Fidelity Funds: Danish Withholding Tax on Dividends Breaches EU Law
The Court of Justice of the European Union (“CJEU”) found in the Fidelity Funds case (C-480-/16) that Danish legislation regarding withholding tax on dividends distributed to non-resident investment funds is not compatible with EU free movement of capital.
The taxpayers, investment funds (“UCITS”) registered in the UK and Luxembourg, reclaimed withholding tax paid on dividends received from Danish companies. Danish law provided for tax to be charged on dividends paid by a Danish company to a foreign UCITS, but not on dividends paid to a Danish UCITS. The CJEU held that this difference in treatment amounted to a restriction on the free movement of capital.
The difference in treatment related to objectively comparable situations. The purpose of the Danish legislation was twofold: first, to prevent double taxation of the UCITS and its investors; and secondly, to defer taxation to the level of the investors. On the double taxation point, the CJEU found that resident and non-resident UCITS were in a comparable position as Danish law imposed tax on the income received by non-resident UCITS, the same as for resident UCITS. On the second point, the court found that Danish and non-Danish UCITS were again comparable. The fact that Danish UCITS were subject to a minimum distribution requirement and a corresponding obligation for the fund to act as withholding agent on its investors’ behalf – a condition not applicable to non-Danish UCITS – was not a decisive difference between the two types of UCITS. It was the substantive conditions of the power to tax investors’ income that was decisive, not the method of taxation used. Denmark had the power to tax resident investors on dividends distributed by non-resident UCITS. The fact that Denmark could not tax non-resident investors on dividends distributed by non-resident UCITS was consistent with the logic of moving the level of taxation from the vehicle to the investor. Moreover, the restriction was not justified by overriding interests relating to the balanced allocation of taxing powers or fiscal coherence.
This article appears in the JHA June 2018 Tax Newsletter, which also features:
- A/S Bevola Applies Marks & Spencer to the Losses of a Foreign Permanent Establishment
- Hornbach-Baumarkt v Finanzamt Landau: German Transfer Pricing Legislation Is Compatible with Freedom of Establishment
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