Court rules that “withholding tax” breaches EU law Potential rebates likely to run into hundreds of millions of pounds
Investment funds and multinationals with pan-European investments may see their tax bills reduced by hundreds of millions of pounds. The prospect has been raised by a ruling today from the European Court of Justice. It found that where “withholding tax” results in a higher tax burden being imposed when dividends are paid to foreign investors than the tax that would have been levied in the domestic situation, it contravenes EU law.
The ECJ has ruled today in the case of Denkavit, a Dutch company in receipt of dividends from two French subsidiaries, pronouncing that, in this case, the withholding tax (tax deducted at source from earnings, received by a non-resident taxpayer to ensure that the income does not leave the country untaxed) breaches EU law, thereby setting a precedent for other similar situations.
Jonathan Bridges of KPMG’s EU law group said: “Today’s ruling dramatically reduces the scope for imposing withholding tax in the EU. Although it specifically concerns French withholding tax, the principle holds true throughout the EU and there will be a snowball effect now as similar cases are brought across Europe. We estimate that the likely rebates arising from Europe-wide challenges to withholding tax will run into hundreds of millions of pounds.”
Member states have already begun to amend their tax legislation in anticipation of today’s ruling and the likely subsequent challenges. The Netherlands, for example, has introduced exemptions from withholding tax for certain non-residents, such as, in this case, pension funds.
“The decision could have a significant effect for UK investment funds,” added Brian Drummond, financial services tax partner at KPMG. “The competitive position of the UK as a location for international funds could be significantly affected by how the UK Government responds to this ECJ decision and that in the case of the FII GLO on Tuesday this week. The UK double tax treaty network has been a key advantage to UK funds as it reduces withholding tax on overseas income. Today's decision erodes that advantage and it is important that the UK government acts swiftly to at least protect and ideally enhance the attractiveness of the UK as a funds centre.”
-ENDS-
Further information:
For further information please contact:
Margot Cowhig, Corporate Communications Manger, Tax and People Services, KPMG
Tel: 020 7694 4246
Mobile: 07920 274 856
e-Mail: margot.cowhig@kpmg.co.uk
