European ruling on Dutch dividend withholding tax

June 09, 2014 2:32 PM
The Court of Justice of the European Union rules that the withholding of Dutch dividend withholding tax on dividend payments to the (former) Netherlands is in agreement with EU provisions.
 
On June 5, 2014, the Court of Justice of the European Union (“CJEU”) has decided that the Netherlands is allowed to levy dividend withholding tax on dividend distributions by a Dutch company to its Netherlands Antilles parent company.
 
Remarks
 
The Netherlands Antilles have been dissolved on October 10, 2010. The Islands Curacao and St. Maarten became independent countries within the Kingdom and Bonaire, Saba and St. Eustatia became independent countries within the Kingdom.
 
Under the Tax Arrangement of the Kingdom, as in force on 2005, the Dutch dividend withholding tax is reduced to 8.3% in case the parent company in the Antilles holds at least an interest of 25% in the Dutch subsidiary. This rule still applies for parent companies in Curacao and St. Maarten.
 
A new Tax Arrangement of the Kingdom between Curacao and the Netherlands is expected to come into force as per January 1, 2015.
 
The Netherlands Antilles where to be considered as an Overseas Country and Territory (“OCT”). The same goes for 
Curacao, St. Maarten, Bonaire, Saba and St. Eustatia after the dissolution of the Netherlands Antilles on October 10, 2010.
 
The Treaty of Functioning of the European Union (“FTEU”) contains a paragraph for associations of countries and territories overseas. In the OCT decision (“LGO-besluit”) the EU has elaborated the special relationship between the EU and the OCT
 
The preamble of the OCT decision states that an OCT is not a third countries, but they are not part of the internal market either and have to comply with the obligations demanded from third countries.
 
Summary of the cases
 
The joined cases C-24 and C 27/12 can be summarized as follows:
 
- In 2005 The Dutch companies each paid a dividend to its parent company in Curacao.
 
- Under the Tax arrangement of the Kingdom, the Dutch dividend withholding tax was reduced to 8.3%.
 
- The parent companies took the standpoint that the withholding tax was not in agreement with the free movement of capital as stated in the TFEU which in certain cases also applies on capital transactions between EU member states and
countries.
 
- The Supreme court of the Netherlands has asked the CJEU to rule over the following 2 questions:
a. Can an OCT be considered as a third country?
b. Can the relationship between an OCT and the country of which it is an OCT be considered an internal relationship as a result if which the free movement of capital would not apply between a EU member state and its OCT?
 
The decision
 
The CJEU states in its decision that the existence of a special arrangement between a EU and OCT’s that the general provisions of the FTEU are not applicable on the OCT  unless there is an explicit reference to the general provisions.
However, the OCT decision refers to the freedom of movement of capital.
In short, the OCT decision prohibits restrictions on the acquisition on shares in companies and the payment of dividends between the EU and OCT’s.
 
However, the OCT decision also contains a carve out explicitly aimed at tax avoidance as many OCT’s where considered as tax havens.
 
According to the CJEU, the Dutch measures taken where to prevent ‘excessive capital flow to the Netherlands Antilles and reduce the attractiveness of the Netherlands Antilles as a tax haven’ and therefore the Dutch measure falls within the carve out provision. As a result, the provision in the OCT decision regarding the freedom of capital is not applicable. The Dutch Supreme court has to decide whether the Dutch rules are indeed aimed to prevent a excessive capital flow to the (former) Netherlands Antilles and reduce the attractiveness of the (former) Netherlands Antilles as tax haven.
 
Conclusion
 
In previous cases, the CJEU decided that the provisions of the free movement of capital where applicable, though these decisions concerned the relationship between a EU member and an OCT of another EU member.
 
From these earlier CJEU decisions it could be concluded that the freedom of capital provisions would also be applicable between  an EU member and its own OCT.
 
From the decision of June 5, 2014 it can be concluded that the freedom of capital provisions are not applicable between a EU member and its OCT or a EU member and a OCT of another member in case of tax avoidance. 
Whether this is the case should be determined on a case to case basis. 
 
We note that the Netherlands Antilles is on the OECD white list as of 2009 and cannot be considered as tax haven anymore. However this does not automatically implicate that the tax avoidance carve out is not applicable. 
 
It is up to the Dutch Supreme court to decide whether the Dutch dividend withholding tax can be considered a measure aimed at combating tax avoidance in an effective and proportional matter.
 
Finally we remark that the new Tax Arrangement of the Kingdom, which is envisioned to come into force on January 
1, 2015, is expected to contain a limitation of benefits clause aimed at combating tax avoidance situations.
 
By Emile G. Steevensz
 
Disclaimer
This Publication contains general information only, and Steevensz|Beckers Tax Lawyers, its member firms or related parties (collectivelyreferred to as Steevensz|Beckers) are not, by means of this publication, rendering professional advice or services. Although we endeavor to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decision or taking any action that may affect your finances or your business you should consult a qualified professional advisor. No entity of Steevensz|Beckers shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

 

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The Court of Justice of the of the European Union did not take over the advice of the Advocate‐General.
Het Hof van Justitie in de EU heeft het advies van de Advocaat Generaal niet overgenomen.
 
 
 
 
 
 

 

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