Funds could save millions following ECJ Denkavit ruling

Investment funds and companies with pan-European investments could see
hundreds of millions of pounds lopped of their tax bills after a European Court
of Justice ruled that withholding tax contravened EU law.

The challenge to withholding tax was brought by Dutch company
Denkavit ,
which had received dividends from two French subsidiaries.

The withholding tax charged on these dividends was deducted at source from
earnings received by a non-resident taxpayer, to ensure the income does not
leave the country untaxed.

The ECJ found that
this tax resulted in a higher tax burden being imposed when dividends are paid
to foreign investors than the tax that would have been levied in the domestic
situation.

Jonathan Bridges, from
KPMG’s EU law team, said
that although the ruling applied specifically to French withholding tax, it had
far wider implications for the rest of Europe and could see challenges to
withholding tax running into hundreds of millions of pounds.

‘Although it specifically concerns French withholding tax, the principle
holds true throughout the EU and there will be a snowball effect now as similar
cases are brought across Europe,’ said Bridges. ‘We estimate that the likely
rebates arising from Europe-wide challenges to withholding tax will run into
hundreds of millions of pounds.’

In the UK the ruling will have a specific impact for investment funds, which
have benefited from the UK’s double taxation treaty.

‘The UK double tax treaty network has been a key advantage to UK funds as it
reduces withholding tax on overseas income,’ said Brian Drummond, financial
services tax partner at KPMG.

‘Today’s decision erodes that advantage and it is important that the UK
government acts swiftly to at least protect, and ideally enhance, the a
ttractiveness of the UK as a funds centre.’

Further reading:

Detail of ECJ ruling on FII case disappoints taxpayers

Treasury steels itself for massive tax hit from ECJ

Treasury faces tax rewrite as European challenges mount