A withholding tax ruling expected from the European Court of Justice (ECJ) could lead to investment funds receiving a EUR4.2bn tax rebate, says Deloitte, the business advisory firm.
The case, which relates to the French withholding tax regime, will provide guidance for similar challenges being taken against several EU member states by portfolio investors such as investment funds, pension funds and charities.
France and several EU member states levy a withholding tax on dividend payments to some foreign investment funds while comparable domestic investors are exempt. EU and US-based institutional investors argue that the French rules amount to discrimination under EU law – notably the free movement of capital provisions of the Treaty on the Functioning of the European Union (TFEU). It states there should be no restriction on the movement of capital between member states, and between member states and third countries.
The European Court of Justice is set to rule on the issue on 10 May 2012.
Kit Dickson, tax partner at Deloitte, says: “France imposes a 15% withholding tax on dividends paid to non-resident investment funds, but domestic investment funds are exempt. It’s not just a French market issue as a number of EU markets apply similar rules and are facing similar challenges. As such the decision by the ECJ on France will be watched closely by tax authorities across the EU and portfolio investors globally alike. Fortunately, as the UK does not levy a withholding tax on dividends, this should not affect the UK Exchequer.
“Given the general principles can apply to various types of portfolio investors in the EU and elsewhere the total value of claims by European and non-European investors across the EU could be as high as EUR20bn+.
“The questions facing the ECJ in this case are whether foreign investment funds are sufficiently comparable to French investment funds so as to be treated in the same way (i.e. tax exempt) and whether non-EEA funds should be entitled to the same benefit and if so, is there any justification for the application of a higher tax burden by the French authorities. Given the potential value of claims, the French tax authorities have also requested that the ECJ consider blocking further claims by applying a temporal limitation. Investment funds and other portfolio investors will be watching this space with interest.
“If the ECJ rules in favour of the claimants, investors will need quickly to consider whether they have valid claims in France and elsewhere.”