One of our clients approached us with the question if we could assist in assessing whether or not it was possible and/OR beneficial to his investors in his offshore funds to file a claim with the European Court of Justice (“ECJ”) for “discriminatory withholding taxes”. A topic that we felt would benefit more clients and their investors.

Is it possible to reclaim of EU withholding tax? 

EU laws and regulations have increasingly impacted the EU tax framework. Increasing numbers of individuals and entities within the EU are making use of EU law in order to challenge the legal validity of EU member state tax rules. The outcome of these challenges does not stop at the EU boundary but extends to entities domiciled outside of the EU. On the basis of recent cases of the European Court of Justice, non-EU domiciled entities, including (offshore) investment funds, investing in EU securities, may claim withholding tax paid on EU Securities dividend income. This, if successfully pursued, could result in tax repayments.

Basis for the claim. 

When withholding taxes can’t be credited against a non-resident’s tax liability (as in the case of offshore funds) then they become a final burden. EU funds are typically treated differently for tax purposes in the source state of the dividend paying company then offshore funds.

The legal arguments used to challenge member state withholding tax rules (which impose a higher tax burden on offshore funds then EU funds) are strong and supported by recent ECJ case law. The claims against the discriminatory withholding tax are based on the EU Treaty which protects the free movement of capital and extends to movement of capital and payments between EU member states and ‘third countries’ (non-EU states, including offshore jurisdictions). The ECJ cases confirm that imposing withholding tax by an EU state on dividends paid to a non-resident company (including offshore funds) while at the same time exempting domestic funds from such taxes results in discriminatory tax positions contrary to the free movement of capital.

The cases have caused an increasing number claims brought by funds for the recovery of discriminatory withholding taxes. Although most claims have principally been considered only by EU resident funds, at the end of last year, notification was received from the Dutch tax authorities, agreeing to repay withholding tax suffered by a non-EU resident portfolio investor.

Also, the European Commission has initiated infringement procedures against several EU member states regarding their discriminatory withholding tax charged on non-EU pension funds (and there seems to be a good case that this should apply to offshore funds as well), including Spain and the Netherlands.

Who should investigate if it’s worth your time (and money) to file claim? 

Both EU and non-EU (clearly including offshore) pension funds and investment funds that received EU dividends that were subject to withholding tax can consider such claims. Clearly there will be cost involved in filing claims depending on number of dividends, number of EU member states involved, etc. But your administrator in cooperation with your tax adviser should be able to give you an indication of whether this could be attractive in your specific situation.

When to act? NOW!! 

There is a risk that your rights may expire. Claims should be made within the applicable EU member state limitation period, which varies from state to state. Given the total amounts involved and particularly because of the extension of possible claims outside of the EU it’s expected that the ECJ will act to halt what it considers late claimants benefiting from these decisions.