Unequal Taxation of Dutch Dividends Violates EU Law

Requiring nonresident companies to pay dividend withholding tax when resident Dutch companies are essentially exempt violates the EU rules on the free movement of capital, the Court of Justice said.

In a November 7 decision in XX v. Netherlands, C-782/22, the Court determined that article 63 of the Treaty on the Functioning of the European Union (the free movement of capital) precludes national legislation that exempts resident state corporations from withholding tax while applying withholding tax to nonresident corporations.

In the Netherlands dividends are generally subject to a 15 percent withholding tax. Resident companies are required to make an advance payment of the dividend tax, which is used to directly offset the corporate tax due at the end of the year and may result in a refund if the tax paid on dividends exceeds the corporate tax liability.

The Court held that resident companies receive preferential treatment by being exempt from dividend withholding tax, finding that it is likely to deter companies from investing in the Netherlands and restricts the free movement of capital.

The unnamed company is a U.K. resident insurance undertaking that invests premiums through unitlinked insurance contracts. Between 2003 and 2010, the company invested in Dutch companies and paid tax on the dividends at the 15 percent rate. However, the company is subject to corporate tax in the United Kingdom and cannot offset the Dutch dividend tax.

The company petitioned the Dutch tax authority for a dividend tax refund but was denied. The company’s refund position was rejected in 2020 by the Zeeland District Court as unfounded. The company then appealed to the Court of Appeal, which referred the decision to the Court of Justice of the European Union in December 2022.

The referring court asked whether allowing a resident company to offset its corporate tax liability by the dividend tax paid while simultaneously requiring nonresident companies to pay the full amount of dividend tax violates the free movement of capital principle in article 63.

The Court determined that nonresident companies are given less favorable treatment than resident companies.

The Court also rejected written challenges from the German government that claimed restrictions on the free movement of capital were necessary to preserve the taxation power between member states.

“Such a ground cannot justify the taxation of non-resident companies receiving dividends by a Member State which has chosen not to tax resident companies in respect of that type of income,” the Court said.

The Court came to a similar conclusion in its July decision in Keva v. Sweden, C-39/23. It held that it was an improper restriction on the free movement of capital for Sweden to subject nonresident pension funds to a variable 30 percent withholding tax on dividends while exempting resident pension funds.