The European Court of Justice (ECJ) has delivered a landmark ruling that will open the doors for investment funds based outside of the EU to reclaim billions of withholding tax levied by EU governments.
The decision - Emerging Markets Series of DFA Investment Trust Company v Dyrektor Izby Skarbowej w Bydgoszcy – delivered on the 10 April 2014 relates to the Polish withholding tax regime.
It follows a number of cases where the ECJ has ruled that funds from one EU member state can claim back withholding tax levied in another member state.
Simon Newsham, a tax partner at law firm Winckworth Sherwood who advises investors and funds around the world, says: “Whilst previous cases have implied that the fundamental principle of freedom of capital applies to non-EU funds, this is the first time the ECJ has been asked to give a decision on this matter.”
“And this decision has massive implications for funds based outside of the EU and, in particular, those based in the US and Canada. The ECJ has effectively said that where a double tax treaty with an exchange of information exists between a fund’s primary location, the US for example, and the relevant EU country, a member state cannot exclude from a tax exemption dividends paid by companies to an investment fund.
“Estimates from the Big Four accountancy firms suggest that it will open the doors to tax refund claims of EUR3 billion or more.”
Simon says making a claim will not be easy: “Funds will need to be able to provide the right information, demonstrate cooperation between relevant tax authorities and be able to show that the overseas fund is comparable to those within the relevant member state.”
Winckworth Sherwood is currently advising a range of non-EU funds, mainly based in the US and Canada, on whether they may be able to make a tax recovery claim.