In two joined cases in which the Dutch levy of dividend withholding tax in connection with a dividend payment from a Dutch subsidiary to a Curaçao parent company was challenged, the Court of Justice of the European Union (EU) has decided that the Netherlands may impose 8.3% dividend withholding tax.
In both cases, dividend payments were made to the Curaçao parent company. According to Dutch tax law, an exemption for dividend withholding tax is granted if the corporate shareholder owns at least 5% of the shares in the Dutch company, and the shareholder is a resident in the Netherlands or the EU. No exemption for dividend withholding tax is granted if the shareholder is a resident of a third (non EU) country, except if a tax treaty provides for an exemption. Pursuant to the tax regulations for the Kingdom of the Netherlands, the Netherlands is entitled to withhold 8.3% dividend withholding tax on the dividend distributions from the Netherlands to Curaçao. This levy was challenged at the Dutch national courts, where it was argued that the dividend withholding tax liability is not in line with the free movement of capital under the EU Treaty. Under certain conditions, this treaty applies as well to capital transactions from and to third jurisdictions. Therefore, parties are of the opinion that the withholding exemption that applies within the EU applies as well in the cases at hand. The Dutch Supreme Court decided to request a preliminary ruling from the Court of Justice of the EU.
Subject of this preliminary ruling was the question whether a Member State’s own overseas country or territory (OCT) could be regarded as a third country, so that the free movement of capital provided in the EU Treaty could be relied on, and if so, whether the OCT circumstances (e.g., tax rate changes) should also be taken into account for the application of the so-called “standstill” clause in relation to restrictions on the free movement of capital existing as of December 31, 1993, in light of amendments to the Dutch law in 2002 (increase of withholding tax rate from 5%/7.5% to 8.3%).
On January 16, 2014, the Advocate General (AG) Niilo Jääskinen of the Court of Justice of the EU released his opinion in this regard. The AG is of the opinion that a Member State’s own OCT should be regarded as a third country in relation to that Member State based on the EU Treaty and that the changes in the OCT tax regime should be taken into account for assessing whether the standstill clause has been observed [i.e., the combined level of taxation should be considered (both withholding tax in the Netherlands and corporate income tax in the Netherlands Antilles)].
On June 5, 2014, the Court of Justice of the EU ruled that restrictions on dividend distributions between the EU and the OCT are in principle forbidden. However, the Court of Justice of the EU did not examine the free movement of capital as mentioned in the EU Treaty, like the AG, but only the restrictions on the movement of capital in the OCT decree. This decree also contains a clause in order to prevent tax evasion. Based on this clause, the Court of Justice of the EU ruled that 8.3% dividend withholding tax may be levied by the Netherlands on dividend distributions to Curaçao, provided that this tax is intended to prevent tax evasion and that this aim is effectively and proportionately reached with this withholding tax levy of 8.3%.
The Dutch Supreme Court should now decide whether the aforementioned conditions are met in the cases at hand. We will post an update on our website as soon as we can bring you any news in this regard.