Tax Insights from International Tax Services Dutch and Luxembourg dividend withholding tax exemption after CJEU ruling on Gibraltar companies May 8, 2020 In brief The Court of Justice of the European Union (CJEU) on April 2 ruled that a company incorporated under the laws of Gibraltar and resident in Gibraltar does not meet the legal form requirement, and is not subject to taxation as provided under article 2, a) of the EU Parent-Subsidiary Directive and the annex thereto. Gibraltar and Netherlands structures Since the withholding tax exemption under Dutch domestic law contains neither the legal form requirement nor the taxation requirement set forth by the EU Parent-Subsidiary Directive, the above ruling is not anticipated to adversely impact the application thereof with respect to distributions from a Dutch subsidiary to a Gibraltar tax-resident parent company. Gibraltar and Luxembourg structures The CJEU mentioned in its decision, in line with the Advocate General’s conclusion, that the judgment is without prejudice to the question of the application of the fundamental freedoms available in the Treaty of the Functioning of the EU (TFEU), which are applicable for all European countries. The CJEU did however not treat this point in further detail. Based on this, companies could still potentially invoke the fundamental freedoms to be entitled to the dividend withholding tax exemption. In detail CJEU ruling summary The CJEU ruling considers how to apply the EU Parent-Subsidiary Directive in the context of a parent company established in Gibraltar. The CJEU confirmed the Opinion of Advocate General (AG) Hogan in that the EU Parent-Subsidiary Directive should, in principle, be applied to Gibraltar as a European territory. www.pwc.com Tax Insights The CJEU nevertheless ruled that companies established under the law of Gibraltar and subject to taxation in Gibraltar cannot invoke the exemption under the EU Parent-Subsidiary Directive. The reason given is that the EU Parent- Subsidiary Directive contains an express and exhaustive list of both the companies (Annex I, Part A) and the taxes (Annex I, Part B) to which it applies. As stated by the UK government, companies ‘incorporated under UK law’ do not include companies incorporated in Gibraltar, and similarly the tax imposed in Gibraltar does not constitute a 'corporation tax in the United Kingdom'. In light of this, the CJEU ruled that companies incorporated in Gibraltar and subject to tax there do not meet the Directive’s requirements. Dutch dividend withholding tax exemption Among others, article 4, paragraph 2 of the Dutch dividend withholding tax act requires that, in order to benefit from the exemption from Dutch domestic dividend withholding tax, the parent needs to be a tax resident of an EU Member State (or a jurisdiction party to the Agreement concerning the European Economic Area or a State with which the Netherlands concluded an income tax treaty that contains an article regarding dividends). Since 2010, the Dutch withholding tax exemption does not require the parent to have a legal form included in Annex I, Part A to the EU Parent-Subsidiary Directive. It also does not require that the parent is subject to one of the taxes as listed in Annex I, Part B to the EU Parent-Subsidiary Directive. The CJEU confirmed that the EU Parent-Subsidiary Directive should, in principle, apply to Gibraltar as an EU Member State for purposes of applying the Directive, consistent with prior case law rendered by the CJEU. Consequently, the CJEU ruling should not adversely impact the application of the Dutch dividend withholding tax exemption. Albeit in context of applying the Dutch participation exemption, the Dutch Ministry of Finance (re)confirmed its position of Gibraltar’s treatment as an EU Member State in a Decree of March 18, 2020. This position is consistent with Advance Tax Rulings obtained in the past, in which the Dutch Revenue confirmed the eligibility for the Dutch dividend withholding tax exemption by a Gibraltar parent. Observation: Each taxpayer must determine (1) whether it meets the additional requirements for invoking the withholding tax exemption and (2) whether the (direct) parent owns the investment in the Dutch company with the main purpose, or one of the main purposes, of mitigating Dutch dividend withholding tax (in which case the exemption may be denied). Luxembourg dividend withholding tax exemption Article 147, 2 of the Luxembourg income tax law provides, among other items, an exemption from Luxembourg dividend withholding tax when the parent company is a collective entity covered by the EU Parent-Subsidiary Directive or a Luxembourg-resident capital company. Although the CJEU decided in line with AG Hogan’s conclusion, that Gibraltar companies cannot be assimilated to UK companies and that Gibraltar corporate taxation cannot be assimilated to UK corporate tax, the Court also followed the AG’s suggestion that the fundamental freedoms laid out in the EU Treaty (notably freedom of establishment and freedom of capital movements) must be considered. Specifically, a question raised is whether an automatic application of withholding tax to a Gibraltar company would not constitute a restriction to the freedom of establishment and the free circulation of capital (and whether such restriction could be justified). Observation: In his advice, the AG concluded that the refusal to exempt from withholding tax any dividends paid to a parent company established in Gibraltar cannot be made in a general way. However, a refusal could occur after applying the anti-abuse measures to a set of particular facts and circumstances. Brexit implications Effective January 31, 2020, the United Kingdom (and consequently, Gibraltar) no longer is part of the European Union. A transition period applies until December 31, 2020. The Brexit withdrawal agreement provides that EU law will in principle apply during the transition period. 2 PwC Insights Observation: This implies that the Dutch dividend withholding exemption may be applied only in relation to Gibraltar until the end of 2020, unless the agreement is extended. A similar conclusion potentially could be reached for dividends distributed by a Luxembourg company to a Gibraltar company. The takeaway Each Dutch and Luxembourg taxpayer must determine whether it meets the requirements for invoking the Dutch or Luxembourg withholding tax exemption based on the specific facts and circumstances. This should be tested applying anti-abuse considerations and a potential restriction of the freedom of establishment. Let’s talk For a deeper discussion of how this issue might affect your business, please contact: International Tax Services, United States Maarten Maaskant Calum Dewar Mike Urse +1 347 449 4736 +1 917 683 7227 +1 216 496 8423 [email protected] [email protected] [email protected] International Tax Services, Dutch desk Regina van der Kuip, New York +1 475 333 9439 [email protected] PwC Netherlands Roland Brandsma Hein Vermeulen Roy van Geilswijk +31 88 792 4346 +31 88 792 7521 +31 88 792 6462 [email protected] [email protected] [email protected] © 2020 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. 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