The Netherlands: The funds industry holds its breath for its first potential victory

   In November 2024, the Court of Justice of the European Union (CJEU) advanced a significant recognition regarding an unjustified restriction on the EU’s free movement of capital (Article 63 of the TFEU) imposed by the Netherlands tax authorities. The case C‑782/22 involves a UK-based life insurance company that received Dutch dividends as part of unit-linked insurance products, which were subject to a final tax rate of 15% under the status of non-resident. In contrast, comparable Dutch insurance companies face an effective tax rate of 0% on the same dividend income. This disparity arises because Dutch insurers are allowed to offset their dividend income with a corresponding increase in provisions for policyholder obligations, resulting in a taxable income of zero for Dutch corporate tax purposes. Consequently, Dutch insurers are eligible for a full refund of the dividend withholding tax. The CJEU determined that an infringement of Article 63 of the TFEU would be established if a direct link exists between the dividends received and the increase in policyholder obligations under unit-linked products. The CJEU’s position highlights that such a link would underscore the discriminatory treatment against non-resident companies. The National Court must now address and provide its findings in response to the CJEU’s judgment.The previous case: a key argument

   If the link between the dividends received and the increase in the obligations to unit-linked policy holders remains to be proved, the connection to this case with case C-17/14 is a fact. The latter case involved litigation between Société Générale and the Dutch Tax Authorities (DTA), where Société Générale was subject to a 15% withholding tax (WHT) on its Dutch dividends, while resident taxpayers were taxed on a net basis (with expenses deducted).The outcome of that case was a CJEU ruling in favor of the DTA, concluding that the French bank was only entitled to deduct costs directly linked to the collection of dividends and not any other related expenses. The DTA referenced this case to argue that the UK life insurance company was not entitled to deductions for amounts representing increases in provisions for policyholder obligations.However, the life insurance company presented evidence before the Dutch court highlighting the differences in business models. It emphasized that its dividend income, associated with offering unit-linked products, was integral to its operations, unlike in the case of Société Générale. Therefore, the company argued that the CJEU’s previous ruling should not apply to their situation.The CJEU's ruling

   The CJEU confirmed that costs directly incurred, which increase payment obligations, should be considered when calculating the taxable base of a non-resident life insurance company in the same manner as for a Dutch company. In this regard, the CJEU acknowledged the comparability aspect concerning costs incurred related to an activity generating taxable income. The CJEU also noted that this case helps establish the link between the costs incurred in performing the activity of collecting dividends, which generates taxable income.While case C-17/14 is relevant for assessing the comparability between resident and non-resident life insurance companies, its ruling cannot serve as the sole basis for a decision.Additionally, the CJEU referenced case C-641/17, involving a Canadian pension fund and the German Tax Authorities. The ruling in this case supports the assessment of comparability, as the CJEU argued that a non-resident pension fund using dividends to contribute to pension provisions is in a comparable situation to a resident pension fund that increases future liabilities based on similar mechanisms. The direct link between dividends received and the corresponding increase in technical reserves served as strong evidence supporting the UK-based life insurance company’s position. The Dutch court agreed on the comparability between pension fund activities and those of the life insurance company, both of which involve investing funds to meet client obligations, leading to an increase in provisions. This demonstrates the link between investment results and changes in a company's liabilities.If it is established under Dutch domestic law that such a link exists between the dividends received by resident companies and changes in their obligations to clients, then a non-resident company would be objectively comparable to a resident company. The Dutch court must now verify these facts and, if confirmed, determine whether dividends should be exempt from corporate income tax under Dutch law.In such a case, the referring court would consider the non-resident company to be in an objectively comparable situation to that of a resident company, and the contested Dutch legislation would represent a violation of Article 63 of the TFEU concerning the free movement of capital.

Our view

In our previous articles, we shared our forecasts of such positive developments for the Dutch market. We foresee a favorable outcome for the UK life insurance company, confirming the discriminatory practices of the DTA and unlocking significant opportunities for the entire funds industry, starting with life insurance companies across multiple jurisdictions. In anticipation of these changes, we have already filed claims to safeguard millions of Euros for our partners during the last years.We recommend that you begin protecting your positions in the Netherlands to maintain competitiveness and mitigate the risk of investor concerns regarding dividends from the Netherlands. If you conducted an analysis with Globe Refund within the past year, our proactive relationship management team will reach out to assess the impact of this news on your funds. Otherwise, we invite you to contact us to delegate your analysis to Globe Refund, free of charge.