“…The Financial Services sector plays a critical role in any modern economy. The bundle of institutions that make up an economy’s financial system can be seen as ‘the brain of the economy’, providing the bulk of the economy’s need for many functions…” (WTO, 2021)
When founding the EU based on the main objective of developing a common market in 1957, the idea of the Financial Services industry being the “brain” of the economy may well have been one of the corner stones of the Union: for the first time ever in history, several nations worked together aiming to build a uniform capital market. Since then, the free movement of capital has been one of the four fundamental freedoms of the EU and a key component of perhaps the most successful integration effort of the European Union to date.
In numerous judgements, the European Court of Justice (CJEU) has been ruling in favor of the development of a common capital market by rejecting tax legislation of the member states, which limited the free movement of capital via “arbitrary discrimination or disguised restriction” (Art. 65 para 3 TFEU). Through this jurisprudence, the CJEU has become one of the driving forces of integration and of a level playing field for the Financial Services sector, especially with regards to the fund industry.
National court decisions in contrast to the free movement of capital
On 23 October 2020, the Dutch Supreme Court gave the final decision in the Koeln-Aktien-fonds case.1 The CJEU, in its decision C-156/17 – Koeln-Aktienfonds Deka dated 30 January 2020, had held that both resident as well as non-resident investment funds are principally subject to the same requirements (here: shareholder and annual distribution require-ments) for an exemption from Dutch WHT. Nevertheless, applying the requirements to non-resident funds constitutes a restriction of the free movement of capital if it is impossi-ble or excessively difficult for them to meet the Dutch requirements. It was for the referring Dutch Supreme Court to decide, whether the actual administrative process in practice constitutes such an excessive burden.
Subsequently, the Dutch Supreme Court on 23 October 2020 found that, requiring the non-resident investment fund to prove the Dutch shareholder requirement and to calculate a – complex – “replacement payment” according to Dutch tax law is not an excessive burden and thus no restriction of the free movement of capital. The Dutch Supreme Court’s ap-proach prevents most non-resident investment funds from the refund of Dutch WHT.
On 24 June 2021, the Danish Supreme Court gave the final decision in the Fidelity Case.2 The CJEU, in its decision C-480/16 – Fidelity Funds dated 21 June 2018, had held that an exemp-tion from Danish WHT granted solely to funds resident in Denmark that fulfilled certain criteria – most importantly a minimum distribution – was contrary to the free movement of capital.
The Danish Supreme Court interpreted the CJEU ruling as stating that solely the residence criteria was contrary to the free movement of capital. The WHT exemption did not have to be granted to non-resident funds, if they did not meet the additional criteria, i.e. did not make a minimum distribution. In practice, most non-resident investment funds could not prove such minimum distribution and thus were unable to gain a refund of Danish WHT.
National court decisions in favor of the free movement of capital
In contrast to the above two restrictive decisions, there are national court decisions favor-able for the free movement of capital in other jurisdictions, e.g. in Spain.
On 30 July 2021, the Spanish High Court gave a ruling regarding a reduction of the tax rate on dividends to 1%, which was granted to funds resident in Spain, if they fulfilled certain additional criteria, e.g. minimum capital, minimum number of investors. The Spanish High Court held that not applying this tax rate reduction to regulated non-resident fund vehicles would violate the free movement of capital. The funds in question were non-harmonized AIFs resident in Germany. When examining the justification of the restriction, the court conducts a comparability analysis. In essence, it holds that it is sufficient for a non-resident AIF to be a regulated fund vehicle in its (EU) home jurisdiction in order to be comparable to a resident fund vehicle that is entitled to the tax rate reduction. As the fund vehicles were reg-ulated AIFs in Germany, it was concluded that they are comparable to resident fund vehicles in scope of the Spanish tax rate reduction. The court held that comparability cannot be assessed taking into consideration the Spanish domestic law.
AG opinion challenging the CJEU predence
On 6 May 2021, the Advocate General (“AG”) Kokott delivered her opinion in the CJEU case C-545/19 – “AEVN”, regarding the WHT reclaim of a German regulated, open-ended contrac-tual investment fund in Portugal. In this case, the fund complained that, under Portuguese law, domestic funds are exempt from WHT on Portuguese dividends (instead, they are charged quarterly with a stamp duty tax of 0.0025% on their net asset value), while foreign funds have no option to be exempt from WHT on Portuguese dividends.According to the AG opinion, the different tax treatment of domestic and foreign funds (NAV tax vs. dividend WHT) is merely a difference in taxation technique that does not result in a worse position for the foreign fund and thus does not constitute a restriction of the free movement of capital. Moreover, any infringement of the free movement of capital would be justified because – according to the AG – the level of protection under the free movement of capital is lower than under the other three fundamental freedoms. The named AG opinion constitutes a particularly strong breach with the established juris-prudence of the CJEU regarding the scope of the free movement of capital; academic comments and objections have already been published in specialized literature.3
AG opinion supporting the CJEU precedence
On 6 October 2021, AG Saugmandsgaard Øe gave his opinion in CJEU case C-342/20 – “A SVPI”, concerning a French fund in corporate legal form (a Real Estate Investment Company), which was denied a tax exemption in Finland because of its legal form; tax exemption in Finland is only granted to foreign funds in contractual form. According to the AG opinion, the link of the tax exemption to the legal form of a foreign fund constitutes a restriction of the free movement of capital. The AG opinion is in line with the CJEU judgment in the case C-480/19, dated 29 April 2021 related to Finland and a Luxembourg incorporated invest-ment fund (SICAV), where the CJEU held that the different treatment of foreign funds merely on the basis of their legal form is not admissible under the free movement of capital.
Interestingly, at the very end of his opinion dated 6 October 2021, AG Saugmandsgaard Øe refers to the CJEU case C-156/17 dated 30 January 2020 – “Koeln-Aktienfonds Deka”, clarify-ing that the CJEU in that case did not establish a justification, when stating that the member states were free to pass special tax regimes for collective investment vehicle. Instead, member states have to use this autonomy within the established scope of the fundamental freedoms, meaning that the adoption of such special tax regimes – especially their (admin-istrative) requirements – must not constitute a restriction of the free movement of capital. This explicit statement seems to be addressed to the Dutch Supreme Court and its final ruling dated 23 October 2020 in the Koeln-Aktienfonds Deka case, which – as described above – takes an opposing view.
Conclusion
The above comparison reveals two opposing trends in national jurisprudence as well as in AG opinions. The potential downside of this exchange of arguments concerns the free movement of capital, the common capital market and thus the European Union’s competi-tiveness as a location for the Financial Services industry. In the upcoming months, the CJEU will have several opportunities to clarify whether its long-standing jurisprudence in favor of the free movement of capital will continue to be a driving force of integration. The opportunities are the upcoming CJEU judgements in the above described cases C-545/19 – “AEVN” (Portugal) and C-342/20 – “A SVPI” (Finland) as well as the case C-537/20 – “L Fund” (Germany). However, as the above-described examples from national jurisprudence in the Nether-lands, Denmark and Spain show, the free movement of capital in practice is ultimately enforced on the national level: in national courts and pre-dominantly in national parlia-ments passing tax legislation either by favoring the free movement of capital or by putting it at a disadvantage.If national legislators are not motivated by CJEU judgements to provide for a consistent tax-legal environment for the common capital market including investment fund vehicles in the European Union, it is ultimately up to the European legislator to establish such a level playing field. The EU Commission seems to be taking a first step into this direction; it is currently reviewing the feedback received on its initiative “New EU system for the avoid-ance of double taxation and prevention of tax abuse in the field of withholding taxes“; a proposal for a respective directive is scheduled for 2022.
1 See also WTS Global FS Infoletter # 20 of 15 March 2021.
2 See also WTS Global FS Infoletter # 22 of 17 September 2021.
3 Stoeber, European Taxation, issue 1-2022 (English); Stoeber, Der Betrieb, 2021, p. 2383 et seq. (German).
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