Press article: The Aberdeen case : Taking it to the next level
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The European Court of Justice’s (ECJ) Aberdeen case concerned a Finnish resident real estate company, Aberdeen Property Fininvest Alpha Oy (Aberdeen Property) which was held 100% by an open-ended investment company established in Luxembourg, Aberdeen Property Nordic Fund I SICAV (the SICAV). The Finnish subsidiary had asked the Finnish tax administration whether dividends distributed to the Luxembourg SICAV could be exempted from Finnish withholding tax. The reason for the requested exemption was based on the discriminatory nature of such taxation with respect to the European Union (EU) tax law.
The case was referred to the ECJ, who had to decide whether it was contrary to article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty to charge Finnish withholding tax on dividends distributed by a Finnish company to a non-resident company incorporated as a Luxembourg SICAV, especially when such dividends distributed to a resident Finnish share capital company or investment fund would have been exempt.
The ECJ, having rejected the arguments from the various EU member states involved in the proceedings, held that i) investment funds with different legal forms are in a comparable situation, therefore member states cannot use this argument to justify the application of a
differential treatment ii) it is of no relevance if the income receiving entity is not subject to taxes in its residence country iii) that the application of withholding taxes could not be justified by the need to avoid tax evasion. In a nutshell, the ECJ decided that a Luxembourg SICAV should be compared to a Finnish corporate resident entity and therefore fully entitled to be granted a refund of the Finnish withholding tax applied on dividend payments.
Previous ECJ cases, such as the Fokus Bank, Denkavit and Amurta cases, had already ruled that the imposition of withholding taxes in comparable situations was contrary to EU tax law. However, the Aberdeen case reinforced once again the possibility of investment funds to initiate tax reclaim proceedings. Some argue that the Aberdeen case may not benefit all EU investment funds due to the
fact that, for instance, the investment fund involved in the ECJ case – the Luxembourg SICAV – was not a UCITS fund and held just one investment and not a portfolio of investments, as is the rule in investments made by retail funds.
Although there has been much debate about this particular case, we also assume that amongst many fund managers there are still open questions for which some guidance is required. Questions such as (i) what is the right approach? (ii) where to start? (iii) what must be done? (iv) what is the right course of action? (v) how can the withholding tax amounts involved be reclaimed? are, without doubt, being asked by many. More specifically additional pertinent questions could include, (i) for how long has my investment fund been levied with excessive withholding taxes? (ii) what are the amounts of withholding tax involved? (iii) how are EU member states paying the income to the investment fund and applying the taxes? (iv) to whom will the costs of the administrative and judicial court cases be imputed to? (v) what documentation needs to be prepared to file the administrative tax reclaims?
The first and potentially most important question fund managers should be asking themselves is what their approach to EU tax reclaims will be? Fund managers will have to determine whether (a) they will initiate the administrative procedures to reclaim the withholding taxes due – i.e. the ‘offensive approach’ or (b) they will file initial claims and wait for developments taking into account maximum legal delays for the next step – i.e. the ‘defensive approach’ – or even (c) they will adopt the ‘wait and see’ approach with the risk that the advantage of the proceeding is lost entirely.
To define the most appropriate strategy, several factors need to be fully scrutinised and thoroughly analysed.
The first exercise is to distinguish investment funds of a corporate type – to which the Aberdeen case clearly applies – from the investment funds of a contractual form – where there is incertitude as to whether these can benefit from EU tax reclaims due to their legal nature as transparent entities in most jurisdictions – and whether the funds are located in an EU member state or in a third country outside the EU. The difficulty to successfully reclaiming excessive withholding taxes in the EU increases when the investment fund is not of a corporate form, e.g. is an FCP rather than a SICAV, and is located in a third country, e.g. Singapore or the USA rather than Luxembourg or France. Comparability is a key criterion of this analysis. It is only when comparability between the legal form of the resident investment fund (benefiting from the withholding taxes exemption) and the non resident investment fund (being subject to the imposition of withholding taxes) is achieved that the tax reclaims are made possible.
Next, fund managers need to assess how many financial years are at stake, meaning how long the investment fund has been investing in a specific jurisdiction and how long has it suffered from excessive withholding taxes. These questions are directly related to the amounts of withholding taxes involved as most jurisdictions establish a maximum time period – statute of limitation – for which taxpayers can go back and reclaim taxes due. The amount of taxes involved is always affected by the number of tax years still available to reclaim in each jurisdiction. In fact, the statutes of limitation for tax laws of the 27 EU member states vary widely, e.g. between one and potentially four years in Germany, three years in France, four years in Spain and Italy, five years in Finland, Belgium and Poland, and between five to seven years in the Netherlands.
In light of ECJ case law, the 27 EU member states fall into two main categories:
Consequently, it only makes sense to pursue tax claims in those EU member states where tax laws were or are discriminatory in relation to non resident investment funds.
Concerning the estimation of costs, many factors must be considered including, but not limited to, costs related to the determination of the amounts involved, costs for document preparation, costs incurred for filing administrative proceedings, initiating administrative tax reclaims and judicial cases, all of which may culminate at the ECJ, as well as all legal and court assistance which is necessary in most EU member states.
One crucial element in the preparation of the tax reclaim file is the documentation phase. To initiate administrative, and potentially, judicial proceedings, the necessary documentation proof must be assembled. This phase probably constitutes the most lengthy and time consuming aspect of this entire process. Additionally it must be remembered that each tax administration applies its own rules as to what is considered as necessary documentation to be filed for the corresponding tax reclaim. In this respect the 27 EU member
states can also be differentiated between more burdensome and less burdensome jurisdictions. For example, whilst some countries request a copy of every dividend voucher and corresponding tax forms, others simply accept a document produced by the fund
managers, e.g. in Excel format, describing the date and amounts of dividend payments received.
For mere illustrative purposes, as each EU member state requires specific documentation, the type of documents that may be requested by certain jurisdictions include power of attorneys, name of the dividend receiving company, full address of the dividend receiving entity, name, function and telephone number of the contact person within the dividend receiving entity, tax registration number of the dividend receiving entity, amount of dividend withholding tax to be refunded, information on number of shares in the dividend distributing company, date that proceeds were made available for distribution, copy of the dividend notes concerned, bank account to which the amount is to be refunded, name of bank account holder and place of residence of the bank.
Another key consideration is the imputation of the costs of the proceedings to either the investment fund itself or to its investors. The same reasoning needs to be applied to any amounts successfully reimbursed, i.e. will they be repaid to the investment fund or to the investors? If it is the investors, then will the withholding tax only be repaid to current investors or also to those holding shares at the time the taxes were levied? Additionally, a decision needs to be taken as to whether any provisional amounts should already be booked in the accounts of the investment fund or if this should only occur upon a successful reclaim procedure. In the great majority of countries this topic is still open to discussion.
One final relevant aspect the fund manager must assess when considering whether to initiate proceedings and in which countries is the estimated time length for these same proceedings. The duration of an administrative reclaim or a judicial court case can vary dramatically between EU member states. Whilst in many northern European member states it is quite usual for an administrative reclaim to be decided within one year and a judicial case being closed within a maximum of two to three years, in most southern European member states it is not unusual for the whole process to last up to six years or more. It may also be relevant to understand if a specific EU member state allows class actions or not, as these types of legal proceedings may considerably shorten the reclaim procedure when several claimants are involved. The problem is that in many civil law European countries, class actions do not exist as such, whilst in common law countries they tend to be quite common.
Overall the decision to pursue tax reclaims under EU tax laws is not only dependant on one criterion, there several factors to consider such as statutes of limitation, withholding taxes amounts, costs, as well as access to relevant and accurate documentation.
Finally, a word on the position of the European Commission (EC) in this context. The EC, together with the ECJ, is responsible for ensuring EU law is properly applied in all EU member states. In relation to pension funds the EC has taken steps, via requests of information and reasoned opinions, against the Czech Republic, Denmark, Estonia, Finland, Germany, Italy, Lithuania, Poland, Portugal, Slovenia, Spain, Sweden and The Netherlands. More recently, the EC has started focusing its attention on the domestic tax laws of EU member states in relation to investment funds and has asked Poland, Belgium and France to amend their legislation. In both situations – pension funds and investment funds – many EU member states have already implemented modifications to their tax laws to be compliant with EU law.
It is quite clear that in the current financial environment, for most fund managers, not acting is no longer an option – this is a corporate governance issue which constitutes part of their responsibilities. It is expected, especially after this Aberdeen case, that fund investors will question the decision of fund managers not to pursue claims and will request appropriate justifications.