CJEU release its KA Deka Judgment
In a recent judgment for Köln-Aktienfonds Deka v Nederlandse Orde van Belastingadviseurs, the Court of Justice of the European Union (“CJEU”) clarified the rules surrounding free movement of capital in the context of tax refunds granted to collective investment funds and, importantly, the extent to which Member States can legitimately set conditions on granting such refunds.
Why was clarification sought?
Under Legislation introduced into the Netherlands, a regime relating to fiscal investment enterprise (“FIEs”) was established to enable natural persons, particularly small investors, to make collective investments in certain types of assets. Those qualifying from the regime were subject to a zero corporation tax rate and benefitted from a refund of dividend tax withheld on dividends received in the Netherlands.
To qualify for the refund, a number of conditions first had to be met. One of these conditions (the “distribution condition”) was that part of the profit had to be paid to shareholders and holders of certificates of participation within 8 months of the end of the financial year. When doing so, the undertaking needed to withhold Netherlands tax on the recipient’s dividends.
KA Deka was an investment fund established in Germany with share prices listed on the German Stock Exchange which made investments on behalf of individuals. It received dividends distributed by companies in the Netherlands but those dividends were subject to a tax of 15% which was withheld at source. The Netherlands tax authorities rejected its application for a refund, quoting the failure to meet the distribution condition as one of the grounds for the rejection. KA Deka therefore sought to challenge some of these conditions on the ground that they were contrary to free movement of capital.
Could the Netherlands refuse the refund on the ground of failing to distribute profits in time?
Under German law, individuals were deemed to receive an annual amount of dividends. Tax was imposed on half of the dividends actually received and on all dividends which were deemed to have been received to meet the minimum threshold. In challenging this condition, KA Deka argued that whilst it did not distribute profits within the specified timeframe, its situation was objectively comparable to a resident FIE because its proceeds were either deemed to have been distributed or were taken into account in the tax which was levied on its shareholders and participants.
The distribution condition did not expressly distinguish between resident and non-resident investment funds. However, the CJEU emphasised that there could be a de facto disadvantage to non-resident funds even if there was no express discrimination in the domestic rules. Importantly, the court held that making the possibility of obtaining a refund subject to strict compliance with the conditions “irrespective of the legal conditions to which non-resident funds are subject to in their State of establishment” would amount to reserving advantageous treatment to resident funds. As such, the Netherlands tax authorities should not have denied the refund on grounds of failing to meet the distribution requirement if KA Deka’s situation was comparable to a FIE qualifying fund.
To establish if their situation is objectively comparable, the CJEU confirmed that one must look at the aim pursued by the national provisions as well as their purpose and content. Therefore, if the aim of the distribution requirement was to ensure profits reached investors speedily, the deemed distribution was irrelevant and therefore not comparable. In contrast, if the objective lied in the taxation of profits, the court stated that this must be regarded as being a comparable situation meaning the refusal of the refund would amount to a restriction. Determining the true objective of the national provisions was for the national court to decide.
Finally, the CJEU acknowledged that such a restriction may be permitted if justified by overriding reasons of public interest but did not elaborate further as such justification had not been proffered by the Netherlands.
Why is important?
KA Deka opens a useful route of challenge to any refusal of a tax advantage which is founded on a failure to comply with specific requirements set out in national provisions. As such, establishments and individuals alike would be wise to reflect on similarities between the rules of their resident State and those of other Member States to ascertain if any additional tax advantages can be gained.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).