PwC NewsUpdate Financial Services/ EU Direct Tax Group

Transcription

1 May 2012 PwC NewsUpdate Financial Services/ EU Direct Tax Group Investment funds Investment funds can claim EU refunds of WHT on dividends Latest developments Did you know that based on EU Law you can claim back withholding taxes which you have already paid? Too good to be true? Not quite. Essentially, in many cases where an EU withholding tax cannot fully be credited in the residence State of the recipient, there is an EU argument to apply for a refund. PwC has assisted many clients with filing requests and protective claims for pension funds, investment funds, insurance companies, charities, banks etc. across many European jurisdictions for the recovery of EU withholding taxes on dividends and interest. Following recent favourable European Court of Justice (ECJ) case law and national court decisions, clients can look forward to refunds of millions of Euros. To safeguard their rights, clients will need to file protective claims within local statutory time limitations ranging from 3 months to 5 years. It might take several years until refunds are granted and in certain cases, court procedures in national courts are necessary. In order to avoid losing out on any payments due to statutory time limitations, it is strongly recommended to take quick action. 1

2 This NewsUpdate provides the latest state of affairs in relation to refunds of dividend withholding tax for investment funds in the various jurisdictions, obviously also taking into account the possible impact for non-eu investment funds. Landmark judgment by European Court After Aberdeen, on May 2012 the European Court of Justice ( ECJ ) has delivered another landmark judgment in relation to discriminatory dividend tax withheld from foreign investment funds. In the so-called Montreuil cases, ten investment funds resident in Belgium, Germany, Spain and the United States which received dividends from their French equity portfolios subject to French dividend withholding tax, contested the French tax rules on the basis that the levy of withholding tax was in breach of the free movement of capital guaranteed by EU law. The ECJ ruled that the levying of French withholding tax on dividend payments made to foreign investment funds was in breach of the free movement of capital as such withholding tax is not levied from French investment funds.¹ As one of the Montreuil cases concerned a US investment fund, this decision may support claims (to be) filed by non-eu investment funds for refunds of dividend tax withheld in EU Member States. How can PwC help? PwC has extensive experience in assisting our clients in filing protective withholding tax reclaims with tax authorities throughout Europe. Our international client servicing teams are a mix of dedicated Financial Services professionals and leading EU direct tax law specialists who are able to determine the possibilities based on actual facts and circumstances that will be an essential element in preparing the cost benefit analysis that should be the starting point for any investor that has suffered withholding tax on EU source dividends and interest payments. You find our contacts at the end of this NewsUpdate. Non-EU investors Non-EU/EEA based investors e.g. based in U.S., Switzerland, etc., may also file protective claims as EU rules prohibit restrictions on capital movements between EU and non-eu countries. In recent ECJ case law it has been concluded that the EU principle of free movement of capital should apply in the same way to portfolio investors based in third countries with whom a sufficient (bilateral or multilateral) agreement on the exchange of information exists. ¹ The condition of information exchange may not always need to be fulfilled, especially in situations where the provision of information is not relevant or necessary for the tax relief. Interesting to note in this respect that there is currently a case court pending in the Netherlands challenging the condition of an exchange of information provision. 2

3 LATEST DEVELOPMENTS PER COUNTRY Below you ll find a brief run-down of the latest developments in the field of Fokus bank claims, listed by country. Of course, this is just a choice selection of the changes in this area in a wide range of countries since 2005 and looks just at recent communications from tax authorities, ECJ judgments, etc. The PwC network is available to provide you with comprehensive overviews of the status of refund claims per type of investor, per country, etc. Austria The Austrian Investment Fund Act 2011 only provides for contractual investment funds (comparable to Dutch FGRs and Luxembourg FCPs), i.e. the co-beneficial-ownership model. As a result, all Austrian investment funds are regarded as tax transparent vehicles. Any income of Austrian investment funds is directly attributed to the investors in the fund and taxed accordingly, i.e. as if it had been directly received by the investors. In this context the Austrian tax authorities state that only the investors in a fund (beneficial owners) can claim treaty benefits and file claims for refund based on EC law. Pursuant to the Austrian Investment Fund Act 2011 this practice is extended to all foreign investment funds, no matter whether they are contractual investment funds (co beneficialownership model) or corporate investment funds like British ICVCs and Luxembourg SICAVs. Moreover, the deduction of Austrian withholding tax on Austrian dividends takes place regardless of the domestic or foreign respectively UCITS or non-ucits status of the investment fund. However, other than in the recent Montreuilcases, foreign corporate funds must not be compared with domestic/austrian investment funds (co-beneficial-ownerships) but with Austrian corporations, which invest in securities according to the principles of risk spreading and are generally opaque, as corporate funds are not possible according to Austrian law. Such a comparison leads to a discrimination of foreign corporate funds, which does not seem to be in line with EC law. Austrian dividend payments received by an Austrian company are generally tax exempt due to the Austrian participation exemption. Any deducted Austrian withholding tax on dividends is credited/refunded within the annual tax return of the Austrian dividend receiving company at the latest. As a result, Austrian dividends are received tax free by Austrian companies, which invest in securities according to the principles of risk spreading. Contrary to that a comparable Luxembourg SICAV, i.e. a foreign corporation investing in securities according to the principles of risk spreading, is treated as tax transparent and generally suffers Austrian withholding tax at the standard rate of 25 %. This constitutes a discrimination, which is not in line with EU/EEA law, if the applicable DTT-rate is not 0 % or the foreign company (foreign corporate investment fund) is not able to credit or utilize the Austrian withholding tax in its state of residence, e.g. because it is tax exempt or taxed at a very low rate. In such a situation all Austrian withholding tax should be refunded to foreign corporate funds (e.g. Luxembourg SICAVs) based on EC law respectively the Austrian Corporate Income Tax Act according to the Austrian statute of limitations (generally 5 years retroactively). This understanding seems to have been confirmed by the ECJ judgment in Aberdeen on 18 June However, claims for refund for corporate investment funds resident in the EU or EEA (e.g. Luxembourg SICAVs or UK ICVCs), which were based on Denkavit, Amurta and Fokus Bank respectively the Austrian Corporate Income Tax Act, have been rejected in the first instance. The corresponding appeals are currently pending with the second instance ( Independent Tax Senate ). According to our latest discussions with the Austrian tax authorities one of these appeals shall be referred to the ECJ for a preliminary ruling, as the Austrian taxation of EU/EEA corporate funds does not seem to be in line with EC law in the light of the ECJ judgment in Aberdeen. The preliminary ruling of the ECJ should not be expected before the end of Nevertheless, with respect to the Aberdeen judgment of the ECJ, we would encourage foreign corporate investment funds to file (protective) claims for refund, as Aberdeen should give us a strong position. Belgium The In Tate & Lyle case In Tate & Lyle Investments Ltd v. Belgium (C- 384/11), Brussels Court of First Instance asked the ECJ whether the withholding taxwithholding tax on dividends distributed by a Belgian subsidiary to its parent, which had a shareholding 3

4 of less than 10%, was compatible with the free movement of capital. Where a Belgian company receives a dividend from a Belgian subsidiary (where the holding less than 10% but its purchase value is more than EUR 1.2 million), 10% withholding taxwithholding tax is due. Plus, the Belgian dividends-received deduction reduces the parent s corporate income tax base by 95% of the dividend income, thus reducing the corporate income tax liability. Because Belgian companies can offset Belgian withholding tax on a dividend against their CIT liability and get a refund for the excess, that, combined with the DRD, generally means that the Belgian parent gets a large (if not full) refund of the withholding tax on the dividend. By contrast, if the parent is located in another Member State (shareholding still less than 10% but purchase value more than EUR 1.2 million), the Belgian withholding tax cannot be offset or refunded. It is thus a final tax in the hands of the parent in the other Member State. Clearly the net dividend received is higher in the hands of a Belgian parent than in the hands of a parent in another Member State. Hence the reference made by the Brussels court. ECJ referral for investment funds On 6 April 2011, the European Commission referred Belgium to Court over discriminatory taxation of foreign investment companies. The European Commission has decided to refer Belgium to the ECJ because of its discriminatory taxation of foreign investment companies. Such discrimination is considered to be in breach of EU Single Market rules on the free movement of capital and freedom of establishment. Indeed, Belgian investment companies do not pay tax on their Belgian interest and dividend income, while their foreign equivalents are taxed. The Commission considers that the Belgian provisions restrict the free movement of capital and the freedom of establishment of the Treaty on the Functioning of the European Union and with the corresponding articles of the European Economic Agreement. Statute of limitations A further interesting issue was raised as to the limitation period for making a claim. The Brussels court held that a claim by a nonresident company seeking recovery of Belgian withholding tax was time-barred six months after (i) the date of the assessment notice or (ii) the date of collection of the tax (by means other than an assessment notice). Where a non-resident does not file tax returns in Belgium, withholding tax is retained at source and no assessment notice is sent by the Belgian tax authorities. The Brussels court therefore held that the six months start on the date of collection of the withholding tax, which it deemed to be the time of payment, failing any indication to the contrary by the tax administration. In addition, the court rejected the five-year limitation period for ex officio tax relief on overpayments of taxes due to new facts or evidence coming to light, based on the Commission v. Italy decision of 19 November 2009 (C-540/07). Change in Belgian tax law The Miscellaneous Provisions Act of 28 December 2011 brings some clarity to the applicable statutes of limitation to claim back undue withholding tax which have been retained at source, in case no formal assessment notice is issued by the tax authorities. The Act states that when no assessment notice is issued for withholding tax retained at source, the claim for recovery of the withholding tax wrongly paid to the Treasury lapses after 5 years starting from the 1st of January of the year in which these withholding tax have been paid. This change in law thus contradicts the position taken by the Brussels Court of First Instance as described above. Also it is mentioned in the preparatory documents of the Act that the aim of the change is to avoid the statute of limitation of 10 years provided by common law to be applicable. Impact for Fokus in Belgium As regards to the applicable statute of limitations, clarification is given in this respect through the recent amendment of Belgian tax legislation, as described above. Though the law is only applicable for withholding tax retained at source as from 1 st of January 2011, this brings additional strong arguments to defend also the 5 years statute of limitation for Fokus 4

5 bank claims introduced in the past or even the 10 years statute of limitation. Moreover, as regards compatibility between the Belgian regime and the free movement of capital, the court considers that prima facie there is indeed discrimination. Conclusion That said, PwC Belgium thus strongly recommend continuing to file Fokus bank claims in Belgium, especially given the prima facie discrimination alluded to by Brussels Court of First Instance, the pending reference for a preliminary ruling and the clarification on the applicable statutes of limitations. One might even consider for dividends received prior to 1 January 2011 to apply for the 10-years statute of limitation given the Belgian legislator himself considered that a clarification of this point was needed to avoid this statute of limitation Denmark There are currently a number of Fokus Bank cases in the Danish High Courts. The cases have been subject to a standstill procedure due to ongoing discussions between Denmark and the EU Commission. Those discussions have been finalised and a Letter of Formal Notice has been sent to the Danish Government. The Letter of Formal Notice has not yet been made public in Denmark and therefore we are not aware of the precise content. On 8 May 2012, the Danish Parliament adopted a bill changing the current Danish tax rules for investment funds. The bill was initiated by changes in relation to UCITS IV but also included certain changes of Danish tax law covering investment funds. For instance, under the new rules, so-called distributing funds will be permitted to issue multiple classes of shares. Further, tax reporting rules for such distributing funds have been relaxed and Danish tax rules for individual investors investing in distributing funds have been simplified. The changes will have effect as from The Danish tax rules enabling Danish distributing funds to receive dividends tax free from Danish portfolio shares have, however, not been amended. These rules are based on the fact that the Danish or foreign fund in question has elected to be treated under the special tax rules for distributing funds entailing certain reporting requirements (which have now been relaxed, cf. above). Danish distributing funds are able to obtain a tax exemption card in relation to dividends from Danish shares. The tax exemption card is only granted to funds fully liable to tax in Denmark. In other words, even though foreign investment funds would elect to be treated under the Danish rules for distributing funds and meet the specific reporting requirements hereof, they would not be able to obtain the same tax treatment in relation to dividends from Danish shares as Danish resident funds. Finland Withholding tax refund claims for non-resident investment funds have been successful if the foreign investment fund has been a UCITS fund (as meant in the directive 85/611/EEC) based on a contractual arrangement and whose key characteristics are comparable to the key characteristics of a Finnish investment fund. There is recent case law on positive refund decisions for Norwegian and Swedish investment funds. For UCITS-funds in a corporate form, there are positive decisions from the tax office in cases where the fund has been listed. The recent Montreuil-cases could provide for additional argumentation in favour of nonresident investment funds. In Finland, the tax exemption of Finnish investment funds is not dependant on the distribution of the profits. Nonresident investment funds are subject to a higher tax burden based on their residence and therefore, the ECJ judgment could be relevant for future Fokus bank claims in Finland. France ECJ Judgment on French discrimination of foreign investment funds On May 10, 2012, the ECJ announced its decision concerning the compatibility of French dividend withholding tax with the EU principle of free movement of capital. The levying of French withholding tax on dividend payments made to foreign investment funds, resident either in the EU or in third countries, had been subject to taxpayer s challenge based on the EU s free movement of capital provision. The French Tribunal first requested the nonbinding advice of the French Supreme Court, 5

6 which itself considered that several questions had to be referred to the ECJ (see EUDTG Newsflash and our ealert of 8 July 2011). The Tribunal followed this advice and requested a preliminary ruling from the ECJ. The questions referred to the ECJ were the following: In order to determine the existence of discrimination, what is the appropriate level of comparability? In order to determine whether there is a difference in the treatment provided by French tax legislation, should the analysis be undertaken at the level of the fund or at the level of the unit holders alongside the status of the fund? If the Court considered that it is the status of the investor that must be taken into account, under which conditions would the French withholding tax be considered to be compatible with the free movement of capital? The ECJ answered only the first of these questions and considered that French tax law creates a difference of treatment between resident and non-resident investment funds. Looking at the justification, the ECJ analysed whether those funds were comparable and whether or not the analysis should take into account the investors. The Court clearly stated that the French provision is based on the residence of the funds. The comparability should be assessed solely at the level of the funds. In the light of the aim of the law which seeks to prevent dividends to be subject to a series of tax charge, the ECJ established that the situations between domestic and foreign funds are comparable. Other arguments which had been put forward by the French government (namely the balanced allocation of taxing right between the Member States, the effectiveness of fiscal supervision and the coherence of the tax system) were set aside by the Court. With regards to non-eu States, the Court did not need to analyse the impact of article 64 1 of the TFEU (i.e. the grandfathering provision) as it was not part of the preliminary ruling question. Besides, it stressed that the French government did not prove that the efficiency of tax audit could justify the discrimination. Last but not least, the Court refused to limit the temporal effect of its decision. Practically, this decision under French procedural law should open a new period to introduce claims for past years (2009, 2010 and 2011). Claims should be filed before 31 December The French tax authorities have already started the refund process. French Ministry of Finance is considering legislative reform. Germany On 20 October 2011, the ECJ decided that the German dividend taxation with respect to withholding taxes for non resident companies is not in line with the free movement of capital. According to current German tax law dividend payments are subject to withholding tax of % irrespective of the recipient's place of residence. However whereas resident companies who receive dividends benefit from a participation exemption regime which nearly leads to a full refund of withholding tax, foreign resident recipients who do not benefit from the Parent Subsidiary Directive (hereafter PSD ) could only get a partial reduction according to domestic law or an underlying Double Tax Treaty (except in rare cases where the treaty provides for 0% withholding tax). The remaining withholding tax is final and could only be credited against the income tax in the state of residence. In its decision the ECJ held that this different treatment constitutes an unjustifiable restriction of the free movement of capital. The decision has an effect on portfolio shareholdings and shareholdings which fall out of scope of the PSD, held by EU and EEA residentcompanies. The judgment implies that Germany is obliged to refund the withholding tax to foreign companies upon application. Foreign companies should apply for such a refund within the statute of limitation. However, the case did not deal with investment funds, pension funds and life insurance companies. Such entities underlie other tax rules than ordinary companies. With respect to pension funds, Germany is facing a separate infringement procedure, C-600/10. Even now, seven months after the judgment, there has been no official guidance from the Ministry of Finance on pending refund claims. Even though the German system is different from the French one, certain statements made by the ECJ in the Santander cases judgment can be 6

7 applied to Germany and should have a positive effect on the pending investment fund claims. Especially the fact that the German rule also uses residency (or rather, the term domestic funds) as a distinguishing criterion for the right to withholding tax refund, implies that the comparability of situations in the discrimination test should take place at fund level. A federal/state working party is currently looking at the taxation of investment funds in Germany with the aim to present a proposal for a new regime until the end of this year. A first report was published at the end of February. The main goal is to simplify the very complex fund taxation. It is proposed to introduce a non-transparent system for public funds with corporate tax liability as the main rule (with exceptions for Spezialfonds etc.). Further, the report states that a reform is also necessary from an EU law perspective. According to the report, the refund claims filed by foreign funds constitute - against the background of the existing jurisprudence of the ECJ -a high litigation and budgetary risk.the proposed rules suggest to reduce the WTH rate to 15% but at the same time a refund - for foreign and domestic funds - would not be possible anymore. Further developments have to be awaited. Hungary In 2011, Budapest Metropolitan Court (of first instance) ruled that an investment fund had been discriminated by being charged withholding tax on dividends received from Hungarian companies between 1 May 2004 and 1 January It held that the 25% withholding tax paid by foreign investment funds on Hungarian dividends (including EU investment funds with a shareholding of less than 25% in 2004 and 20% in 2005) contravened the EU s basic freedom of movement of capital. It further held that, because the Treaty on the Functioning of the European Union was of direct application, administrative bodies such as the tax authority had to take those rules into account when applying Hungarian law and examine whether a particular provision is contrary to them. At the time of the deduction, Hungary s Corporate Income Tax Act was contrary to the Treaty and should therefore have been disregarded by the tax authority. A reference for a preliminary ruling from the Supreme Court has been lodged on 1 March 2012 (Case C-112/12). The Supreme Court expects the European Court of Justice to answer whether Hungarian withholding taxwithholding tax rules described above were compliant with EU law. The ongoing reclaim procedures have been suspended by the courts on the basis of preliminary ruling procedure. Italy In the case of Commission v Italy (C-540/07), the ECJ held that the Italian withholding tax rules on outbound dividends breached EU law due to their adverse treatment of outbound dividends paid by EU and EEA companies. In its wake, the Italian tax authorities issued a practice note on 8 July In 2008, Italy changed its withholding tax provisions on outbound dividend payments and eliminated the discrimination between distributions to (i) Italian companies and (ii) EU/EEA companies. In its recent practice note, the Italian tax authority agrees to refund withholding tax wrongly levied on distributions to EU/EEA companies and indicates that the tax provisions on outbound dividends in force as of 2008 also apply to previous dividend distributions (prior to 2008, 1.65% of the withholding tax cannot be recovered as this was the actual tax charge also borne by Italian companies). Refunds are subject to certain conditions: (i) the dividend must have been paid after 2004; (ii) the claim has to be submitted within 48 months of the relevant dividend payment; (ii) the entity receiving the Italian dividend must be subject to corporate income tax and (iii) may not obtain a full tax credit of the Italian withholding tax in its State; (iv) the dividend distribution may not constitute an abusive transaction within the meaning of Cadbury Schweppes (C-196/04). Although the practice note does not address refund claims by foreign pension or investment funds, it should strengthen their position before the courts and increase their chances of getting a refund. As far as pension funds are concerned, since 2009 Italy had been providing for a reduced 11% dividend withholding tax for eligible European 7

8 pension funds, following an EU Commission infringement procedure. This reduced withholding tax was mistakenly repealed in August 2011 (effective January 2012) in the hastily drafted financial tax reform. Then the ECJ decision in Case C-493/09 (Commission v Portuguese Republic) came, which stated that European pension funds were not to be taxed more heavily than domestic ones, irrespective of any argument relying on the taxation of pension benefits (a reasoning echoed in Santander). In the wake of such decision, the 11% reduced dividend withholding tax rate for European pension funds was restored, retroactively from January Italian investment funds have recently undergone a major reform: until June 30, 2011 they were subject to a 12.5% substitute tax, while from July 1 st, 2011 they are exempt, unit holders being now subject to the 12.5% tax (20% from 2012). In this respect, the Santander case is likely to have the following consequences: Netherlands any legislation forced by an infringement procedure will either provide that no withholding tax applies on dividends paid to European investment funds, or will restore the dividend withholding tax for domestic investment funds also (possibly creditable against the substitute tax due by the unit holders); a discrimination can be found to exist for past periods (as Santander states that its effects should not be limited in time), for the difference between the dividend withholding tax suffered by European investment funds (either the 27% domestic rate or 15% under most DTTs) and the 12.5% taxation of Italian investment funds. There are two appeals pending to (second instance) court cases in the Netherlands in which non-dutch investment funds argue that they are entitled to a refund of Dutch dividend withholding tax. The Lower Court of Breda and the Court of Appeal in s-hertogenbosch have a different view on the conformity of the Dutch legislation with EU law as the compare the foreign funds with different type of Dutch entities which are not subject to Dutch dividend withholding tax or are granted a refund. One of these cases is currently pending before the Dutch High Court. It is under debate what impact of the judgment of the ECJ in the Montreuil- cases has on the conformity with EU law of the Dutch legislation. Finnish investment fund is entitled to refund of Dutch dividend withholding tax pending at High Court The case concerned a Finnish investment fund which is exempt from Finnish corporation tax. The investment fund is a so-called open end investment fund (its participants can freely enter and leave the fund). The investment fund received Dutch portfolio dividends on which Dutch dividend withholding tax was levied. The s-hertogenbosch Court of Appeal has decided that the levy of Dutch withholding tax breaches Article 63 TFEU, because an entity which is tax resident in the Netherlands and which is not subject to Dutch corporate income tax would have been entitled to a refund of Dutch dividend withholding tax pursuant to the Dutch Dividend Tax Act. Examples of entities covered by this provision are pension funds and certain government institutions. The Court of Appeal observed that the objective of the respective article is to avoid the imposition of dividend withholding tax in a situation where the recipient of a dividend payment is exempt from Dutch corporate income tax. Implicitly, the Court of Appeal held that this objective is discriminatory to the extent that the respective article does not apply in case of an exemption from foreign corporate income tax. The conclusion must therefore be that the investment fund is comparable to a Netherlands resident entity which is exempt from corporate income tax. Accordingly, the investment fund was entitled to a refund of Dutch dividend withholding tax with interest. The Dutch tax authorities have announced that they will lodge an appeal with the Dutch Supreme Court against this decision. Spanish investment fund is not entitled to a refund of Dutch dividend withholding ta: Pending at Court of Appeal On 22 March 2010, the Lower Court of Breda has decided on a case in which a Spanish investment fund argued that it is entitled to a refund of Dutch dividend withholding tax. 8

9 One of the arguments brought forward by the Spanish fund was that it is comparable to a Dutch investment fund which, under the regulations which were at stake, could request for a refund of the Dutch dividend withholding tax. The Lower Court rejected the claim as it considered the Spanish fund not comparable to a Dutch investment institution. The Spanish investment institution filed an appeal against the decision of the Lower Court. This appeal is still pending. Norway Norway is not a member of the EU. But as a member of EFTA the EEA treaty gives more or less the same results within the EEA (EU plus the EFTA member states less Switzerland, which is Iceland and Liechtenstein in addition to Norway). Tax is excluded in the EEA treaty but the fundamental freedoms (including free movement of capital and free establishment) apply. Accordingly decisions from the ECJ and the EFTA court are relevant for Norwegian tax issues. The Fokus Bank case was actually a EFTA court decision. The Norwegian tax authorities accept claims for refund of withholding tax on dividends from Norwegian companies when the comparable test is passed. The subjects of the Norwegian tax exemption method are as a main rule companies where the participants have limited liability or partnerships with legal personality where at least one participant has unlimited liability and has contributed capital. Exceptions may apply and an analysis in each separate case is recommended. Transparent entities will be considered at the level of the beneficial owner. Luxembourg SICAV has been accepted, and the same applies for most pension funds and also life insurance companies (unit link and non-nit linked). Luxembourg FCP and German KG and similar entities in other jurisdictions may be disputed by the tax authorities (a case regarding a German KG is pending for the Norwegian Supreme court). The statute of limitation is as a main rule three years from 1 January the year after the time of distribution of the dividends. There is no longer any reason to see the absence of information exchange clause in the EEA treaty as an obstacle as the same clause in included in the tax treaties that Norway has with all other EEA states. However the EEA treaty has no article with rights for entities in a third country connected to the free movement of capital leaving it unclear whether such rights apply due to interpretation of the treaty based on the objective of the treaty to contribute to an effective European capital market. Portugal On 6 October 2011, the ECJ issued its decision in the case of Commission v. Portugal (C-493/09). In line with the opinion of the Advocate General rendered several months previously, the ECJ ruled that, by taxing dividends received by nonresident pension funds at a higher rate than those received by Portuguese-resident pension funds, Portuguese tax law breached the basic EU freedom of movement of capital. The ECJ found there were no grounds justifying the discrimination. It is expected that Portugal will amend its legislation in line with the judgement. In the meantime, future decisions are expected to fall into line with the ECJ, even in the case of a rejection by the tax authorities. Because the case is specific to Portugal, it is also advisable to claim for dividends received since 2009, based on the ECJ decision. Poland European Commission request Poland to end discriminatory treatment On 16 June 2011, the Commission asked Poland to amend its tax legislation so as not to discriminate against investment and pension funds from other EU and EEA countries. Partly due to a previous request from the European Commission, Polish tax law currently exempts foreign funds located in EU, EEA or taxtreaty countries, in line with the exemption for Polish funds. However, Polish funds do not need to meet any conditions, whereas foreign funds have to be subject to tax in their country of residence. According to the Commission, a conditional exemption is not in line with the EU law, as some pension and investment funds from other EU or EEA states are denied the Polish exemption. 9

10 The Commission s request is in the form of an additional reasoned opinion. Following the Commission s request Poland amended its tax legislation in December Under new wording of the Polish Corporate Income Tax Act, the investment funds and pension funds from EU countries and countries of the European Economic Area (EEA) are exempt from corporate income tax in Poland if they meet certain, additional conditions. Namely, 1. the funds have to carry out their activity under the permission of the competent financial supervision authorities in the country of their establishment, or conducting of their business requires notification to the competent authorities in the country of establishment, provided that: they conduct their activity in form of a collective closed-end investment institution, and in accordance with their incorporation deeds, their units are not offered through a public offering or released to trading on a regulated market, or are not released to the alternative trading scheme and can be acquired by individuals only when they make a single purchase of the unites at the value not less than EUR 40'000, 2. The funds activities have to be subject to direct supervision of the competent authorities of the financial market supervision of the state in which they are established; 3. The funds have to be managed by entities that carry out their activities under the permission of the competent authorities for the financial market supervision of the state in which these entities are established. Currently, under the Polish Corporate Income Tax Act, non-eu / EEA funds are not beneficiaries of tax exemption on income derived in Poland. Refunds obtained for EU investment funds Further to positive decisions rendered, some foreign (EU) funds did already obtain a refund of the withholding tax levied in Poland. We have positive experiences in winning the case in the first instance. Within the last year only, PwC Poland was engaged in refund claims on behalf of eight investment funds for the total amount of nearly EUR 10 million. So far, PwC Poland has recovered taxes amounting to almost EUR 4 million.. Possibility of obtaining a refund of the withholding tax levied in Poland by non EU/EEA funds Currently, none of Polish courts have executed any final judgement for non EU/EEA funds related to refund of the withholding tax levied in Poland. However, in a decision dated 28 March 2012 Provincial Administrative Court in Bydgoszcz requested The Court of Justice of the European Union for preliminary ruling. Polish Court has some legal doubts as to the possibility to apply corporate income tax exemption in Poland to an investment fund from US operating in Poland. The background of the case was that the US fund acquired shares of Polish companies and received dividend from Poland. Withholding tax was applied to income received by the US fund in Poland. The fund s official request to refund the withholding tax was rejected by Polish local tax authorities. The fund claimed that Polish tax law discriminate non-eu/eea funds and is contrary to Article 63 of The Treaty on The Functioning of the European Union, which prohibit all restrictions on the movement of capital between Member States and between Member States and third countries. Refunds obtained for foreign investment funds Further to positive decisions rendered, some foreign funds did already obtain a refund of the withholding tax levied in Poland. Within the last year only, PwC Poland was engaged in refund claims on behalf of eight investment funds for the total amount of nearly EUR 9 million. So far, PwC Poland has recovered taxes amounting to over EUR 3 million and is currently waiting for decisions regarding the remaining amounts of nearly EUR 6 million. Spain Since January 1, 2010 Spanish the Non Resident Tax Act was amended in order to comply with EU principles. In this regard, Spanish withholding tax on dividends distributed to EU non-resident UCITS which meet the conditions of Directive 2009/65/EG of 13 July 2009 and dividends distributed to Spanish resident UCITS should be taxed similar (1 %). Likewise, EEA non-resident investment funds are entitled to file a claim for a 10

11 refund if there is a double taxation convention or an exchange information treaty agreed with Spain. As a result of these new amendments, dividend distributions to EU/EEA non-resident UCITS will continue at source and said entities should submit with the Spanish Tax Authorities ( STA ) a claim for a refund by providing evidences that they are comparable entities to Spanish resident UCITS (mainly a certificate issued by the relevant authority in the respective jurisdiction stating that the entity meets the requirements of Directive 2009/65/CE, of 13 July 2009). Referring amongst others to this amendment, the Spanish National High Court of Justice ( Audiencia Nacional ) ordered the refund of unduly withheld dividend tax to 3 Dutch pension funds. In a decision dated 29 November 2011 related to withholding tax suffered by a UK pension fund during FY 2004 in Spain, Madrid s Regional Administrative Tax Court ( TEAR ) acknowledged the application of EU Law over previous discriminatory withheld dividend tax, referring to the above mentioned amendment and the judgment of the Spanish National High Court of Justice. Nonetheless, the TEAR did not directly grant the refund of undue tax paid, sending back the case file to the STA so they may start a verification proceeding in order to assess whether the UK pension fund is comparable to a Spanish pension fund. If the outcome of the verification proceeding is positive, the TEAR says that the refund plus late payment interest must be made accordingly. In its judgements the Court considers that the Swedish tax rules lead to a difference in treatment of foreign resident investment funds, as opposed to Swedish investment funds, which cannot be justified. Indeed, the Court considers that the fact that Sweden has no taxing rights to the investor s of a foreign fund, does not motivate the differing tax effects in spite of the need of a coherent tax system for Sweden. The Court decided that the Swedish withholding tax should be repaid to the foreign funds and also grants certain compensation for the expenses of the representatives in Court (which very rarely is granted in Sweden). It has recently become known that the tax agency has appealed these judgements to the Swedish Supreme Tax Court, but since a trial would require a special trial dispensation, it is currently not clear if the litigations actually will continue or not. As a further comment, these Swedish judgments are in part in line with the very recent EU Court judgment in the Montreuil-cases. Sweden has also from this year 2012 implemented new tax and withholding tax rules for investment funds implying that dividends to qualifying foreign investment funds will be exempt from withholding taxes. Our international client servicing teams are a mix of dedicated Financial Services professionals and leading EU direct tax law specialists who are able to determine the possibilities based on actual facts and circumstances that will be an essential element in preparing the cost benefit analysis that should be the starting point for any investor that has suffered withholding tax on EU source dividends and interest payments. Notwithstanding the above, many EU investment funds are receiving rejections from the Spanish tax authorities at a first instance with regard to protective refund claims filed before 2010 and are in the process of appealing these via tax administrative courts. In addition, early protective claims filed between 2004 and 2010 have reached the lower judicial stages. Sweden PwC Sweden has recently obtained a few favourable judgements before the Swedish Tax Court of Appeal for some of its clients (Luxembourg investment funds, SICAV's), on the matter regarding the recovery of substantial amounts of Swedish dividend withholding tax suffered during

12 PwC Contacts PwC Contacts Australia The Netherlands Ken Woo Martin Vink ken.woo@au.pwc.com Australia martin.vink@nl.pwc.com Japan Bob van der Made Ken Woo Stuart Porter bob.van.der.made@nl.pwc.com ken.woo@au.pwc.com stuart.porter@jp.pwc.com Belgium Switzerland Belgium Olivier Hermand The Netherlands Anna-Maria Widrig Giallouraki olivier.hermand@be.pwc.com Olivier Hermand anna-maria.widrig.giallouraki@ch.pwc.com Martin Vink olivier.hermand@be.pwc.com Patrice Delacroix martin.vink@nl.pwc.com Victor Meyer patrice.delacroix@be.pwc.com victor.meyer@ch.pwc.com Patrice Delacroix Bob van der Made patrice.delacroix@be.pwc.com Dieter bob.van.der.made@nl.pwc.com Wirth dieter.wirth@ch.pwc.com Brazil United Kingdom Alvara Taiar Teresa Owusu-Adjei alvaro.taiar@br.pwc.com Teresa.s.owusu-adjei@uk.pwc.com Ana Luiza Oliver Plunkett ana.luiza@br.pwc.com oliver.plunkett@uk.pwc.com Hong Kong USA Florence Yip Kip Oscar Teunissen Florence.Yip@hk.pwc.com Florence.kip@hk.pwc.com oscar.teunissen@us.pwc.com Japan Stuart Porter stuart.porter@jp.pwc.com 2012 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Solicitation. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 12