Beneficiary to the income
The Supreme Court ruled that the words “on whose behalf the dividend withholding tax is withheld" (art. 25 CITA) refer to the beneficiary to the income. The starting point is that only the person who is entitled to the proceeds of shares under civil law can qualify as the beneficiary to the income. If the right to the proceeds of a share is not split off, as a rule, the holder of the shares will be regarded as the beneficiary to the income. If the Tax Inspector disputes that a taxpayer has that status, it is up to that taxpayer to establish facts and make a plausible case that it is the beneficiary to the income.
The exception included in article 25(2) CITA, as a result of which crediting of dividend withholding tax withheld is not possible after all, refers to the situation in which the recipient of the dividends qualifies as the beneficiary to the income but not as the beneficial owner. The basic principle here is that a beneficiary to the income who has free and personal power of disposal over the income received, and does not act in an agency or fiduciary capacity, qualifies as the beneficial owner. However, if the beneficiary to the income performs a quid pro quo in connection with the proceeds, as part of a series of transactions, they are not regarded as the beneficial owner by operation of law. What is to be understood by a ‘series of transactions’ is detailed in article 25(3) CITA.
Limited interpretation of dividend stripping measure
The legislative history of article 25(2) and (3) CITA shows that the legislator intended to leave it to the courts to interpret the concept of ‘beneficial owner’. But it cannot be deduced from that legislative history what conditions, requirements and circumstances the legislator had in mind. Nor have any examples been included that could indicate in which cases a beneficiary to the income qualifies as the beneficial owner and what factors play a role in this. The examples given relate only to cases where there is a series of transactions, and precisely where the beneficiary to the income does not qualify as the beneficial owner. The Supreme Court therefore concludes that in article 25(2) and (3) CITA, the legislator aimed to exhaustively regulate the cases in which a beneficiary to the income cannot be regarded as the beneficial owner. It is up to the Tax Inspector to argue, and in the event of a dispute to make it plausible, that this exception applies.
Discussion of grounds for cassation
The Supreme Court then addressed the grounds of cassation raised by the parties. In cassation, the AEX shares must be assumed to be book-entry securities. Since the Supreme Court considers the holding of these shares to be decisive in respect of qualifying the recipient as the beneficiary to the income and this is a property law issue, under the Dutch regulations on international private law the legal system of the country in which the depositary is established is leading. Consequently, French statutory provisions on book entry securities must be used to assess who qualified as the holder of the AEX shares when the dividend payments were received in FY 2007/2008. The Court of Appeal erred in failing to do so.
Furthermore, the Court of Appeal assigned too broad a scope to the dividend stripping measure (article 25(2) and (3) CITA). As stated before, this is an exhaustive statutory provision. In other cases, a beneficiary to the income who can freely dispose of the income and who does not act as an agent or fiduciary qualifies as the beneficial owner.
The Court of Appeal declaring the argument of the assumed presence of a permanent establishment in the UK to be out of time does not stand up to scrutiny either. After all, the report of the hearing shows that the Court of Appeal had raised this point itself. The interested party then responded by raising the presence of a permanent establishment as an alternative position. The Supreme Court argued that the Court of Appeal should have considered this circumstance when assessing whether due process of law was violated. Substantively, the Supreme Court ruled that in respect of the application of article 5(6) of the NL-UK Convention, the Court of Appeal should have placed the burden of proof on the Tax Inspector. After all, the latter had invoked this provision, under which no permanent establishment is present if a Dutch company does business in the United Kingdom through an independent representative acting in the ordinary course of business.
Referral and settlement
The Supreme Court referred the case to the The Hague Court of Appeal to re-examine whether the interested party can be considered to be the beneficiary to the income and beneficial owner of the dividends received, taking into account the Supreme Court’s interpretation of these concepts. The Court of Appeal to which the case is referred must also assess the parties’ statements that have not been dealt with so far, including the Tax Inspector’s reliance on fraus legis.
The Supreme Court itself decided on the case regarding the decision requiring information. This decision cannot be upheld because the missing records are irrelevant for tax purposes and, hence, are not part of the accounting records as referred to in article 52 of the State Taxes Act. The interested party’s stock lending system shows the share loans outstanding at any given time and the related payments. The accounting records thus meet the legal requirements.
Source: HR 19 January 2024, 20/01884, ECLI:NL:HR:2024:49
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The Supreme Court ruling in this case revolves around the interpretation of specific provisions in the Corporate Income Tax Act (CITA), particularly Article 25(2) and (3). The focus is on the concept of "beneficiary to the income" and "beneficial owner" in the context of dividend withholding tax.
Beneficiary to the Income: The Supreme Court emphasizes that the individual entitled to the proceeds of shares under civil law is considered the beneficiary to the income. If the right to the proceeds is not separated, the holder of the shares is typically regarded as the beneficiary to the income. In case of a dispute, the burden of proof lies with the taxpayer to establish that they are indeed the beneficiary to the income.
Beneficial Owner: The exception mentioned in Article 25(2) CITA comes into play when the recipient of dividends is the beneficiary to the income but not the beneficial owner. A beneficial owner, as per the basic principle, is someone with free and personal power of disposal over the received income, acting without agency or fiduciary capacity. However, if a quid pro quo is involved in a series of transactions, the individual is not considered the beneficial owner by operation of law. The definition of a 'series of transactions' is outlined in Article 25(3) CITA.
Legislative Intent and Interpretation: The legislative history of Article 25(2) and (3) CITA indicates that the legislator intended courts to interpret the concept of 'beneficial owner.' However, it doesn't provide specific conditions or examples. The Supreme Court concludes that the legislator aimed to exhaustively regulate cases where a beneficiary to the income cannot be regarded as the beneficial owner, leaving it to the Tax Inspector to argue and make plausible claims in case of disputes.
Grounds for Cassation: The Supreme Court addressed the grounds for cassation, highlighting errors in the Court of Appeal's interpretation of book-entry securities and the scope of the dividend stripping measure. It argued that the Court of Appeal should have considered the presence of a permanent establishment in the UK and clarified the burden of proof under the NL-UK Convention.
Referral and Settlement: The case has been referred back to the Hague Court of Appeal for a re-examination considering the Supreme Court's interpretation of beneficiary to the income and beneficial owner. Unaddressed statements and the Tax Inspector's reliance on fraus legis (fraud on the law) should also be assessed.
In summary, this case involves a nuanced analysis of tax law concepts, with a focus on defining the beneficiary to the income and the beneficial owner, and the exhaustive regulation of exceptions under Article 25(2) and (3) CITA. The Supreme Court's decision emphasizes the importance of legal interpretation and proper consideration of international conventions in tax matters.