US investment fund entitled to Polish withholding tax refund under EU freedoms

Thu 17 Apr 2014

The CJEU has ruled that no withholding tax should be deducted from dividends paid by Polish companies to a US based investment fund (Emerging Markets Series of DFA Investment Trust Co).  The decision will be of wider relevance, not merely to Polish/US dividends, but to non EU resident investment funds which have suffered withholding tax on dividends paid to them where a resident fund would have been exempt.  The case is of particular interest as a non EU body (in this case a US investment fund) has been able to take advantage of EU freedoms.

Poland levies a 19% withholding tax.  The Poland/US DTA reduces this to 5% for >10% holdings, otherwise 15%.  The shareholder of the Polish company was a US investment fund.  Had the shareholder been a comparable Polish resident fund, Polish domestic law would have exempted dividend receipts from tax regardless of the state of residence of the investors in such a hypothetical Polish fund.  Despite the recipient entity in this case being resident outside of the EU the CJEU decided that the EU freedoms applied.  The Polish tax authority can obtain information on the US tax status of the shareholder and in particular that it would be exempt from tax were it registered in Poland using the Poland/US DTA. Thus the dividend payment to the US fund is exempt from Polish tax.  The CJEU drew considerably on its previous decision in the FII GLO case.

The UK does not impose a dividend withholding.  This decision is thus irrelevant so far as UK dividend paying companies are concerned. 

In order to benefit from this decision and pursue repayment claims for past withholding tax the key criteria are:

• that an investment fund situated outside the EU has been treated less advantageously than an EU resident fund for dividends received from an EU resident company;
• that less advantageous treatment is solely on the grounds that the fund is not established in the EU;
• the conditions for the tax exemption are otherwise met.  In this case, the US investment fund must demonstrate that the US regulatory framework is equivalent to that in the EU.  For the Polish tax authority to check this condition is met there must be an exchange of information clause in the relevant double tax treaty.