A step closer to withholding tax refunds for Investment funds: the ECJ decision in Aberdeen SICAV

The European Court of Justice (“ECJ”) found that the Finnish tax regime according to which dividend distributions to Luxembourg SICAVs are subject to withholding tax, is discriminatory.

For a description of the facts and the procedure, please refer to our newsletter “A step closer to withholding tax refunds for Investment funds, The ECJ General Advocate opinion in Aberdeen SICAV”

The ECJ rendered its decision in the Aberdeen Case (C-303/7) related to a Luxembourg Specialised Investment Fund (“SIF”) incorporated as a SICAV (a variable capital investment company) which had invested into shares in a Finnish real estate investment Company.

Under Finnish law payments made to Finnish Parent companies or funds are exempt from withholding tax (“WHT”), whereas a WHT applies to a dividend paid to a SICAV resident in another Member State.

The ECJ ruled that a Member State law which discriminates between payments to national and foreign (EU) investment funds goes against the freedom of establishment.

The ECJ considered that this conclusion was not jeopardized by the fact that:

The Finish government argued among others that the Finnish rules were intended to prevent tax avoidance, in that the exemption from withholding tax of a dividend paid to a company resident in a Member State other than the Republic of Finland, which does not itself pay tax on that income and the distribution of whose profits does not give rise to withholding tax (which is the case for Luxembourg SICAVs), entails a risk of artificial arrangements being set up with the intention of avoiding all forms of tax on income. The ECJ explained that according to the recent Cadbury Schweppes case law, national measures restricting freedom of establishment may be justified where it specifically targets wholly artificial arrangements. The Court came however to the conclusion that in the case at hand, there was no such wholly artificial arrangement. Thus, the WHT could not be justified by the need to prevent tax avoidance.

The case is a major step ahead towards the elimination of discriminatory dividend withholding tax on distributions to entities which do not qualify for the Parent-Subsidiary Directive, such as Luxembourg SICAVs. The case means that dividends from any EU country which are distributed to Luxembourg SICAVs will be exempt from withholding tax in the foreign country, to the extent the foreign country’s legislation exempts from withholding tax dividends distributed to similar local entities. In case the foreign country doesn’t grant a full exemption but a reduced WHT rate, the Luxembourg SICAV will have to be granted the same favourable treatment. Member States can only refuse to grant the lower rate in case of wholly artificial arrangement (anti-abuse provision under the conditions set in the Cadbury Schweppes case-law).

Based on a recent internal survey within Taxand, our international network, Spain, Denmark, Poland, Belgium, France, Italy and Finland of course, are some examples of jurisdictions that levy a withholding tax on distributions to foreign funds which is higher than the tax levied on distributions to their national funds.

The tax treatment of dividend distributions to investment funds is already an important topic under review at OECD level: the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors has recently released a Report on the Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles. Thus, while a major objective at international level is to have DTT-reduced withholding tax rates applied to distributions made to all types of collective investment vehicles, the ECJ case law goes a step further in an EU context, exempting this income under certain conditions.

The amendments of the foreign discriminatory legislations could however take some time and investors should keep on filing claims in order to recover overpaid WHT in the meantime.