Comment: Europe strikes a blow for funds' freedom
The European Union is not in wildly good odour with the continent's fund industry at the moment. Managers are up in arms about what they see as a misconceived and damaging draft Directive on Alternative Investment Fund Managers, while the financial sectors and governments of several member states have reservations about the proposed system of EU-wide regulation that the union's political leaders are currently discussing in Brussels.
But let's hear three cheers for the European Court of Justice which, not for the first time, has ruled robustly in favour of the principles underlying the EU single market by striking down national legislation that seeks to discriminate against institutions, investment vehicles or investors based in other member states.
In the case of Aberdeen Property Fininvest Alpha Oy, the court has rules that Finland was wrong to levy a withholding tax on dividends paid by Fininvest Alpha to its parent company, the Luxembourg open-ended fund Aberdeen Property Nordic Fund I SICAV, where similar payments to a fund domiciled in Finland would not have been subject to the tax.
The Helsinki government argued that the discrimination was justified because a Sicav is not a type of company known to Finnish law, and that the double taxation treaty between Luxembourg and Finland does not refer specifically to companies with that corporate form. It also cited the fact that Sicavs are not subject to corporate income tax in Luxembourg, only a tax on net asset value ranging from one top five basis points a year.
The Finns were backed by the Italian government, which submitted to the court the argument that in any case a Sicav investing in real estate, being not covered by the EU's Ucits legislation, constituted a transparent entity that was not taxable in its jurisdiction of domicile.
However, the court was having none of this, ruling that Finland's tax rules constituted an infringement of freedom of establishment, one of the four underlying principles of the EU single market. And now the floodgates may be open for a host of claims by funds and other corporate recipients of dividends from subsidiaries elsewhere in the EU where similar payments to comparable domestic companies would have been taxed more lightly or not at all.
Says Kit Dickson, senior manager at KPMG in the UK said:
"This is good news for EU/EEA corporates who suffer EU withholding taxes on income and in our view provides further support to those who have filed claims for the recovery of withholding tax in various member states,," says Kit Dickson, a senior manager with KPMG in the UK.
"It backs previous decisions from the European Court of Justice that withholding tax should not be levied in a cross-border situation within the EU if it would not have been levied in a domestic situation, and thus is a further step towards these funds receiving significant tax rebates from EU member states. We recommend that all corporates and in particular portfolio investors review the amounts of EU/EEA withholding suffered and consider filing reclaims for all or part of [it]."
It's also a timely reminder that for all its faults, the EU's single market is an inestimable boon to the fund industry and that the European Court has played a vital role in upholding the principle of equal treatment of investors and investment vehicles. What the European fund market would look like without it doesn't bear thinking about.
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