TaxCorporate TaxUK braced for withholding tax impact

UK braced for withholding tax impact

European member states suffer another blow to their withholding tax rules in the ECJ, and UK could be affected

The UK Treasury faces the prospect of tens of millions of pounds in tax
reclaims from pension funds, after member states suffered another blow to their
withholding tax rules in the ECJ.

The taxes are levied when money changes hands across and within state
boundaries within the EU and instances of the tax are being challenged heavily
as a restriction to trade at the European Court of Justice.

Tax advisers said this week that the UK could suffer the consequences as a
result of witholding taxes charged where stock is lent.

Jonathan Bridges of KPMG’s international corporate tax team said that, where
pension funds lent foreign shares to other parties, they sometimes have to pay a
UK witholding tax.

The tax arises on ‘manufactured dividends’. The borrower of the stock, in
order to compensate the pension fund for dividends received, will pay a
manufactured dividend so the funds are no worse off.

But since the UK pension fund would (if it had kept hold of the stock) have
had to pay a foreign withholding tax, the UK charges a withholding tax on the
manufactured dividend so that the final position for the UK fund is the same.

The ECJ ruled in the Amurta case this week that the Dutch government could
not charge withholding tax on non-residents while letting Dutch residents
receive dividends tax-free.

‘The good news is that UK funds can pursue reclaims and are not restricted to
the Netherlands, it’s pan-European,’ said Bridges.

The biggest winners from this case, and a similar case earlier this year
called Denkavit, will be pension and investment funds, with at least €500m
(£348m) in claims likely to emanate from UK funds.

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