Tax climate change: are Brexit’s side effects state aid-proof?

Tax climate change: are Brexit’s side effects state aid-proof?

Any special tax treatment to just a handful of companies is a way to distort competition. In the Netherlands the government is planning to scrap dividend withholding tax for multinationals. But is the measure state aid-proof?

On 15 March 2018 victory trumpets sounded in The Hague. Prime Minister Mark Rutte celebrated the arrival of his biggest Brexit bounty for his administration: multinational Unilever, famous for household brands such as Marmite, has decided to establish its headquarters in Rotterdam.

Mr Rutte explained that scrapping dividend withholding tax is a way to win over multinationals, such as Shell and Unilever, to fully set up shop in the Netherlands. Moreover, this policy is intended to create a level playing field in dividend taxes at the same time.

From the Dutch administration’s point of view, the proposed 1.4 billion tax reduction is simply a reaction to the British dividend tax reforms, initiated in July 2015. Since the UK tax reforms effectively scrap dividend withholding tax for undertakings in the UK, the Dutch cabinet proposed similar legislative proposals in September 2017. The main goal is to re-establish the level playing field between the UK and the Netherlands. Therefore, the new Dutch proposals aim to reduce dividend withholding tax from 15% to 0%.

However, Mr Rutte’s view on the level playing field seems to be contradictory to his recent views on the functioning of the internal market. During his Berlin speech, on 2 March 2018, Rutte proclaimed his belief in the internal market “as the bread and butter of the Netherlands”, and warned the other Member States that the “level playing field must not give rise to abuses and unfair competition. Neither inside the EU nor from outside the EU.”

This “double Dutch” interpretation of a level playing field raises some legal questions. First of all, are the Dutch policies indeed aimed at creating a climate of fair competition for all taxable companies? Secondly, is the Dutch interpretation of a level playing field in line with the goals of the internal market? And, in addition, from a more practical point of view: are the Dutch tax policies, once adopted, state aid-proof?

This last question will determine whether these reforms will trigger a state aid investigation by the Commission into preferential tax advantages. And, as the Netherlands has already experienced, such an investigation is far from a hypothetical possibility. EU Commissioner for Competition, Margrethe Vestager, has made it abundantly clear that any special tax treatment to just a handful of companies is a way of cheating which distorts fair competition. Vestager has warned the Member States that “the state aid rules allow the EU to put a stop to that special treatment.”

With that warning in mind, the Dutch government will have to ask itself if the proposed tax reforms will actually undermine the EU level playing field of fair competition. More specifically, whether the Dutch dividend tax reforms indeed result in effectively benefitting multinationals to the detriment of other types of undertakings established in the Netherlands, such as SMEs or non–Dutch companies, then the answer is probably affirmative. In that case, Vestager may very likely start investigations into state aid, once the proposals are adopted.

In November 2017 the Dutch government briefed its parliament on this matter and indicated that the tax reforms will mainly benefit multinational public limited companies, although indirect effects for small and medium enterprises (SMEs) were not precluded (TK, 14 November 2017, 2017-2018, 393). This briefing strengthens the arguments of commentators who argue that the dividend tax reforms will solely benefit multinationals.

Adding a legal analysis to this claim one can comment that when the scrapping of the dividend withholding tax specifically benefits large undertakings to the detriment of small enterprises, state aid can be involved. The case law of the ECJ corroborates this claim as the ECJ has always interpreted the concept of selectivity very broadly, taking into consideration whether or not large and smaller undertakings effectively benefit in the same way (Case C‑279/08 P, Commission v the Netherlands (NOx)).

The practice that SMEs usually pay out only a small percentage of dividend compared to public limited companies indicates that these tax reforms can actually lead to unequal treatment. Furthermore, SMEs do not attract foreign capital comparable to multinationals, and as a result multinationals and their shareholders will predominantly benefit from a scrapping of the withholding tax. In such a case a passing-on-defence, justifying tax advantages to multinationals by establishing indirect economic effects for SMEs , will not preclude the dividend tax reform, once adopted, from constituting state aid (ECJ, Cases C‑164/15 P and C‑165/15 P, Commission v Ryanair).

And let there be no doubt here; the Commission eats national “tax avoidance” policies for breakfast. This is because Vestager’s enforcement priorities concentrate fully on special tax treatment for multinationals. This has already led to a number of high profile investigations.

Since 2015 the Commission has already concluded investigations in tax cases with negative decisions (including the Belgian “Excess profit” tax, Starbucks, Amazon, Fiat and Apple), requiring Member States to recover unlawful state aid involving huge sums. In the case of Apple, the Commission referred Ireland to the Court to order the recovery of 13 billion euros. Pending investigations concern the possible tax advantages by Luxembourg to Mc Donald’s and Suez, and preferential tax treatment of IKEA by the Netherlands.

Currently the United Kingdom is also experiencing the consequences of unequal tax treatment of offshore multinationals. On 26 October 2017 the Commission started an investigation into the British tax deals with multinationals. Vestager has declared that these deals might breach EU state aid. This preliminary outcome did not come as a surprise since the UK and the EU already had several conflicts, resulting in the ECJ Gibraltar - judgment (Cases C‑106/09 P & C‑107/09 P), in which the ECJ declared the entire tax system of Gibraltar to effectively favour offshore companies.

In conclusion, the current track record of the Commission shows that preferential tax treatment is no trifling matter. The pending Commission investigations are only a prelude to a bitter, Marmitey, aftertaste, as the Commission has developed a certain taste for being successful as the sole enforcer of the level playing field when it comes to taxes. Therefore, the Dutch government would do well to consult the Commission before adopting its new tax dividend legislation in order to prevent becoming the next main course for a Commission with an ever-growing appetite.


Heather Self

The article would be clearer if it included some basic information about the U.K. tax system.

The U.K. has not had withholding tax on dividends since (I think) 1965. It had an imputation system until ACT was abolished in 1997, and vestiges remained until recently.

What changed in 2009 is that the U.K. moved from a credit to an exemption system for (most) dividends, similar to the participation exemption which has applied in the NL for many years.

I am a U.K. tax adviser with some (but not detailed) knowledge of State Aid issues.

Tom OShea

the Netherlands is entitled to tax dividends or not to tax them.
if it chooses not to tax them then it must apply that rule to all Dutch companies. if it does so it complies with the fundamental freedoms and the state aid rules do not come into play because all Dutch companies are treated in a similar way under the Dutch regime. in such cases, there is no selectivity. Competence in relation to direct tax matters remains with the Member States.

Add a comment