NETHERLANDS/UK - The Dutch tax office will have to refund up €500m to pension funds after a legal challenge by the UK's £9.24bn (€10.3bn) Strathclyde pension fund.

The tax authorities yesterday issued a ruling which is likely lead to the refund of over €100m to UK pension funds, according to KPMG, in a test case pursued on behalf of a number of UK pension funds and led by the Scottish scheme.

The ruling essentially states Dutch tax authorities should not have levied a withholding tax on dividend payments to tax-exempt bodies, such as UK pension funds, which are located within the European Union but based outside the Netherlands.

KPMG added today the ruling also has implications for similar tax-exempt bodies in other EU member states who have paid Dutch withholding taxes in recent years, and estimated the total cost to the Dutch Revenue could be in the order of €500m.

Chris Morgan, head of KPMG's international corporate tax practice in the UK called the ruling "progressive", as it support the principle of free movement of capital within the EU.

He urged pension funds who have not filed claims to date to investigate doing so in the near future before claims potentially become time-barred.

"Hopefully this decision will pave the way for other EU Member States to follow suit and repay other reclaims for withholding tax lodged on the same grounds as in the Netherlands. Such claims have been brought against at least 12 Member States of the EU," he concluded.

While there will be a repayment of claims made for years prior to 2007, the Dutch Tax Authorities have granted these payments on an ex-officio basis and have yet to admit that the Dutch WHT rules in place prior to 2007 were in contravention of EU Law.

In a statement sent out today, KPMG explained pension funds, investment funds and other tax-exempt bodies across Europe have in recent years been pursuing claims against a number of EU Member States, for the recovery of withholding taxes suffered on EU sourced dividend income.

These claims were made in the light of the Fokus Bank (Case E-1/04) ruling in December 2004, on the grounds that the witholding tax rules of those member states are in breach of the free movement of capital principle of the EC Treaty.

KPMG said it received notification from the Dutch authorities yesterday that the claims brought by the test claimant for the recovery of withholding taxes going back to 2003 had been accepted, ex-officio, and would be repaid in the near future.

Notification was also made that all other EU entities having brought similar action would be treated with due regard to the decision on Strathclyde Pension Fund's claims.

KPMG currently has over 70 UK pension fund clients whose claims in the Netherlands should follow this test case ruling.

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