CJEU opines on refund of dividend WHT to non-resident FIIs

On 5 September 2019 the Court of Justice of the European Union (CJEU) delivered its opinion in a case (C-156/17) referred by the Netherlands Supreme Court on whether a non-resident fiscal investment institution (FII) should be entitled to a repayment of withholding tax on dividend distributions from Dutch resident companies. Dutch legislation provides several methods to neutralise the imposition of dividend withholding tax, with the applicable method depending on the status of the dividend recipient. Until 2007, a recipient of dividends that was either not subject to tax or subject to a 0% corporate income tax rate was entitled to a refund of any Dutch dividend withholding tax suffered. In principle, no distinction was made between Dutch resident recipients and non-resident recipients. Non-resident recipients, however, were required to meet all the conditions a domestic company had to meet to qualify as an FII. This gave rise to the question of when a non-resident FII would be comparable to a resident FII and, as such, entitled to the dividend withholding tax refund.

The CJEU is of the opinion that the Dutch law may infringe the free movement of capital provisions of the Treaty on the Functioning of the European Union. It is possible that, under its domestic legislation, the non-resident FII would be deemed to have paid a substantial proportion of its dividends received to its participants within a term that is reasonably comparable to the eight months under the Dutch legislation. As such, the objective of the Dutch distribution requirement (i.e. taxation at the level of the participant within a reasonable time) also would be met, even though the specific requirement for actual distribution of the dividends within eight months of the end of the fiscal year would not. Therefore, depending on the tax treatment of the non-resident FII, the distribution requirement may be an infringement of EU law, since the tax authorities do not accept actual or deemed distributions within a period reasonably comparable to eight months that would have an equivalent effect.

United States: Unanimous ruling in Amazon Case

The unanimous ruling upheld the Tax Court’s decision that the definition of intangible assets under US Treasury regulations in effect in 2005 and 2006 does not include residual business assets such as the value of the workforce, goodwill and going concern value. At issue were the assets required to be included in a cost sharing buy-in payment in relation to a cost sharing arrangement (CSA) that was entered into as part of a 2004 restructuring by Amazon.com Inc. (Amazon) and its Luxembourg subsidiary. Amazon valued only the independently transferable intangible assets that it transferred to the European holding company under the CSA, including website technology, trademarks, and customer lists. The Internal Revenue Service (IRS) valued the entire European business, other than pre-existing tangible assets. The valuation by the IRS included residual business assets such as workforce in place, goodwill, going concern value, and other unique business attributes such as growth options and Amazon’s culture of innovation.

The court concluded instead that the definition was limited to independently transferrable assets. To reach this conclusion, the Ninth Circuit examined the regulatory definition of an intangible contained in the transfer pricing regulations, the overall transfer pricing regulatory framework, the rulemaking history of the regulations, and whether the IRS’s position was entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997), which states that, under certain circumstances, an agency’s interpretation of its own regulations must be given controlling weight as long as it is not plainly erroneous or inconsistent with the regulation. Looking at the text of the regulatory definition of “intangible,” the definition’s place within the transfer pricing regulations generally, and the rulemaking history, the court concluded that Auer deference was not warranted.

Ireland: Transfer pricing legislation

On 2 September 2019, the Irish Department of Finance issued Ireland’s Transfer Pricing Rules Feedback Statement, which contains draft legislation to update the domestic transfer pricing regime from 1 January 2020. The existing Irish transfer pricing rules allow an exemption from the transfer pricing rules for certain arrangements entered into before 1 July 2010, to the extent the terms and conditions of such arrangements did not subsequently change. The proposed new legislation would remove this exemption for chargeable periods beginning on or after 1 January 2020. It should be noted that section 835F TCA 1997, which contains documentation provisions, still exempts “grandfathered” transactions from documentation requirements when both parties to the transaction are Irish tax resident companies. Such transactions between Irish tax resident companies will still need to be priced at arm’s length, even though there will be no formal documentation requirements in place. Companies classified as “small enterprises” would continue to fall outside the ambit of the domestic transfer pricing documentation requirements from 1 January 2020, but still would be required to adhere to the arm’s length principle. However, companies classified as “medium enterprises” would be subject to the domestic transfer pricing law provisions (including documentation requirements) from 1 January 2020. The proposed amendments exclude transfers of assets between Irish tax resident companies from the scope of the transfer pricing documentation requirements. Such transfers also may be subject to group relief under the relevant Irish capital gains tax provisions to provide an exemption from a tax charge.

Finally, the proposed amendments provide that medium-sized enterprises would be subject to reduced transfer pricing documentation requirements. The draft legislation provides for consolidated revenue-based thresholds to apply before it is necessary to prepare the master file and/or local file as follows: Master file – revenue threshold of EUR 250 million; and Local file – revenue threshold of EUR 50 million.

The due date for completion of the relevant documentation would be contemporaneous with the filing of the annual corporation tax return, approximately nine months after the end of the accounting period. The relevant documentation must be made available upon request in writing by Irish Revenue within 30 days of the request. There is no requirement to file transfer pricing documentation with the corporation tax return.

The article is part of dReport – September 2019, Tax news; Grants and investment Incentives.