TAX NEWS - 2010

Netherlands Tax: Supreme Court concludes dividend withholding tax on distributions to Netherlands Antilles compatible with EU law

The Dutch Supreme Court ruled on 9 April 2010 that the imposition of withholding tax on dividend distributions made by a Dutch resident company to its 100% parent company in the Netherlands Antilles is not contrary to EU law. Under Dutch law, an 8.3% withholding tax is levied on dividend distributions to a Netherlands Antilles parent company that holds at least 25% of the payer company.

In line with the opinion of Advocate General Wattel, the Supreme Court stated that the dividend distributions in the case qualified in principle under the EU freedom of establishment principle rather than the free movement of capital, since the Netherlands Antilles parent company holds all the shares in the Dutch payer company and, thus, has a decisive influence in the decision-making of the Dutch company. However, because the freedom of establishment only applies in relation to the EU Member States, it could not apply in a case involving the Netherlands and the Netherlands Antilles. Thus, the dividend distribution can be subject to the 8.3% withholding tax.

Since the Supreme Court considered the free movement of capital (which, unlike the freedom of establishment, applies in relation to third countries) subordinate to the freedom of establishment, the Supreme Court did not have to determine whether the Netherlands Antilles is considered a third country for purposes of the application of the free movement of capital in relation to the Netherlands.

The Court also did not consider it relevant whether the EC Decision on Overseas Countries and Territories (OCT) was applicable. (The OCT refers to overseas countries and territories that have special relationships with EU Member States.

While not part of the EU, they are able to benefit from the freedom of establishment and other freedoms under "association arrangements" with the EU.) Even if the OCT Decision could be applied in respect of the relationship between an OCT and its associated EU Member State, as is the situation in this case, the freedom of establishment provision in the OCT Decision was not beneficial for the taxpayer because the freedom of establishment in the OCT Decision is narrower in scope than the freedom of establishment principle in the Treaty on the Functioning of the EU.

Finally, the Dutch Supreme Court did not refer the case to the European Court of Justice (ECJ) for a preliminary ruling. Apparently, the Dutch judge was of the opinion that the issues were sufficiently clear so that ECJ involvement was unnecessary. There would seem to be some interpretational uncertainties regarding the concurrence on the freedoms in the Treaty on the Functioning of the EU and the application of the OCT Decision that should be resolved by the ECJ. This case would have provided such an opportunity.