On 21 June 2018, a further positive decision on withholding tax reclaim for foreign investment funds was judged by the Court of Justice of the European Union (CJEU). Specifically, the CJEU issued its judgment in Fidelity Funds (C-480/16). The key topic was whether it is compatible with EU law that distributions from Denmark to non-resident investment funds are subject to withholding tax while resident investment funds can be exempted from withholding tax on such dividend payments.
Facts in a nutshell
The case concerned UCITS investment funds ("Fidelity") resident in the UK and in Luxembourg, which invested in Danish portfolio shares. Distributions from the Danish shares to Fidelity have been subject to Danish withholding tax while such distributions could in principle (subject to a minimum distribution calculation rule) be exempted from this withholding tax if distributed to resident (Danish) investment funds.
Fidelity argued that this different treatment is contrary to the free movement of capital and filed a claim for refund of the tax levied.
The CJEU held that such different tax treatment of dividends, based in particular on the UCITS’ residence, may discourage non-resident UCITS from investing in Danish companies and investors resident in Denmark from acquiring shares in non-resident UCITS. Accordingly the Court concluded that the Danish tax legislation constitutes in the first place a restriction to the free movement of capital.
In further assessing whether there is a justification for this restriction, the CJEU concluded that the restriction was not proportionate and that it went beyond what was necessary to safeguard the coherence of the Danish tax system. Accordingly, such different treatment was not justifiable and therefore the Danish rules were ultimately found to be in breach of EU law.
- Based on the CJEU’s judgment, non-resident investment funds – both UCITS and non-UCITS – should be entitled to reclaim taxes withheld on dividend payments from Danish portfolio shares. This possibility is in principle available also to funds resident outside of the EU (e.g. Swiss funds) since the freedom concerned is the free movement of capital which also extends to non-EU countries.
- The case is scheduled for a hearing before the Danish High Court in February 2019 (where important issues such as the minimum distribution requirement and comparable taxation are expected to be clarified). In the meantime, foreign investment funds should file protective claims in order to avoid potential claims from being statute barred. It might further be possible, due to this judgment, to rely on a 10-year statutes of limitation and reclaim withholding tax amounts from 2008 onwards.
- This decision contributes further to the already positive existing case law of the CJEU ( e.g. "Aberdeen" (C-303/07), "Santander" (C-338/11), "Emerging Markets" (C-448/16) etc.) and confirms the merits of reviewing the possibility to file protective claims for the recovery of withholding taxes on dividends levied in the EU within the different deadlines that exist per country and subject to the specific conditions which are relevant for each country.
- PwC Switzerland has been successfully coordinating claims for its clients investment- as well as pension funds resident in the EU and in Switzerland and has already obtained several positive decisions from the authorities and/or the courts in several European countries.