UK and International Tax news

ECJ Judgment In Santander Case

Friday 11th May 2012

The ECJ has issued its judgment in the Santander case [C-338/11], which is likely to have a significant impact on the levying of withholding tax [WHT] on dividends by EU Member States.  The ECJ ruled that certain non-French mutual investment funds were entitled to a full refund of the 25% WHT on French source portfolio dividends.

Given most EU Member States differentiate between domestic and foreign investment fund investors, the importance of the ECJ’s ruling is significant not only for France but other Member States, for EU investment funds and also funds established outside the EU.

The Santander case forms part of a number of joined cases [C-338/11 – C-347/11] in which Belgian, German and Spanish UCITS and US regulated investment funds argued that the levy of the 25% French WHT on French source dividends [now 30%] was in breach of EU law, given French source portfolio dividends paid to French mutual investment funds were fully exempt from WHT.

The ECJ considered that the difference in treatment constituted a restriction of the free movement of capital [Art63 TFEU].  Such a difference in treatment was not allowed if the foreign and domestic investment funds were comparable and no justification ground was available. The ECJ noted that the French legislation made a distinction based on the place of residence of the investment fund. The ECJ confirmed that since the position of the investors in the reclaiming investment fund was irrelevant for the application of the challenged French tax rules, the comparison should be made at the level of the investment fund and not that of the investors.

On this reasoning, the ECJ ruled that the foreign applicants were comparable to French domestic investment funds which were eligible for exemption from French withholding tax. Furthermore, the ECJ considered that the restriction could not be justified in the public interest.

The ECJ also confirmed that resulting budgetary consequences, as brought forward by the French government without any data thereon, could not justify a limitation in time as regards the application of the ruling.

This judgment should support the position of EU and non EU funds in claiming refunds of WHT suffered in Europe and if you require further advice on or assistance with preparing and submitting tax reclaims, please contact Keith Rushen on +44 (0)20 7486 2378.

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