While the European Union’s (“EU”) common market provides for the free movement of goods, capital, services, and people across member states, harmonizing the laws of the 28 participating jurisdictions has proven challenging – especially in the world of cross-border tax.
Due to varying national laws, member states have applied different tax treatment to resident versus non-resident entities. A number of these “tax discrimination” cases have made their way to the European Court of Justice (“ECJ”), which has established a body of precedent prohibiting such differential tax treatment. As a result of those rulings, comparable beneficial owners from inside and outside of the European Union have begun filing discrimination-based claims with the tax authorities of EU member states to recover improperly withheld taxes.
Although discrimination-based claims can materially enhance portfolio returns, the case landscape is rapidly evolving and is thus less than straightforward. To remedy any misconceptions, we attempt to answer some of the most frequently asked questions about reclaiming taxes under the precedent of these court decisions.
What is EU discrimination?
Together, the Treaty on the Functioning of the European Union and the Treaty on European Union establish the constitutional basis for the European Union and the free movement of goods, capital, services, and people across the common market. While the free movement of capital principle forbids member states from restricting the purchase of currency or shares of foreign companies, each state retains the right to tax income (e.g., dividends, interest, and capital gains). However, in keeping with the objective of a common market, member state tax authorities must apply the same tax treatment to entities regardless of their residency. Failing to maintain that neutrality is discriminatory.
What cases have established the legal precedent for EU discrimination claims?
The European Court of Justice has heard a number of cases alleging discriminatory treatment, and consistently ruled to outlaw the practice. Several of the most influential cases include:
- Fokus Bank ASA v. The Norwegian State: established that non-resident shareholders must receive similar dividend tax credits as those granted to resident shareholders.
- Santander Asset Management SGIIC SA v. Directeur des résidents à l’étranger et des services généraux: consolidated a series of cases against French governmental agencies, concluding that member states are prohibited from applying different tax treatment to entities from other states versus entities in their own country.
- Emerging Markets Series of DFA Investment Trust Company v. Dyrektor Izby Skarbowej w Bydgoszczy: held that the dividends paid to investment funds in non-member states must receive similar exemptions to investment funds established in member states.
How does an investor file a discrimination-based claim?
To file a discrimination-based claim, investors must first identify an ECJ ruling that can be used as precedent. Because member state tax authorities often amend procedures after initial rulings, investors alleging discriminatory tax treatment should file ‘protective claims’ prior to anticipated legislative changes in an attempt to preserve possible entitlements. The process for this, as might be expected, varies by market and entity type.
If the original claim is denied, investors may pursue litigation. Initially, the country of investment will hear the case. Should further escalation be required, the suit may eventually be brought before the ECJ. If the law is found to be discriminatory, the beneficial owner will likely receive a refund and the problematic law nullified. As noted above, until the discriminatory law is modified or repealed, any similarly-situated investors seeking entitlements would need to file protective claims or also pursue their cases with the courts.
What should investors look for moving forward?
In particular, global investors are watching suits pending in Finland, the Netherlands, and Poland that govern the treatment of investment funds. At the same time, the European Commission has begun focusing on pension funds and life insurers with unit-linked contracts. The ECJ also is reviewing a case involving unfavorable taxation of a Canadian pension fund in Germany. Depending on the outcomes, markets such as Austria, the Czech Republic, Italy, Poland, and Portugal might be found in violation of free movement of capital principles for their taxation of pension funds from third countries (i.e. those from outside the EU or European Economic Area).
Can GlobeTax help?
Already the world’s leading provider of treaty and domestic legislation-based withholding tax recovery services, GlobeTax is carefully monitoring these types of cases so as to promptly identify entitlement opportunities for clients around the world. Upon identifying an opportunity, GlobeTax can pursue claims on behalf of clients, compiling and filing the necessary documentation with the appropriate foreign body. EU Discrimination filings round out GlobeTax’s service offering, ensuring that clients receive their full foreign tax entitlements through all available avenues.