EU law.
If a Member State fails to correct an identified breach, the Commission may issue a reasoned opinion and eventually refer the case to the CJEU.
Should the CJEU rule against the Netherlands, the country would be required to take corrective measures.
Failure to comply could result in the Commission imposing financial penalties under Article 260 para. 2 TFEU.
The Netherlands has two months to respond to the Commission’s concerns; otherwise, the Commission may escalate the procedure.
Conclusion
In summing up, the European Commission’s infringement procedure against the Netherlands marks a critical juncture for the country’s tax regime concerning foreign investment funds.
If upheld, this action could necessitate substantial changes to align Dutch tax practices with EU law, particularly in ensuring that foreign funds are treated equitably.
The potential repercussions include not only financial penalties but also a broader impact on the attractiveness of the Netherlands as an investment destination.
As the Netherlands faces the challenge of responding to the Commission’s concerns, the outcome could set a precedent for how similar cases are handled across the EU, reinforcing the principle of non-discrimination within the internal market.
Final thoughts
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