EUROPE - European pensions funds are now entitled to claim hundreds of millions of euros in tax from the Netherlands government, after the European Courts of Justice ruled against their application of withholding tax (WHT) on dividends.

ECJ's today ruled in the Amurta case no C‑379/05 the Dutch government is in breach of an EU treaty by applying a discriminatory withholding tax on the dividend and interest payments received by foreign pension funds - a practice many governments across Europe have been applying in favour of domestic pension and investment funds.

Local treasury departments, including the Netherlands, have previously argued it could apply the additional tax because they had double taxation agreements with other countries under which pension funds could claim a tax credit.

In the case of the Netherlands, rules previously meant only overseas companies with more than a 5% shareholding in a Dutch company were not subject to the dividend tax.

But Jonathan Bridges, of KPMG's international corporate tax team, said today's ruling in favour of Portugese-resident company Amurta means governments will be forced to change, and in some cases abolish, their withholding tax rules applied to cross-border EU companies.

"One point which the court goes some way to clarifying is whether member states can avoid liability where a credit for the WHT tax is available in the taxpayer's residence state. The ECJ makes clear that liablity cannot be avoided simply by referring to the domestic legislation in place in the taxpayers' residence state," said Bridges.

"However, the ECJ accepts that reference may be made to the relevant double tax treaty provisions in which case the member state levying the tax must demonstrate that the provisions of the double tax treaty do operate to remove any discrimination," he added.

Exact wording on today's judgement states: "Where a Member State relies on a convention for the avoidance ofdouble taxation concluded with another Member State, it is for thenational court to establish whether account should be taken, in themain proceedings, of that convention, and, if so, to determine whetherit enables the effects of the restriction on the free movement ofcapital to be neutralised."

The Netherlands had already moved to adjust its tax position in the likely event of this case going against them, by introducing WHT exemptions for certain non-residents and by proposing a new WHT on resident taxpayers.

But there are several countries where governments have yet to act and will now be under fresh pressure to rectify this discrimination as this is the second such ECJ ruling, following the earlier ‘Denkavit' case, brought by a Dutch farm food supply firm against the French government in December last year.

The European Commission has also been threatening to take action against countries which do not move to rectify discriminatory WHT positions. (See earlier IPE story: Italy and Finland face dividend spotlight)

KPMG is predicting Member State tax authorities could now see huge claims for the tax credit from some of Europe's largest pension funds.

Bridges told IPE initial estimates are UK pension and investment funds claims in the Netherlands could be in excess of €500m and German funds entitled to over €400m, but given the number of claims outstanding against other governments, the sum could be substantially higher if applied Europe-wide.

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