By Ian Fraser
Published: Sunday Herald
Date: 25 April 2010
Two of Scotland’s largest public-sector pension schemes are in the vanguard of efforts by UK pension funds to claw back some €1 billion of tax that was illegally imposed by European governments.
Strathclyde Pension Fund and Highland Council Pension Fund are entitled to claw back so-called “withholding” taxes paid out to EU member states as a result of a string of major European court cases. Withholding tax has traditionally been charged by European countries on the dividend income that overseas investors earn in their jurisdictions, often at rates of 15% to 20% of earnings.
The first court case came in 2004 when Fokus Bank won a landmark ruling against the Norwegian state. The European Economic Area court decided that Norway’s withholding tax regime on dividend income contravened article 40 of the EAA Agreement. This case was followed in 2006 by the European Court of Justice’s Denkavit ruling, in which the ECJ found in favour of the Dutch agribusiness Denkavit in its battle with the French government.
The ECJ decided that France’s taxation of dividends paid by French subsidiaries to foreign parent companies was illegal under EU law, and that any EU member that imposed higher withholding taxes on foreign investors than on domestic investors was in contravention of the free movement of capital principles of the EC Treaties. The Denkavit ruling dramatically reduced the scope for withholding tax in the EU.
Even so, many EU member states continued to drag their heels and persisted with the uneven imposition of withholding taxes on different classes of investors. Spain and Portugal, for example, still levy withholding tax of 18% and 25% on pension funds based elsewhere in the EU. This is something the EC is keen to clamp down on as it strives to create a harmonized European capital market.
Whilst such anomalies remain, there is scope for UK pension funds and their advisers to challenge EU governments in a bid to retrieve their cash.
Last December Highland Council pension fund became the latest Scottish fund to go on the warpath in Europe and anticipates it will be able to retrieve £1.3m in withholding tax from European exchequers. The £890m pension fund is advised by accountancy firm KPMG.
Roger Niven, Highland Council’s principal accountant for treasury and investments, said the council last week successfully persuaded the Dutch tax authorities to hand back €124,000 (£109,000).
The path to wringing cash out the Netherlands government became easier last year when another Scottish pension fund won a landmark ruling in Holland. In January 2009, the £9 billion Strathclyde pension fund took the Dutch government to court in a test case and won.
“That was groundbreaking and progressive ruling from the Dutch tax authorities in that it recognised the need to remove barriers to cross-border investment,” said Chris Morgan head of KPMG’s international corporate tax practice in the UK.
At the time KPMG -– which is advising Strathclyde pension fund and more than 50 other pension funds –- said the ruling should enable UK funds to retrieve €100m from the Dutch government and would give them a greater chance of success elsewhere in Europe. It is now targeting other European exchequers including Germany, Italy, Spain, France, Austria, Denmark and Sweden.
The Highland fund’s investment portfolio is managed by five asset management firms including Edinburgh-based Baillie Gifford.
An edited version of this article was published in the Sunday Herald on April 25th, 2010