Parent companies in certain treaty-protected EU jurisdictions, such as the Netherlands, are able to claim valuable refunds of tax credits on dividends from UK subsidiaries. However, the tax treaty provides for the refund to be paid after deduction of 5% of the aggregate of the dividend and the tax credit.
The EC Parent-Subsidiary Directive requires profits distributed by a subsidiary in one Member State to its parent company in another Member State to be exempt from withholding tax. Nevertheless, the UK Inland Revenue maintains that, on a correct reading of the law, the 5% is not a withholding tax, but a rebate of the tax credit, and the tax credit is not ‘profits distributed’. Alternatively, the Revenue argue, even if the 5% is a withholding tax on profits distributed, the withholding is specifically allowed by the Directive itself.
The point is now being litigated. In Océ van der Grinten NV v CIR, Graham Aaronson QC and Mark Barnes QC (counsel for the taxpayer, instructed by KPMG) persuaded the Special Commissioner that the 5% ‘withholding’ in the UK/Netherlands treaty was, as a matter of UK law, a tax on the profits distributed to the Netherlands parent. The Special Commissioner has referred the case to the European Court of Justice, for it to consider the legality of the 5% charge.
Océ is the test case for a consortium of Dutch companies. In addition to the members of the consortium, many other companies have now made protective claims - the Océ case will be relevant not only to Dutch companies but to parent companies resident in Belgium, Denmark, Finland, Italy, Luxembourg and Sweden. For further information and assistance in making protective claims if appropriate - speak to your usual KPMG tax contact.
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