Luxembourg: No refund of withholding tax on dividends, insufficient proof of beneficial ownership

Luxembourg: No refund of withholding tax on dividends

A Luxembourg court upheld the position of the Luxembourg tax administration that rejected a claim for a refund of withholding tax on dividends because the taxpayer was not able to provide convincing evidence of its beneficial ownership of the dividend income.

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Background

The taxpayer, a Luxembourg limited company, held dematerialized shares in three Luxembourg companies which paid dividends in the years 2014 and 2015.

The legal framework for dematerialized shares involves a securities depository (i.e., custodian bank) that keeps and holds the shares on behalf of the investor. No physical document of these intermediated securities is issued. The dematerialized shares are only represented by a record in a securities account maintained by the custodian. Thus, the identity of the investor as beneficial owner is not disclosed to the public, while the relationship between the investor and the securities depository follows the rules set forth by the custodian agreements.

The exercise of investor rights is determined when a certificate issued by the custodian is provided to the investor attesting the number of securities held. Dematerialized securities circulate by account-to-account transfer. Dividend distributions by the issuing company are validly carried out by payments on the securities account maintained by the custodian and may involve further intermediaries, such as a paying agent.

In this case, the tax administration required documentation of the complete chain of payments and a proof of payment from each intermediary in the chain from the issuing company to the investor.

However, the taxpayer claimed that it would be impossible to produce this evidence, since the chain of the dividend payment involved many intermediaries that were not informed of the identity of the investor being the last link in the chain.

Instead, the taxpayer submitted “tax vouchers” issued by an intermediary that stated information about the dividends declared at the shareholder meeting, including the amounts of dividends. The Luxembourg tax administration disregarded the tax voucher as insufficient proof, finding that this document was not a “classic form” of a tax voucher. The computer-generated document had no (double) signature and was not printed on a proper letterhead with a logo of the company.


Decision of the court

The court agreed with the position of the tax administration. The judges took a close look at the underlying legal provisions and a broader look at the current tax environment. In particular, the judges took into account the “Cum-Ex scheme” which apparently allowed multiple persons to claim ownership of the same shares and the corresponding right to receive a refund of the same amount as the taxes withheld from dividend payments.

In Luxembourg, a refund of withholding tax can be claimed by the beneficiary of the dividend income, provided that the beneficiary maintained, as of the date of the dividend distribution, for an uninterrupted period of at least 12 months, a direct participation of at least 10% in the share capital or at least an acquisition price of €1.2 million in the issuing Luxembourg company.

The court held that the burden of proof was on the taxpayer to provide evidence that satisfies these requirements in order for the full exemption from withholding tax to be actually met.

The court acknowledged the difficulties of the tax administration in identifying multiple withholding tax reclaims for the same shares, especially when intermediated securities (i.e., dematerialized shares or bearer shares) are involved. As a consequence, investors that claim legal or economic ownership of shares in a distributing company must prove that they are the beneficial owner (bénéficiare éffectif) of the dividend income.

There was an additional complexity in that the investor had lent some dematerialized stocks to a third party. In consideration for the dividends paid by the issuing companies to the third party, a compensation payment was due to the investor. The investor asserted that no claim for refund of the withholding tax had been filed for the shares that formed part of the stock-lending scheme. However, the investor could not submit convincing evidence that allowed the court to identify these compensation payments and to distinguish them from dividends.

The court concluded that the evidence, in particular the tax vouchers, did not satisfy the burden of proof that the investor was the beneficial owner of the dividend payments.


KPMG observation

An appeal has been filed in this case. Companies currently facing a similar tax controversy need to consider safeguarding their rights. Also, consideration may need to be given to setting up a proper process and documentation together with the custodian and paying agents, and preparing applications for a reduction at source and the filing of withholding tax refund claims in all countries that infringe EU law, tax treaty provisions, and domestic law by applying a discriminatory tax treatment to cross-border dividend distributions.

Read a January 2021 report prepared by the KPMG member firm in Luxembourg


For more information, contact a KPMG tax professional in Luxembourg:

Hermann Schomakers | +352 22 51 51 5606 | hermann.schomakers@kpmg.lu

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. 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. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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