In the world of cross-border tax, it has been challenging for the European Commission to harmonise the different regulations and laws that govern EU-law based withholding tax reclaims. This adds complexity for institutional investment firms which need to navigate the withholding tax reclaim opportunities available to them through double taxation treaty agreements and previous tax discrimination case law commonly known as European Court of Justice claims.
EU law-based withholding tax reclaims via double taxation agreements
The most common method of reclaiming foreign withholding taxes from Europe is by applying double taxation agreements. These agreements exist between the country of residence of the beneficiary of the income and the investment country.
A withholding tax refund opportunity exists when there is a differential between the investment country’s standard (withholding) tax rate and the tax rate agreed upon between two countries in their double tax agreement.
Alarmingly, a material portion of the world’s recoverable withholding tax goes unclaimed every year. The considerable gap in tax leakage is due to a complex and cumbersome reclaim process. Intricate data analysis and specific supporting documentation is also required to file claims.
However, if completed successfully, these withholding tax refunds make for welcome cash returns that boost an investment’s ROI by up to 0.5% p.a.
EU law-based withholding tax reclaims via ECJ rulings (tax discrimination cases)
European Court of Justice (ECJ) claims provide another mechanism to recover withholding tax refunds. The mechanism is based on historic tax discrimination cases that found their way to the Court of Justice of the European Union. These include amongst others the Aberdeen Property Fininvest Alpha Oy (C-303/07) vs. Finland, Joint Santander judgement (C-338/11/C347-11) vs France and Emerging Markets Series of DFA Investment Trust Company vs Poland (C-190/12).
These cases set a precedent for how non-EU investment firms looking to claim from the EU should be treated. These historic cases allow non-EU investment firms to claim a WHT tax refund so long as they are comparable beneficial owners in structure to an EU investment firm equivalent.
Although discrimination-based claims can materially enhance portfolio returns, the landscape is rapidly evolving and is thus less than straightforward. We have addressed some of the most common misconceptions about reclaiming taxes, under the precedent of these court decisions, below:
Withholding tax discrimination in the EU
When EU Member States tax domestic investment funds differently to comparable foreign investment funds on the same type of income, this constitutes a discriminatory tax practice that is often unjustified. In many cases, this results in less favourable treatment between residents and non-residents in comparable situations.
These tax practices are contradictory to the principle of free movement of capital, goods and services within the EU laid out in the Treaty of the Functioning of the European Union (TFEU). The treaty states that the restriction on the movement of capital within the EU and between the EU and any third-party countries is prohibited
- Claiming withholding tax via ECJ rulings
ECJ claims can be lucrative and can often add an extra 15% of gross dividend income to returns. However, the process requires a deep and up-to-date knowledge of the process and the regulations. While it is common to use custodians or in-house teams to manage withholding tax refunds via double taxation treaties, in contrast, it is cumbersome if not impossible to perform ECJ claims successfully using in-house resources.
In order to file an ECJ claim successfully, an investment firm must first identify a historic ruling on which to base the refund request argument. Next, the important task of proving comparability is necessary. A company will have to provide documentation that supports the argument that the investment fund seeking a refund is comparable to funds within the jurisdiction from which it is requesting a refund.
- Keeping an eye on the future for withholding tax refund opportunities
There are still many cases being heard in European courts (e.g. Germany), over possible tax discrimination by EU member states. Investors should keep a close eye on these cases as the rulings may prove to unlock further refund opportunities.
How WTax can help your investment firm
WTax provides a completely outsourced, end-to-end service helping global investment firms claim withholding taxes through double taxation treaties, ECJ claim and domestic exemptions. If you have reason to believe that you may be suffering from tax leakage on your dividend income, please get in touch with us about how we can help.