CASE C 480/16 – FIDELITY FUNDS AND OTHERS VS. SKATTEMINISTERIET STEPHEN DAZI HOKE

CASE C 480/16 – FIDELITY FUNDS AND OTHERS VS. SKATTEMINISTERIET 

STEPHEN DAZI HOKE

BACKGROUND OF THE CASE: 

The dispute centres on whether Denmark’s withholding tax (WHT) regime unlawfully  discriminated against non-resident investment funds, thereby restricting the free movement of  capital under Article 63 TFEU. Luxembourg UCITS the Applicants in this case received a Danish sourced dividends which were automatically subject to WHT, whereas comparable Danish  investment funds could obtain an exemption if they satisfied domestic conditions such as  mandatory distribution of a minimum share of taxable income. This mechanism ensured taxation  occurred at the investor level for resident funds, creating a difference in treatment between  domestic and foreign structures. 

The Applicants argued that this differential treatment amounted to a restriction on cross-border  investment and sought refunds of the WHT deduct from their payment. The Danish authorities  rejected the claims, leading to litigation before the national courts. The matter was eventually  referred to the CJEU, which was asked to assess whether the funds were in comparable  situations, whether Denmark’s arguments could justify the distinction, and whether the national  rules was in breach of the EU provision. 

FACTS IN ISSUE: 

The applicants in relying on the fundamental freedoms provided under the EU law, contend that  their right to free movement of capital is infringed by the unequal treatment applied to them by  the Danish authority. Specifically, the imposition of WHT on dividends of the applicants by the  Danish authorities while at the same time granting exemption to domestic funds was contended  to have violated the right to free movement of capital as enshrined under Article 63 TFEU. 

The applicants dissatisfied, approached the court for a determination as to: 

1. Whether it discriminatory to withhold tax on dividends paid to non-resident funds while  exempting resident funds?  

2. If Denmark can justify this difference with reasons such as combating tax avoidance,  ensuring effective fiscal supervision, or maintaining balanced taxation? 

ARGUMENT: 

In support of their position, the applicants were able to demonstrate that the imposition of WHT  and exemption of same on domestic counterparts goes against the spirit of the EU law in  fostering free trade within the community. The applicants contended that both resident and non resident funds are collective investment vehicles which received dividends from Danish 

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companies and distribute income to investors and as such comparable justifying why they  should be taxed similarly. 

It is important to note that a key features of the Danish tax regime governing investment funds  at the time categorised investment as “minimum-taxed investment institutions” or other domestic collective investment vehicle. In the case of the later, dividends from such investment are  exempted because a portion of such dividends has to be distributed and eventually taxed at  hands of the investors who are resident in Denmark. 

From the perspective of the Danish authority, the rational for imposing the WHT on the applicant  was that the applicant cannot be compared with that of the domestic investment companies  because it cannot ensure the proper taxation of the applicant (investors), and that the  exemptions on WHT was specifically intended for domestic companies. 

At the court of first instance, the court was sceptical on the argument put forward by the applicant  especially as regards to the claim that the Danish tax regime is compatible with Article 63 TFEU,  the case was then referred to the CJEU for preliminary ruling. 

The EU has a unique institutional structure involving the commission, the council, and the  parliament. The Court of Justice of the EU (CJEU) consisting of the Court of Justice (upper  court) and the General Court is crucial as the judicial branch. It interprets EU law and ensures  its uniform application. National courts often refer questions to the CJEU on how to interpret  treaty freedoms or directives (via the preliminary ruling procedure of Article 267 TFEU), and the  Commission or member states may bring cases of non-compliance (via infringement procedures  under Articles 258–260 TFEU). The CJEU’s rulings are binding and have shaped EU tax law  significantly. 

DECISION OF THE CJEU USING THE ANALYTICAL FRAMEWORK: 

At the CJEU, the court was to determine among other things, the questions as to: 

1. Whether foreign and domestic investment funds were comparable in light of their  functions and tax treatment. 

2. Whether Denmark’s withholding tax regime restricted the free movement of capital. 3. Whether the restriction, if any, was justified and proportionate. 

The court in determining the matter before it applied the analytical principles which it has  developed over the years into a step-by-step test in determining whether a national tax measure  complies with the fundamental freedoms. In considering this case the CJEU did not find it difficult 

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in identifying that a fundamental freedom was involved as the applicant’s freedom of movement  of capital was at stake which is provided under Article 63 (1) of the TFEU prohibiting all  restrictions on the movement of capital and payments between member states and between  member states and third countries. Because the Applicants funds held only portfolio level  interests in Danish companies, the court characterised the operation as a movement of capital  falling squarely under Article 63 TFEU. 

Having established the relevant freedom, the court then assessed whether the Danish WHT rules constituted a restriction to the right. The court compared the situation of resident and non resident investment funds and found that both categories performed the same economic activity  and operated under harmonised investment funds standards, making them objectively  comparable. Under EU law, a treatment or measure is said to breach the freedoms if it treats  comparable cross-border situations less favourably (discriminatory) or places burdens that deter  cross-border activity even without unequal treatment (restriction).  

The court identified that Denmark granted domestic funds a WHT exemption while  systematically denying the same treatment to foreign funds, thereby making cross-border  investment less attractive; this amounted to a restriction on the free movement of capital. Once  the existence of a restriction was established, the Court proceeded to consider the justifications  of the Danish authorities as unsubstantiated. The Danish authority has argued preservation of  taxing rights, the effectiveness of fiscal supervision, and the prevention of tax avoidance as its  basis, however, this was rejected by the court and held that the Danish attempt to levy tax at  investor level does not justify discriminatory treatment.  

The court then evaluated the proportionality test to determine whether the measure of the  Danish authority was suitable and necessary to achieve the claimed objectives (preservation of  taxing rights, the effectiveness of fiscal supervision, and the prevention of tax avoidance). This test under the EU law asks the question “whether a national measure that restricts an EU  freedom is necessary and appropriate to achieve a legitimate objective”. 

The court in its findings held that the blanket exclusion of foreign funds of the Applicants was  not proportionate because Denmark chose the most restrictive option, even though less intrusive  alternatives such as cooperation mechanisms or adapted reporting requirements were  available. That the measures placed by the Danish authority went beyond what was necessary  to safeguard fiscal supervision and could not be justified. The Court therefore held that  Denmark’s WHT regime infringed on Article 63 TFEU.

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