Article 63 And Withholding Tax On Foreign Funds: Another Step On The Road To Refund

Background

Köln-Aktienfonds Deka> ("KA Deka") is an investment fund constituted under German law. It is a UCITS within the meaning of Directives 85/611 and 2009/65, open-ended, listed on the stock exchange, without legal personality and exempt from tax on profits in Germany. It makes investments on behalf of individuals.

During the financial years 2002/2003 to 2007/2008, KA Deka received dividends distributed by Dutch companies, in which it held shares. Those dividends were subject, in accordance with the Netherlands-Germany double tax treaty ("DTT"), to a tax of 15%, which was withheld at source. KA Deka, unlike an investment fund established in the Netherlands meeting the conditions enabling it to qualify as a fiscal investment enterprise ("FIE"), was not able to benefit from the repayment of that tax based on Article 10(2) of the Law on the Taxation of Dividends of 1965.

FIEs are subject to a zero-corporation tax rate and benefit from the refund of dividend tax withheld on dividends received in the Netherlands. In order for an undertaking to qualify for the FIE regime, one of the conditions that needs to be fulfilled is that it distributes its income to its shareholders or participants within 8 months following the financial year end. When they distribute dividends, FIEs are required to withhold Netherlands tax on the recipient's dividends. KA Deka is not subject, in the Netherlands, to the obligation to withhold tax on dividends that it has itself distributed. Furthermore, it is required that the participants in the investment undertakings are predominantly individuals without a significant concentration of shares in the hands of single investors.

FIEs are also entitled to a reduction of dividend withholding tax on profit distributions in respect to tax deducted at source on their investment products abroad.

The FIEs regime is intended to enable natural persons, and, in particular, small investors, to make collective investments in certain types of assets. The aim of that regime is to bring the tax treatment applicable to private individuals who invest through an FIE in line with the tax treatment of private individuals who make investments on an individual basis.

KA Deka applied for a refund of the dividend tax deducted from its dividends distributed by Netherlands companies for the financial years 2002/2003 to 2007/2008 to the Netherlands tax authorities, which was rejected. When bringing an action before the District Court of...