The ECJ stated Danish tax legislation discriminated against funds domiciled in other European Union member states. Foreign Ucits in Denmark were taxed on dividends from holding companies, while locally-domiciled funds were exempt if they paid a minimum distribution to fund investors.
Fidelity told Portfolio Adviser that it welcomed the result, which was decided on 21 June.
A spokesperson said: “This case has been brought on behalf of three Fidelity mutual funds in Luxembourg and the UK concerning Danish withholding tax deducted from dividends paid to those funds.
“Our position was that this deduction of tax is contrary to EU law and we sought to recover what we feel is unfair withholding tax charged.”
Fidelity has previously said it would return any tax refund to the funds. Over the period the funds are seeking repayment of withholding tax dividends were taxed at a rate of 25% in 2000 and 28% between 2001 and 2009.
The claim was supported by Dutch asset manager NN Investment Partners (NNIP), which declined to comment on the case.
Free movement of capital
The ECJ argued the Danish legislation represented an impediment to the free movement of capital because it discouraged Danish investors from buying foreign Ucits and also discouraged foreign Ucits from investing in Danish companies.
Platforum associate research director Rodolfo Crespo said the decision is significant for the single market for funds in the European Union.
Crespo said: “For UK asset managers or UK wealth managers looking to expand into Continental Europe, the main implication is that they can be confident that having a fund structure in Luxembourg or Ireland will be enough to be competitive. They won’t have to be launching local funds in every single country.”
However, he added whether the decision benefits the UK in the longer term depends on the outcome of Brexit negotiations over its future relationship with the EU.
Precedents
Speaking ahead of the decision, Association of the Luxembourg Fund Industry legal and tax director Marc-André Bechet said the case followed in the footsteps of a ruling in favour of Aberdeen over the Finnish government regarding withholding tax.
In 2009, the court ruled domestic and foreign funds are comparable and must therefore receive the same tax treatment under EU law.
Bechet said the ECJ consistently ruled that governments cannot discriminate between domestic and foreign funds when it comes to the taxes on dividends received and distributions paid by the fund.
Funds bonanza
Fewer than €7bn is invested via foreign funds in Denmark, according to a European Fund Distribution report published by Platforum in November 2017. In contrast, the investment in funds and shares in the country represents €267bn.
The report said a ruling against the Danish government, and in favour of Fidelity and NNIP, would be significant for international asset managers. In contrast, Danske Bank, Jyske Bank and Nordea are the leading fund distributors in Denmark and now face a more competitive marketplace.
Crespo said Denmark was a unique case in its taxation rules for funds, although other EU member states do have local requirements, such as requiring a local representative to do business, and there was still some way to go to create a truly single market for funds.
“A tax issue is a very obvious case for discrimination. If local funds aren’t paying tax on dividends paid by local companies and foreign funds are paying tax then it’s a disadvantage to them.”
In March, the European Commission launched proposals for making the cross-border distribution of funds in the trading bloc simpler, quicker and cheaper.
While the EU investment funds market amounts to a total of €14.3trn, only 37% of Ucits are registered for sale in more than three member states, according to the European Commission.
