EC calls on Netherlands to reform dividend tax relief for investment funds

The European Commission has called on the Netherlands to bring its rules on taxation of investment funds in line with EU law in a formal notice letter. 

The EC decided on this action after the country failed to extend the Dutch tax levy reduction scheme to foreign investment funds, which are comparable to domestic investment funds.

Dutch law provides for a reduction of the dividend tax paid by investment funds on dividends they receive from companies in which they hold shares by offsetting the tax paid by the Dutch company distributing the dividends.

That reduction is granted on account of the due dividend tax (and similar foreign taxes). Unlike Dutch investment funds, foreign investment funds cannot offset the dividend tax paid by Dutch companies on dividends they distribute and which the foreign investment funds subsequently redistribute to their own investors.

Therefore, the Dutch tax levy reduction scheme makes it less attractive for foreign investment funds to provide their services to Dutch investors and to invest in shares of Dutch resident companies.

The EC said it therefore considered that the scheme restricts the free movement of capital which is in principle prohibited by Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area because the Dutch scheme creates a difference in treatment to the detriment of investment funds of other EU Member States and EEA States.

The Netherlands now has two months to respond and address the shortcomings raised by the EC. "In the absence of a satisfactory response, the Commission may decide to issue a reasoned opinion", it said.