ECJ ruling on withholding tax in Poland means £3bn plus tax reclaims

A landmark decision by the European Court of Justice (ECJ) has opened the way for investment funds based outside the EU to reclaim billions in withholding tax levied by EU governments. Although the case centred around Poland, the ruling will affect all EU jurisdictions

The decision follows a number of cases where the ECJ has ruled that funds from one EU member state can claim back withholding tax levied in another member state. While the Court has previously implied this principle holds where the fund claiming is from a non-EU member state, this is the first time the Court has been asked to give a decisive ruling on the matter.

The case, Emerging Markets Series of DFA Investment Trust Company (C-190/12), relates to the Polish withholding tax regime. It provides guidance for similar challenges being taken against several EU member states by portfolio investors such as investment funds, pension funds and charities based outside of the EU.

The court said it considered that, with regard to tax legislation which adopts as the main distinguishing criterion the place of residence of investment funds, according to which criterion tax is or is not deducted at source on dividends paid to them by Polish companies, non-resident investment funds are in a situation which is objectively comparable to that of investment funds whose registered office is situated in Poland.

It ruled that a member state may not exclude from a tax exemption dividends paid by nationally established companies to an investment fund established in a non-member state if there exists between the two states an obligation of mutual administrative assistance

Chris Morgan, head of tax policy at KPMG, described the decision as ‘seismic’, saying: ‘We estimate around €3bn (£2.5bn) of claims have already been made and this news is likely to prompt more investment funds to submit claims which, in our view, are likely to be several billion more.’

Most claims are likely to come from investment funds based in the US and Canada, and KPMG says that although the decision relates to a case in Poland, the decision is applicable across the EU. 

Morgan said: ‘The key point is that provided a double tax treaty with an exchange of information clause exists between the Investment fund’s state of residence and the relevant EU country, there can be no justification for discriminatory tax rules being applied. Investment funds that have withholding taxes levied on them by EU fiscal authorities may well find that today’s decision means that they can claim a refund.  They will need specialist advice to submit a claim however as the process is complicated.’

Kit Dickson, tax partner at Deloitte, said: ‘The Polish case is significant as it confirms how and whether the same principles can apply to funds from outside the EU. However the ability to reclaim will depend on both the provision of sufficient information to show the non-resident fund is comparable to a Polish Fund and the co-operation of the tax authorities of their state of residence (ie, the IRS in the US) to prove conditions for exemption in Poland are met. This will be for the Polish courts to decide and the burden of proof could be high.’

Details of the judgment are available here:

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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