April 11, 2014
In its verdict in Case C-190/12 (Emerging Markets Series of DFA Investment Trust Company), the European Court of Justice (ECJ) confirmed that investment funds based outside the EU should benefit from the EU's free movement of capital rule regarding investments in Europe. Thus, if an investment fund based in an EU member state can benefit from local income tax exemptions, then non-EU funds (for example, American or Canadian ones) investing in Europe should also be entitled to apply for such exemptions.
In the case at hand, a US investment fund applied for a refund of withholding taxes paid on dividends derived from Polish companies. The ECJ stated that US funds are entitled to put themselves in a position similar to that of local funds. This means that under certain conditions, non-EU investors may benefit from local tax preferences/exemptions.
In view of the fact that the relevant Polish regulations provide for income tax exemptions for domestic investment funds and funds based in the EU/European Economic Area (EEA), and that there is an exchange of tax information mechanism between Poland and the US, then the dividends paid to a US fund should also be exempted from withholding taxes in Poland, relying on the EU principles of freedom of establishment and the free movement of capital.
This judgment gives solid grounds for non-EU investors to benefit from certain EU rules and to rely on tax preferences granted to EU/EEA entities. Therefore, if these investors have paid withholding taxes on dividends derived from EU/EEA companies, they should analyze whether certain tax preferences are available for investment funds in the country of residence of the companies paying the dividends. Please note that the possibility to apply for a refund might be time-barred.
Dentons global tax team has significant experience in assisting non-EU investors with analyses of the grounds for overpayment and withholding tax refund cases. We would be happy to provide you with a more detailed description of these developments upon request.
April 10, 2014