A Dutch tax court’s decision would require Healthcare of Ontario Pension Plan to repay millions in tax refunds and interest charges.Galit Rodan/The Globe and Mail
A Dutch tax court ruled this week that Healthcare of Ontario Pension Plan wrongly claimed nearly €214-million ($346-million) of dividend tax refunds through a trading strategy designed to take advantage of the pension fund’s favourable tax status in the Netherlands.
The court upheld the opinion of a tax inspector who found that in 445 transactions between 2013 and 2018, HOOPP was not the true beneficial owner of Dutch shares that paid the dividends and so could not reclaim tax withheld against them, in a ruling published on Wednesday.
The decision is a setback for HOOPP in a long-running tax dispute, launched in 2019, which also led a Dutch prosecutor to initiate a separate criminal investigation in October. The tax court’s decision would require HOOPP to repay the refunded tax as well as about €40-million ($65-million) in interest charges.
“HOOPP is disappointed by this tax court ruling and will appeal the decision,” spokesperson Scott White said in an e-mailed statement. “This initial ruling on events that occurred between 2013 and 2018 will have no impact on HOOPP’s ability to pay pensions to our members today or in the future.”
HOOPP declined to make further comment on the case because it is still before the courts.
The key issue in the tax dispute – and the more recent criminal inquiry – is whether HOOPP met the test to be considered the beneficial owners of shares traded on the Dutch stock exchange. Dutch authorities have alleged the pension fund used sophisticated contracts with counterparties to exploit its tax status for financial gain.
Dutch tax authorities first looked into HOOPP’s trades in response to a news story about “dividend stripping,” which involves buying shares for a short period before a dividend is declared and then selling them back to the original owner, according to court filings.
In 2013, HOOPP’s investment risk committee approved a derivative strategy that sought to capitalize on the fact that foreign pension funds in countries including Canada are entitled to have a 15-per-cent tax on dividend distributions refunded, which other institutions would have to pay, according to documents reviewed by the court.
HOOPP found that it could buy “foreign stocks prior to the payment of dividends,” then sell them to another entity – a bank – shortly after it received the dividend, according to the risk committee’s documents. In the meantime, it would hedge the risk of the stock price changing using an equity swap or call option, keep “a small percentage of the dividend – a percentage less than the withholding tax, and the remaining dividend amount is paid to the other entity.”
HOOPP purchased and sold the shares “over the counter” through brokers, and argued there was no contractual link between its share purchases and the price return swaps it entered into with banks, so the transactions were not “circular,” according to court filings.
But the tax authorities found that HOOPP correspondence showed the pension fund was communicating with various banks, agreeing on “price return swaps” at the time it bought the shares. Those contracts were settled after the record date when HOOPP became eligible to receive the tax-free dividends.
“With this strategy, the interested party wanted to make use of its dividend withholding tax refund position,” the court ruling said, in reference to HOOPP.
HOOPP’s counterparty bank, “which has retained its interest in the shares by means of the price return swap, is on balance compensated an amount corresponding to the amount of the net dividend to be distributed, plus part of the dividend tax withheld from the dividend distribution,” the tax court said.
The Dutch tax inspector initially granted HOOPP refunds between 2015 and 2019 totalling €213.5-million, but later ruled that HOOPP must repay that sum with interest. HOOPP contested that decision but Wednesday’s ruling said the pension fund’s objections “are unfounded.”