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Tax-Exempt Entities (Pension funds, Charities, etc.) may be entitled to a refund

USTAXFS works with a number of IFAs, accountants, solicitors, and other professionals who provide guidance on issues related to tax. They occasionally provide us “guest” blogs which we are happy to share with you. Below is an article on tax-exempt entities planning provided by Willem Otterspeer, a partner with Otterspeer, Haasnoot & Partners BV.  Please note that these views do not necessarily represent the views of US Tax & Financial Services.

Nearly all EU member states, including the Netherlands, levy withholding taxes on dividends (DWT). (Partial) refunds of this DWT can be possible under national law, tax treaties or EU law.
In intra-EU situations, this is often quite time-consuming, especially where refunds are claimed by entities that are tax-exempt in their state of residence, such as charitable foundations and qualified pension funds. Charities (Foundations), pensions funds, and life insurance companies often have excess cash invested in passive investment portfolios, which pay dividends whereby tax is withheld.
Claiming such refunds may seem impossible if the above-mentioned investors are resident in a third state (outside the EU). Especially in these case tax leakage may occur if the DWT cannot be refunded or claimed as a tax credit. During the last years, it has become clear that dividend withholding tax is an obstacle for (passive) investors. As such, this tax leakage is a violation of general principles of EU law, in particular the freedom of capital movement.  At first sight it appears that the freedom of capital movement only applies within the EU, but since 1993 this principle also applies in the relation between EU and third states, like the US or Canada (except where transitional measures protect regulations which have not changed significantly since then). Accordingly, parties all over the world can benefit.

Based on the international developments and more specific the case law of the European Court of Justice (ECJ) the Netherlands has adjusted and brought its national law in line with the EU legislation. Subsequently, tax-exempt EU (and EEA) entities can reclaim Dutch DWT. There above tax-exempt entities resident in non-EU (and EEA) countries also can (under conditions) reclaim Dutch DWT be it that this is limited to DWT on dividend from portfolio investments.

Some EU member states have not yet adapted their legislations to the requirements of EU law. As a result, they may treat domestic situations (whereby refund is granted without many formalities) more favorably than cross-border situations (whereby refunds are refused or formalities effectively make this extremely difficult). In such cases, EU law can be the basis to still claim a refund.

If you would like to know more, please contact Willem Otterspeer at Otterspeer, Haasnoot & Partners BV +31 10 436 50 44 willem.otterspeer@ohp.nl

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