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On 10 May 2012 European Court of Justice (ECJ) has given a
significant judgment (Santander) concerning withholding tax that
the State of France has levied for French source dividends paid to
non-resident mutual investment funds for their portfolio
investments. French legislation has fully exempted comparable
French investment funds from similar kind of tax.
The Santander case concerned a combination of ten cases (C-338/11
– C347/11) which all dealt with the conflict between EU
law and French legislation concerning the free movement of capital.
As plaintiffs in these cases were different UCITS funds from Spain,
Germany and Belgium and investments funds under US
regulation.
The ECJ regarded that an arrangement where non-resident mutual
funds are treated with higher tax burden than resident ones,
reduces the willingness of non-resident funds to invest in France
and respectively reduces willingness of French investors to buy
shares from non-resident mutual funds. Thus the ECJ found that the
withholding taxation legislation of France did not comply with the
article 63 of Treaty on the Functioning of the European Union
(TFEU) and there were no such circumstances that the difference in
taxation treatment of resident and non-resident funds could not be
justified with the grounds stated in article 65 TFEU. The
legislation of France breached the free movement of capital under
EU law and the ECJ ruled that the plaintiffs were entitled to a
full refund of the French dividend withholding tax.
ECJ did not make difference between EU-residents and
non-EU-residents in the judgment and thus for example dividend
withholding tax levied from an US-based fund does not comply with
EU law if comparable resident funds are fully exempted from
withholding tax.
The French Government asked the ECJ to limit the temporal effects
of its judgment on the basis that the ruling would have long-term
and grave financial consequences. The ECJ did not agree to limit
the temporal effect as it confirmed that financial grounds could
not justify the limitation in this kind of case.
Opportunities for refund
The judgment gives an opportunity for Finnish and foreign mutual
investment funds to claim a refund for the withholding tax that
they have paid for dividends received from EU member state provided
that comparable funds in that reside in that state are exempted
from similar kind of tax. This applies also to non-resident funds
that have paid withholding tax to Finland. As a consequence of the
judgment both Finnish and foreign mutual investment funds should
seriously consider their possibilities to claim for a refund for
withholding taxes that they have paid for their dividends within
EU.
Administrative court of Helsinki has previously this spring given a
decision in which a Swedish investment fund was entitled to a
refund for withholding tax that they had paid for dividends
received from Finland. The decision complies with the judgment
given by the ECJ. Attorneys at law Borenius successfully
represented the Swedish fund in the process. In addition Attorneys
at law Borenius currently advises several US investment funds in
reclaiming withholding tax refund from Finland.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
