Tax Alert: The European Commission calls on the Netherlands to align taxation of investment funds with EU law

Dutch tax levy reduction regime

Under Dutch legislation, eligible investment funds can reduce their tax liability on dividends received from both qualifying domestic and foreign equity investments. This reduction is achieved – in short – by offsetting (part of) the dividend tax paid by the investment fund on the dividends it receives against the Dutch dividend withholding tax to be remitted by the investment fund in relation to dividends it distributes. 

In practice, only Dutch investment funds are eligible for this Dutch tax levy reduction regime. According to Dutch case law, foreign investment funds are not objectively comparable to eligible Dutch investment funds for the purposes of the Dutch tax levy reduction regime and can therefore be excluded from this benefit. The main argument in this regard is the fact that foreign investment funds are not subject to Dutch dividend withholding tax on redistributions to their participants. 

Discriminatory treatment and breach of EU law

According to the Commission, this discrepancy in treatment between Dutch investment funds and foreign investments funds makes it less attractive for foreign investment funds to provide services to Dutch investors and to invest in shares of Dutch resident companies.

The Commission considers that the Dutch tax levy reduction regime (in its current form) restricts the free movement of capital, which is prohibited by Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area. In the opinion of the Commission, the Dutch tax levy reduction regime creates a difference in treatment to the detriment of investment funds from other EU Member States and EEA States.

Next steps

The Netherlands has two months to respond to the Commission's letter and to remedy the identified shortcomings. If the response is not satisfactory, the Commission may issue a reasoned opinion. If the Netherlands still fails to comply even after this, the Commission has the power to refer the matter to the European Court of Justice (CJEU), although most cases are resolved before reaching this stage.

Concluding remarks

Currently, a number of cases are pending before the Dutch Supreme Court in relation to the Dutch tax levy reduction regime. The infringement procedure may lead the Dutch Supreme Court to seek for a preliminary ruling from the CJEU in one or more of these cases. In addition, while no legislative changes are currently planned, the outcome of the infringement procedure may result in amendments to the statutory provisions underlying the Dutch tax levy reduction regime. This could have a significant impact on the taxation of investment funds and the wider landscape of EU law compliance.

For further details, please see the Commission’s official communication and stay tuned for updates on this evolving situation.