CJ rules that non-EU pension funds can obtain the refund of dividend withholding tax

CJ rules that non-EU pension funds can obtain the refund of dividend withholding tax if they are comparable to domestic pension funds (College Pension Plan of British Columbia)

On 13 November 2019, the CJ issued its judgment in case College Pension Plan of British Columbia (C-641/17). The case deals with the tax treatment of dividends paid by German companies to a Canadian pension fund and the possibility to claim a refund of the 15% withholding
tax paid on those dividends on the basis that dividends received by resident pension funds do not increase their taxable amount, or increase it only very slightly. The CJ concludes that there is a restriction on the free movement of capital if the comparability test is fulfilled; i.e., if the non- resident pension fund allocates dividends received to make provisions for pensions that it will have to pay in the future so they are comparable to domestic funds.

When a German pension fund receives dividends, they are fully credited to the various pension fund agreementsif the profits correspond to the technical interest rate used to calculate the contributions (accounting investments). Returns exceeding the technical interest rate (non- accounting investments) must be also credited at a rate of at least 90%. Thus, it is only to the extent that returns on non-accounting investments do not have to be credited to the various pension fund agreements that they result in a pension fund profit that must also be taken into account for tax purposes. On the contrary, non-resident pension funds are always subject to de nitive dividend withholding tax, usually at a rate of 15%. Thus, the CJ identifies a restriction to the free movement of capital given that dividends paid to non-resident pension funds are the subject of less favourable treatment than that applied to dividends paid to resident pension funds, since the former are subject to de nitive taxation of 15%, whereas the latter are exempt from tax in whole or in part.

As to the comparability test, the CJ concludes that a non-resident pension fund, which allocates the dividends received to provisions for pensions that it will have to pay in the future, intentionally or pursuant to the law in force in its State of residence, is in that regard in a situation comparable to that of a resident pension fund. That is a matter for the referring court to ascertain, but the CJ clari es that the fact that allocations to the mathematical and other technical provisions do not constitute expenses incurred in order to generate income in respect of dividends cannot call into question that comparability of the situations.

None of the justification grounds raised in the proceeding (balanced allocation of taxing rights, coherence of the tax system and guaranteeing effectiveness of scal supervision) are accepted by the CJ.

Finally, the CJ addresses if this restriction may be covered by the standstill clause laid down by Article 64(1) TFEU to the extent it was a restriction existing on 31 December 1993 for the purposes of that provision. On the one hand, as to the temporal criterion, the CJ does not conclude on whether the introduction of special legislation relating to pension funds after 31 December 1993 is the circumstance that makes the tax situation of non-resident pension funds less advantageous compared to domestic funds. However, the CJ considers that the acquisitions of shareholdings and the receipt of dividends constitute a means by which a pension fund can honour its pension commitments and not a service that it provides to those insured persons. Based on that, unlike the case of  investment funds in the Wagner-Raith decision (C-560/13), the CJ does not nd the necessary causal link between the capital movement and the provision of nancial services. Therefore, the restriction does not meet the substantive criterion and cannot be covered by the standstill clause.