Recent developments in withholding tax reclaims: Germany, the Netherlands and Sweden

Recent positive developments related to withholding tax (WHT) in Germany, Netherlands, and Sweden, mark a crucial advancement for foreign investment funds seeking WHT reclaims, not only reinforcing the rights of foreign investors but also highlighting the importance of equitable tax treatment within the EU framework. Potentially impacted foreign investment funds should consider these developments and, when relevant, carry out their reclaim process.

2024 German Withholding Tax Reclaim Developments: Impact on Foreign Investment Funds

A pivotal ruling by the German Federal Tax Court in a test case involving a French FCP and a Luxembourg SICAV has brought clarity to the issue of WHT reclaims for foreign investment funds. The court's decision addresses the compatibility of Germany's pre-2018 WHT regime with EU law and sets the stage for substantial financial awards for affected claimants. With a four-year statute of limitations for reclaims, the case now moves to a lower court for further review, which will also encompass the assessment of partial exemptions for funds qualifying as equity or balanced funds, the validation of status certificates, and WM Datenservice reporting for distributions. These additional elements are critical for claimants to ensure their reclaims are accurately processed.

Background and context: Historically, Germany's tax system imposed a higher WHT on foreign investment funds compared to their domestic counterparts, leading to claims of discrimination and contravention of EU principles. The German Investment Tax Act (InvTA) reform in 2018 sought to harmonize the tax treatment of domestic and foreign funds. The recent court ruling builds on this legislative change, offering a judicial perspective that supports the position of foreign funds and reinforces the EU's commitment to the free movement of capital. Moreover, the ruling indirectly emphasizes the importance of qualifying for partial exemptions by classifying funds appropriately, obtaining necessary status certificates, and complying with WM Datenservice reporting requirements for distributions.

Key findings of the Federal Tax Court ruling:

• EU law infringement: The pre-2018 German WHT regime has been deemed contrary to the EU's free movement of capital provision.
• Interest on reclaims: Claimants are entitled to interest on reclaimed amounts, with expectations of significant financial compensation.
• Reclaim timeframe: A clear four-year statute of limitations has been established for filing WHT reclaims.
• Partial exemptions and compliance: The importance of determining eligibility for partial exemptions by qualifying as equity or balanced funds has been underscored, along with the need for accurate status certificates and adherence to WM Datenservice reporting for distributions.

Current proceedings and implications: As the case progresses to a lower court for detailed assessment, claimants should anticipate requests for information from the Bundeszentralamt für Steuern in Germany (BZSt) (Federal Central Tax Office) and are advised to rigorously review their reclaims. This includes validating the basis of the reclaims, ensuring that the documentation supports the reclaim values, and confirming that they have obtained the necessary status certificates and fulfilled all WM Datenservice reporting obligations. These steps are vital to maximize the likelihood of successful reclaims and financial recovery.

Conclusion and Recommendations: The German Federal Tax Court's ruling marks a crucial advancement for foreign investment funds seeking WHT reclaims. In addition to the financial implications, claimants must be vigilant about their fund classification to qualify for partial exemptions, ensure they have up-to-date status certificates, and comply with WM Datenservice reporting standards. Staying informed about the evolving EU WHT reclaims landscape is essential.

Developments in Dutch WHT reclaims: implications for foreign investment funds

The Dutch WHT landscape has been undergoing significant changes, particularly in relation to foreign investment funds. Traditionally, a 15% WHT was levied on dividend distributions to both resident and non-resident investment funds. However, a discrepancy arose whereby Dutch funds designated as fiscal investment institutions (FIIs) were able to reclaim this WHT, a benefit not afforded to foreign funds.

Recent developments: Earlier this year, the European Commission has initiated infringement proceedings against the Netherlands for excluding non-resident funds from the Dutch tax levy reduction scheme. This scheme compensates Dutch investment funds for dividend tax paid on dividends from Dutch companies, a privilege not extended to foreign funds. The Commission contends that this constitutes a breach of the EU's free movement of capital principle.

Key points from the European Commission’s challenge

• Discriminatory tax rules: The Commission identified a bias in Dutch tax regulations that favored domestic funds.
• Infringement of EU Law: The exclusion of foreign funds from the tax reduction scheme is seen as a restriction on the free movement of capital.
• Response requirement: The Netherlands has been given a two-month deadline to address and amend the discriminatory tax treatment.

Pending and historic EU WHT reclaims: Amidst these developments, numerous funds have ongoing or historic WHT reclaims with the Dutch tax authorities or in the courts. A recent case saw the Advocate General uphold a ruling unfavorable to taxpayers. However, the Commission's notice may offer some hope to taxpayers and could influence the Supreme Court to re-examine contentious issues, although it may also complicate longstanding claims.

Implications for foreign investment funds: The European Commission's actions are likely to significantly impact the tax treatment of non-resident investment funds in the Netherlands. Should the Netherlands fail to adequately address the Commission's concerns, it could potentially lead to a tax regulation reform.

Navigating the reclaim process: The WHT reclaim process in the Netherlands requires detailed applications and extensive documentation. The complexity of the process involves often the assistance of tax professionals.

Key considerations for claimants

• Documentation: Ensure all required documentation is thoroughly prepared and submitted.
• Timely filing: Meet deadlines to prevent complications in the reclaim process.
• Expert assistance: Engage tax professionals to enhance the likelihood of a successful reclaim.

CJEU rules Swedish withholding tax on dividends to foreign public pension funds is contrary to free movement of capital

On 29 July 2024, the Court of Justice of the European Union (CJEU) ruled in the case of Keva et al. v. Skatteverket (C-39/23) that Sweden’s practice of imposing a withholding tax on dividends paid to foreign public pension funds, while exempting Swedish public pension funds, violates the principle of free movement of capital as outlined in Article 63 of the Treaty on the Functioning of the European Union (TFEU). This landmark decision opens avenues for foreign public pension funds to reclaim previously paid withholding taxes.

Background and Context: The case originated from three Finnish public pension funds that received dividends from Swedish companies over several years, which were subject to a withholding tax. In contrast, dividends received by Swedish public pension funds, known as Allmänna pensionsfonderna (AP Funds), were exempt from such taxes due to their status as state entities. The Finnish funds argued that this differential treatment constituted a violation of the free movement of capital, prompting them to seek a refund from the Swedish Tax Agency.

After unsuccessful appeals in Swedish administrative courts, the matter was escalated to the Swedish Supreme Administrative Court (SAC), which sought clarification from the CJEU regarding the compatibility of Sweden’s tax practices with EU law.

Key findings

• CJEU’s analysis: The CJEU found that the differing tax treatments imposed by Sweden created a restriction on the free movement of capital. The court emphasized that both Swedish and Finnish public pension funds serve similar social policy objectives and operate under comparable legal and financial frameworks.
• Rejection of Sweden’s justifications: The Swedish government argued that the tax exemption for domestic funds was necessary to prevent circular funding and to maintain the stability of the public pension system. However, the CJEU dismissed these justifications, stating that administrative advantages alone do not warrant such discriminatory treatment for foreign public pension funds.
• Implications for foreign funds: The ruling significantly enhances the potential for foreign public pension funds and similar entities to claim exemptions from Swedish withholding tax on dividends. The CJEU’s decision suggests that any public pension fund with comparable objectives may be eligible for tax relief

Conclusion and recommendations

The CJEU’s ruling is a development for foreign public pension funds, allowing them to pursue refunds for withholding taxes paid on dividends from Swedish companies. Affected funds should:

1. Assess eligibility: Review past dividend payments to determine if withholding tax was applied.

2. File claims promptly: Claims for refunds must be submitted within five years of the tax payment, specifically before 31 December 2024, for taxes paid in 2019.

3. Consider broader implications: The ruling may also affect public pension funds outside the EU, as the principles of free movement of capital apply broadly

These decisions not only reinforce the rights of foreign investors but also highlights the importance of equitable tax treatment within the EU framework. Investment entities and/or pension funds investing in Germany, the Netherlands or Sweden should seek advice of professionals to assess and successfully benefit from their WHT reclaim opportunities .