Netherlands: Withholding tax on dividends paid to foreign investment funds (Dutch Supreme Court decision)

Netherlands: Withholding tax on dividends

The Dutch Supreme Court (Hoge Raad) issued a decision in a case concerning the compatibility of the Dutch withholding tax on dividends distributed to non-resident investment funds with EU law.


The Supreme Court held that its earlier judgments (from 2013 and 2015) were an incorrect interpretation of EU law and that foreign investment funds are entitled to a refund of the Dutch dividend withholding tax paid if certain conditions are met.

The case is: Köln Aktienfonds Deka (C-156/17, 23 October 2020)

KPMG observation

The conditions for a refund are difficult to meet, and it seems that foreign funds (unlike Dutch funds) are not provided with a mechanism to avoid economic double taxation. This raises the question whether this decision is contrary to case law of the Court of Justice of the European Union (CJEU).


The taxpayer (a contractual investment fund established in Germany) which complies with the requirements of EU Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS). The taxpayer filed a claim for refund of the withholding tax levied on dividends received from Dutch companies between 2002 and 2008, based on equal treatment under EU law.

Under Dutch tax law, dividend distributions to both resident and non-resident investment funds are subject to a 15% withholding tax (25% until 2007), but Dutch funds that elect to be treated as a fiscal investment institution (FII) are entitled to a refund of the dividend withholding tax they paid in the years in question, provided that they meet profit distribution and certain shareholder requirements. However, the Dutch withholding tax on dividend distributions constitutes a final tax burden for foreign investment funds, as they are not entitled to any tax refund upon distribution of their profits. The taxpayer argued that this different treatment is contrary to the free movement of capital and requested a refund of the tax withheld.

In 2017, the Dutch Supreme Court referred to the CJEU questions whether the Dutch requirements for the FII regime are in line with the free movement of capital. As a result of the CJEU judgment in June 2018 in Fidelity Funds (C-480/16), the questions were further amended in December 2018 to focus on whether the shareholder and distribution requirements are in line with EU law.

The CJEU in January 2020 held that although the Dutch shareholder requirements do not discriminate, given that these rules apply equally to residents and non-residents, the CJEU concluded that it was for the Dutch referring court to determine whether discrimination exists regarding the manner in which these rules are administered in practice for resident and non-resident investment funds.

In relation to the obligation, under Dutch law, for qualifying investment funds to distribute their profits within eight months of the end of the corresponding financial year, the CJEU found that denying the benefit of the FII regime to a non-resident fund whose profits are subject to tax in its state of residence, irrespective of whether such profits have been distributed or not, could constitute a restriction on the free movement of capital. The CJEU also held that a requirement for the fund to actually distribute profits may not be relevant if the objective of the tax measure was achieved through other means, such as in Germany where the profits of the fund are included in the income of the investors even if the profits are not distributed.

Dutch Supreme Court’s decision

The Dutch Supreme Court acknowledged it had decided incorrectly in 2013 and 2015; however, some believe this decision may again be contrary to EU law.

With regard to the profit distribution requirement, the Dutch high court held that income inclusion rules as they were applied in Germany are satisfactory. However, the profits to be taxed at the level of the investor must be calculated based on Dutch, and not German, rules. This may have the adverse consequence that the German fund can never qualify if the recalculated profits under Dutch law are higher than the profit under German law.

With regard to the shareholder requirements, the CJEU was very clear in its judgment that the national court must investigate whether rules are administered without distinction. Like German funds, Dutch UCITS do not know who their shareholders are. Nevertheless, the Dutch Supreme Court held that foreign investment funds must meet the shareholder requirements. The Supreme Court did acknowledge the point made by the CJEU; the reason why the Supreme Court did not address this difference in treatment by the Dutch tax authorities is very likely that the Supreme Court restricted its judgment to answering the questions that were referred by the Court of Appeals in Breda (and this issue was not included in the questions referred by the Supreme Court).

Another question to be addressed was what was meant by “any tax” in the CJEU’s Fidelity Funds judgment (C-480/16). Is this tax paid in the source country or does it relate to the country where the fund is resident? According to the Dutch Supreme Court, this is without a doubt the source country, thus the Netherlands in this case. The high court also held that the foreign fund can apply for a refund of the Dutch dividend withholding tax paid, if it makes a "replacing payment". The replacing payment is computed as follows:

  • (15% x worldwide profits) minus foreign withholding tax paid (step 1)
  • A foreign investment fund will be eligible for a refund of the Dutch dividend withholding tax paid if and to the extent that the Dutch dividend withholding tax paid exceeds the amount of the replacing payment (step 2)

The rules introduced by the Dutch Supreme Court raise many questions, such as:

  • Are UK dividends or Dutch interest income received (which are both exempt from withholding tax in those countries) within the scope of the 15% replacing payment? That seems to be the case and would result in the strange conclusion that the Netherlands imposes a “tax” on UK dividends and Dutch interest income.
  • Will other countries such as Germany accept the replacing payment as a creditable withholding tax? If not, double taxation arises, which means that the objective of the Dutch FII regime is not met (avoiding economic double taxation). The question arises whether this is compatible with EU law.

KPMG observation

Many foreign investment funds were anticipating the Dutch Supreme Court decision. Although the Supreme Court acknowledged that it had applied EU law incorrectly in its judgments in 2013 and 2015 (concerning a Finnish and a Luxembourg investment fund), the current decision does not provide the clarity everyone had hoped for, because many elements of the decision are either unclear or possibly contrary to EU law.

Tax professionals first note that the Supreme Court’s line of reasoning is that the foreign fund should be given the same treatment as funds that are based in the Netherlands. For that reason, the replacing payment reflects the same amount that a Dutch fund would have paid as dividend withholding tax. The Supreme Court then applied the case law of the CJEU in the Miljoen and X cases (C-10/14, C-14/14, September 2015), which gave the court cause to reconsider its earlier judgment that year. That line of reasoning is reflected in step 2 (discussed above) as this step requires that the tax burden of a non-resident may not be higher than the tax burden of a resident. Note that in previous CJEU case law, this burden comparison was limited to source country income (which is not the case in the method developed by the Dutch Supreme Court which includes worldwide income).

Second, it is important to look at the objective of the Dutch FII regime, which is to prevent economic double taxation when investments are made indirectly (through an investment fund). An essential element of achieving this objective is that the underlying dividend withholding tax is passed on upwards to the investors. In other words, the (Dutch and foreign) dividend withholding tax paid by the fund is refunded to the fund and replaced by dividend withholding tax withheld by the fund from its participants. In this way, together with the 0% corporate income tax rate, economic double taxation is avoided. Under EU law, the system introduced by the Supreme Court—in terms of avoiding economic double taxation—should not be to the detriment of foreign funds. It is unclear how economic taxation is avoided in the solution of the Supreme Court.

For that reason, tax professionals have expressed a hope that the European Commission would intervene as it did in Denmark in November 2019 after the 2018 CJEU decision in the Fidelity Funds case. The EC can initiate infringement proceedings before the CJEU if it believes that an EU Member State is applying domestic rules in a manner incompatible with EU law. Since the EC has already opened a file concerning the same issue for Denmark, tax professionals believe that it would not be surprising if the EC did this for the Netherlands as well.

The next step in this case is for the court of appeals (that referred questions to the Supreme Court, which now have been answered) is to resume the court proceedings based on the input received from the Supreme Court (and CJEU).

Read an October 2020 report prepared by the KPMG member firm in the Netherlands

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