On May 4, 2022, the Dutch Zeeland-West Brabant District Court ruled that the interposition of a Luxembourg holding company by a non-EU private equity fund to own a 15.3 percent interest in a Dutch company constituted abuse of EU Law. The court based its decision on the indicators of abuse as provided in the T-Danmark cases (C-116/16 / C-117/16, please also refer to our news alert.
In the Netherlands, a 15 percent dividend tax is levied by means of withholding by any Dutch company that makes a profit distribution (i.e. the “withholding agent”). The withholding agent has to arrange for withholding the dividend tax and remitting it to the Dutch tax authorities, even though the recipient of the dividend is the taxpayer. In the case of an underpayment of taxes that are withheld at source, an additional tax assessment can be imposed on the withholding agent. However, if it is determined that the underpayment of tax was due to the taxpayer failing to comply with provisions of Dutch tax law, the additional tax must be levied directly from the taxpayer.
In the case at hand, the Luxembourg holding company (LuxCo) was interposed between the non-EU private equity fund (the Fund) and the Dutch company (DutchCo) shortly before the DutchCo made its first distribution, and the LuxCo was dissolved shortly after the DutchCo made its final distribution. The LuxCo’s main asset consisted of its investment in the DutchCo’s share capital. The LuxCo had financed 30 percent of the purchase price out of equity and 70 percent out of interest-bearing debt owed to the Fund. Furthermore, the LuxCo had four directors (two local directors and two directors employed by the private equity firm) and had its own bank account, bookkeeping and office address in Luxembourg. The articles of association of the LuxCo did not include an obligation to pay any income received to its shareholders nor was there any contractual obligation to pay onwards any income received.
The court determined that the Fund holding the 15.3 percent interest in the LuxCo would not have been entitled to benefit from the EU Parent Subsidiary Directive had it held the shares in the DutchCo directly, and that Luxembourg did not levy withholding tax on payments to the Fund. The court also concluded that the LuxCo basically had no other function but to pass on income received from the DutchCo to the shareholder. Furthermore, the court determined that the LuxCo did not have its own personnel, did not rent its own office space and de facto distributed almost all the income it received to its shareholder within a relative short period of time.
According to the court, the LuxCo could therefore not be considered the beneficial owner of the dividend income and interposing the LuxCo constituted an abuse of EU law. Having said that, the court also ruled that the taxpayer did not fail to comply with any provisions of Dutch tax law as such. The court therefore ruled that even though the withholding agent did not take part in the abuse of EU law, the additional dividend tax assessments were correctly imposed on the withholding agent. The court confirmed that the withholding agent has the right to recover the Dutch dividend tax from the taxpayer.
Even though the concept of abuse of EU law is not new, in the court’s view, the T-Danmark cases can be considered landmark cases that further elaborated what constitutes abuse of EU law. As the Court of Justice of the European Union had not handed down its judgment in the T-Danmark cases before the distributions were made in the case at hand, the court ruled that at the time the distributions were made, the withholding agent in all reasonableness came to the conclusion that it did not have to withhold dividend tax, even though this conclusion was incorrect. The court ruled that the underpayment of dividend withholding tax was not intentional and quashed the decision of the Dutch tax authorities to impose penalties for the underpayment of dividend tax.
The withholding agent and the tax inspector can still appeal the court’s verdict.
Our observations
The case makes it clear that withholding tax agents should not tread lightly when deciding not to withhold dividend tax. In certain cases, it may prove better to play it safe and withhold the Dutch 15 percent dividend tax and leave it up to the taxpayer (the recipient of the dividend) to file a request for a refund.