Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends
(Art. 56(1) EC)
A Member State that makes the exemption of dividends distributed by companies resident in that Member State subject to a higher level of holding by recipient companies in the capital of the distributing companies for recipient companies resident in another Member State than for recipient companies resident in that Member State fails to fulfil its obligations under Article 56(1) EC.
Such a difference in treatment is capable of dissuading companies established in other Member States from investing in the Member State concerned and therefore constitutes a restriction of the free movement of capital, prohibited, in principle, by Article 56(1) EC.
Such a difference in treatment cannot be justified by the difference in situation of the resident companies and companies residing in another Member State. It is true that, in the context of measures laid down by a Member State in order to prevent or mitigate the imposition of a series of charges to tax on, or economic double taxation of, profits distributed by a resident company, resident shareholders receiving dividends are not necessarily in a comparable situation to that of shareholders receiving dividends resident in another Member State. However, once a Member State, unilaterally or by way of a convention, imposes a charge to income tax not only on resident shareholders but also on non-resident shareholders in respect of dividends which they receive from a resident company, the position of those non-resident shareholders becomes comparable to that of resident shareholders. It is solely because of the exercise by that State of its power of taxation that, irrespective of any taxation in another Member State, a risk of a series of charges to tax or economic double taxation may arise. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction of freedom of establishment prohibited, in principle, by Article 56 EC, the State in which the company making the distribution is resident is obliged to ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax, non-resident shareholder companies are subject to the same treatment as resident shareholder companies. In applying the rules cited above, a Member State chooses to exercise its power of taxation over dividends distributed to companies established in other Member States. Non-resident recipients of those dividends thus find themselves in a situation comparable to that of resident companies as regards the risk of economic double taxation of dividends distributed by resident companies, so that non-resident recipients may not be treated differently from resident recipients.
Furthermore, although the disadvantages arising from the parallel exercise of the powers of taxation by different Member States, to the extent that such an exercise is not discriminatory, do not constitute restrictions prohibited by the Treaty, that is not the case where the unfavourable treatment of dividends distributed to recipient companies residing in another Member State arises solely from the exercise of the Member State of residence of the distributing company of its powers of taxation and is attributable to it.
Moreover, that difference in treatment is not called into question by the application of conventions for the avoidance of double taxation. Admittedly, it is not inconceivable that a Member State might succeed in ensuring compliance with its obligations under the Treaty through the conclusion of a convention for the avoidance of double taxation with another Member State. However, it is necessary for that purpose that application of such a convention should allow the effects of the difference in treatment under national legislation to be compensated for. Thus, it is only in a situation in which the tax withheld at source under national legislation can be set off against the tax due in the other Member State in the full amount of the difference in treatment arising under the national legislation that the difference in treatment between dividends distributed to companies established in other Member States and dividends distributed to resident companies disappears. In order to attain the objective of neutralisation, the application of a method of deduction provided for in conventions for the avoidance of double taxation should therefore enable the tax on dividends levied by that Member State to be deducted in its entirety from the tax due in the Member State of residence of the recipient company, so that if the dividends received by that company were ultimately taxed more heavily than the dividends paid to companies resident in Spain, that heavier tax burden could no longer be attributed to the Kingdom of Spain, but to the State of residence of the company receiving dividends which exercised its power to impose taxes.
In that connection, when the majority of conventions for the avoidance of double taxation concluded by a Member State provide that the amount deducted or set off in respect of tax withheld in that State may not exceed the fraction of the tax of the Member State of residence paid by the recipient company, calculated before the deduction, corresponding to taxable income in the first Member State, the difference in treatment may be neutralised only if the dividends from the Member State concerned are sufficiently taxed in the other Member State. If those dividends are not taxed, or are not sufficiently taxed, the sum withheld in the Member State concerned or a part thereof cannot be deducted. In that case, the difference in treatment arising from the application of national legislation cannot be compensated for by applying provisions of the double taxation convention. That finding applies even where the conventions for the avoidance of double taxation by the Member State of residence of the recipient company do not provide for the deduction to be limited to the fraction of the tax paid by the company receiving dividends, calculated before the deduction, corresponding to income taxable in the Member State of residence of the distributing company, but provide that the tax levied in that Member State is to be deducted from tax relating to that income in the Member State of residence of the recipient company. If those dividends are not taxed or are not sufficiently taxed, the sum withheld in the Member State of residence of the distributing company or a part thereof cannot be deducted. The choice as to whether to tax income from the Member State of residence of the distributing company in the other Member State or the level at which it is to be taxed depends not on the Member State of residence, but on the tax rules laid down by that other Member State. Therefore, the deduction of tax withheld from the tax due in that other Member State pursuant to the provisions of conventions for the avoidance of double taxation does not, in all cases, enable the difference in treatment arising from the application of national legislation to be neutralised.
(see paras 43, 50-53, 56-64, 67, 69, operative part)