Keywords
Summary

Keywords

1. Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends – Receiving company’s holding in the capital of the distributing company below the threshold laid down in Directive 90/435

(Art. 56(1) EC; Council Directive 90/435, Art. 3(1)(a))

2. International agreements – Agreement on the European Economic Area – Free movement of capital – National legislation taxing dividends distributed to a non-resident company more heavily than dividends distributed to a resident company – Not permissible

(EEA Agreement, Art. 40)

Summary

1. A Member State fails to fulfil its obligations under Article 56(1) EC if it taxes dividends distributed to companies established in other Member States, where the threshold for a parent company’s holding in the capital of its subsidiary laid down in Article 3(1)(a) of Directive 90/435 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended by Directive 2003/123, is not reached, more heavily in economic terms than dividends distributed to companies established in its territory.

In respect of shareholdings not covered by Directive 90/435, it is indeed for the Member States to determine whether, and to what extent, economic double taxation or a series of charges to tax on distributed profits is to be avoided and, for that purpose, to establish, either unilaterally or by conventions concluded with other Member States, procedures intended to prevent or mitigate such economic double taxation or series of charges to tax. However, this does not of itself mean that they may impose measures that contravene the freedoms of movement guaranteed by the EC Treaty.

As soon as a Member State, either unilaterally or by way of a convention, imposes a charge to tax on the income not only of resident companies but also of non-resident companies from dividends which they receive from a resident company, the situation of those non-resident companies becomes comparable to that of resident companies. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction on the free movement of capital prohibited in principle by Article 56 EC, the State in which the distributing company is resident must ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax or economic double taxation, non-resident companies are subject to the same treatment as resident companies.

Such a restriction is not justified by overriding reasons in the public interest. A justification connected with the need to safeguard the balanced allocation between the Member States of the power to tax may indeed be accepted, in particular, where the system in question is designed to prevent conduct capable of jeopardising the right of a Member State to exercise its powers of taxation in relation to activities carried on in its territory. However, where a Member State has chosen not to tax recipient companies established in its territory in respect of income of this kind, it cannot rely on the need to ensure a balanced allocation between the Member States of the power to tax in order to justify the taxation of recipient companies established in another Member State. A reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is, in principle, contrary to a fundamental freedom. Nor is such a measure justified by reasons connected with the coherence of the tax system. The argument that the tax advantage concerned is compensated by a tax disadvantage cannot succeed, since there is no direct link between the exemption from withholding tax on dividends distributed to resident companies and the taxation of those dividends, whether as income of the shareholders of those companies or on the occasion of a possible future taxable transaction.

(see paras 48, 56-57, 77-78, 83, 86, 92, 94, operative part 1)

2. A Member State fails to fulfil its obligations under Article 40 of the Agreement on the European Economic Area (EEA) if it taxes dividends distributed to companies established in Iceland and Norway more heavily in economic terms than dividends distributed to companies established in its territory.

While restrictions of the free movement of capital between nationals of States party to the EEA Agreement must be assessed in the light of Article 40 of and Annex XII to that agreement, those provisions have the same legal scope as the substantially identical provisions of Article 56 EC.

(see paras 96, 99, operative part 2)