On 18 June 2009, the ECJ issued its judgment in the Aberdeen Property Fininvest Alpha Oy (Aberdeen) case. It is the first time the ECJ has considered the compatibility with the EC Treaty of an EU Member State levying dividend withholding taxes only on dividends paid to non-resident investment funds while exempting domestic investment funds from such taxes, therefore the ruling is of considerable significance for the European investment management industry.
Aberdeen is a Finnish resident real estate company wholly owned by a real estate fund structured as a Luxembourg SICAV. The case concerns Finnish rules which subjected dividends paid by Aberdeen to its Luxembourg SICAV parent to withholding tax.
The case was referred to the ECJ to rule whether the imposition of withholding tax by Finland on dividends paid to a nonresident company constituted as a Luxembourg SICAV while exempting Finnish resident parent companies and investment funds from such taxes is contrary to Article 43 (freedom of establishment) and 56 (free movement of capital) of the EC Treaty.
Under Articles 43 and 48, as well as Articles 56 and 58 of the EC Treaty, persons that are objectively comparable to each other are entitled to equal tax treatment. Thus a company such as the Luxembourg SICAV must be considered ‘comparable’ to the local company and/or investment fund in order to sustain an argument that the differing withholding tax treatment is discriminatory.
The ECJ ruled in favour of Aberdeen dismissing every one of the Finnish government’s arguments. The judgment both confirms the principles established in earlier cases on dividend withholding taxes, and applies them specifically in an investment fund context.
The ECJ stated that (1) Differences between the legal forms of the funds were not presented to be sufficient to create an objective distinction with respect to exemption from withholding tax on dividends received; (2) It does not matter that the recipient fund is not liable to domestic corporate taxes in its home territory; (3) It is not appropriate to consider the tax position at the level of the investors; (4) The imposition of a withholding tax could not be justified by the need to counteract the risk of tax avoidance.
In particular the judgment clarifies a number of important issues that we have seen raised by numerous European tax authorities in response to our clients’ withholding tax reclaim applications. The Court concluded:
- Investment funds of different legal form are comparable and so this argument cannot justify a difference in treatment
- It does not matter that the recipient fund is not liable to domestic corporate taxes in its home territory
- It is not appropriate to consider the tax position at the level of the investors
- The imposition of a withholding tax could not be justified by the need to counteract the risk of tax avoidance
This judgment is very welcome news for investment funds that have been subjected to discriminatory withholding taxes on dividends from EU/EEA member states and marks a significant step forward, confirming the validity of the arguments that ECJ has put forward to Member State’s tax authorities on behalf of its clients and, more importantly, rebutting each of the reasons tax authorities have presented thus far in rejecting claims.
Moreover, it reveals the strength of the position for those investment funds which have been perhaps reluctant to make withholding tax reclaims because. for example. they were outside the scope of the UCITS directive and so felt less comfortable with the arguments for comparability and therefore the case for making claims.
Globe Refund recommends that all investment funds regardless of their legal structure, UCITS or non-UCITS, now review their past and future withholding tax position and considers the cost/benefit of making withholding tax reclaims.
Investment funds that have yet to file protective claims for the recovery of taxes should be aware that a statute of limitation will apply in each Member State to restrict the level of any payout, thereby increasing the need for prompt action.
Contact us for a complete check of the reclaim possibilities
Stanislas Conte, CEO