The European Court of Justice has ruled against the Netherlands for its discriminatory treatment of foreign insurers compared to domestic ones in the taxation of dividends.
According to the judgment delivered on 7 November 2024, this unequal tax treatment contravenes the free movement of capital within the EU. This provides an additional opportunity to reclaim locally withheld withholding tax on Dutch and/or Belgian shares.
What was the issue?
The case concerns a United Kingdom-registered insurance company offering policies that qualify as unit-linked policies. These are life insurance contracts where the premiums are converted into units or fractions of one or more funds offered by the insurer. The fund’s performance determines the return on the policy, meaning there is no fixed interest rate or profit sharing. Under Belgian law, these are referred to as “Branch 23 insurance policies”.
The Netherlands levies a 15 percent withholding tax on Dutch dividends paid to foreign insurers, with no option for reimbursement. In contrast, domestic insurers are not subject to this tax, as it is either offset against corporate tax liabilities or refunded.
This results in a preferential treatment of domestic insurers, who ultimately only pay tax on the net income from their investments after deducting certain expenses. Mostly, Dutch insurers pay no corporate tax at all on these investments.
By contrast, Dutch dividends received by non-resident insurers are generally taxed at 15 percent of the gross amount.
Key conclusions of the European Court of Justice
- Comparable situations: The Court ruled that foreign insurers receiving dividends are comparable to Dutch insurers, as their activities and the impact of dividends on their obligations are equivalent.
- Justifications rejected: The Netherlands argued that the unequal treatment was necessary to preserve the coherence of the tax system, but the Court found these arguments insufficient. Foreign insurers are unjustly disadvantaged.
Implications
- The Dutch court in ’s-Hertogenbosch, which asked the preliminary question to the European Court, must now decide the pilot case involving the British unit-linked insurer, taking the preliminary European ruling into account. This decision will provide further guidance for other pending cases before the Dutch tax authorities and courts.
- For Belgian and foreign insurers with Dutch investments: Belgian and foreign insurers can, based on this ECJ ruling, file tax claims with the Dutch tax authorities to reclaim the Dutch withholding tax paid. They must, however, be mindful of the statute of limitations or period of prescription under Dutch law.
- For foreign insurers with Belgian investments: A similar situation exists in Belgium. Based on this ruling, it is arguable that foreign insurers can reclaim Belgian withholding tax on Belgian dividends. The refund may also apply to the balance of Belgian withholding tax, remaining after application of the reduced withholding tax of 15 percent—following the application of a double tax treaty.
Act quickly
A swift response is required to reclaim Belgian withholding tax paid in 2020. Foreign insurers who received dividends from Belgian shares can demand a refund, provided they act in time. The statute of limitations is five years from 1 January of the year in which the withholding tax was paid.
For Belgian dividends where withholding tax was paid in 2020, the five-year limitation period will expire at the end of this year. Immediate action in the coming weeks is essential.
And beyond Europe?
Does this ruling apply only to taxpayers within the European Economic Area, or does it also extend to those outside it? The judgment emphasises that EU member states must provide equal tax treatment to domestic and foreign companies to safeguard the free movement of capital.
The principle of free movement of capital is broader than other freedoms within the European Union (such as the free movement of goods, services, and persons) and is not confined to EU and EEA member states. It also applies to relations with third countries, such as Switzerland and the United States. This distinguishes the free movement of capital from other freedoms, which are generally limited to the EU/EEA.
However, taxpayers outside the EEA are expected to demonstrate that such discriminatory treatment constitutes an unjustifiable restriction. Outcomes may therefore vary depending on the specific status of the third country.
In summary, while the free movement of capital applies to taxpayers from third countries outside the EEA, the practical protection may be weaker than that available to EU/EEA citizens, depending on the circumstances and justifications presented.
Dirk Coveliers is a partner at LLJ (Lallemand, Legros & Joyn), a member of the Investment Officer panel of experts, and editor-in-chief of the Journal “Tax Clicking”. This is a general commentary and does not constitute advice for specific circumstances.