Case C‑35/11

Test Claimants in the FII Group Litigation

v

Commissioners of Inland Revenue and The Commissioners for Her Majesty’s Revenue & Customs

(Reference for a preliminary ruling from the High Court of Justice of England and Wales, Chancery Division)

‛Articles 49 TFEU and 63 TFEU — Payment of dividends — Corporation tax — Case C‑446/04 — Test Claimants in the FII Group Litigation — Interpretation of the judgment — Prevention of economic double taxation — Equivalence of the exemption and imputation methods — Meaning of ‘tax rates’ and ‘different levels of taxation’ — Dividends from third countries’

Summary — Judgment of the Court (Grand Chamber), 13 November 2012

1. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Exemption of nationally-sourced dividends — Taxation of foreign-sourced dividends with set-off of the tax actually paid by the company making the distribution in the Member State in which it is resident — Effective level of taxation of company profits generally lower than the nominal rate of tax — Not permissible — Justification — Need to ensure the cohesion of the tax system — Not justified

   (Arts 49 TFEU and 63 TFEU)

2. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Set-off against the advance tax payable by a resident company receiving nationally-sourced dividends of the amount of advance tax paid by the company making the distribution — Inability of a resident company receiving foreign-sourced dividends to deduct the tax on distributed profits paid by the company making the distribution in the State in which it is resident — Foreign tax paid by a subsidiary — Advance tax paid by the resident parent company — Not permissible

   (Arts 49 TFEU and 63 TFEU)

3. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Exemption from advance corporation tax of resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends — Optional regime for resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends that permits them to recover the advance corporation tax paid — Obligation to pay the advance corporation tax and subsequently to claim repayment — No tax credit for shareholders of those companies — Foreign tax paid by a subsidiary — Advance tax paid by the resident parent company — Not permissible

   (Arts 49 TFEU and 63 TFEU)

4. EU law — Direct effect — National charges incompatible with EU law — Obligation to repay them

5. Freedom of establishment — Free movement of capital — Scope — Tax legislation — Corporation tax — Taxation of dividends — Tax treatment of dividends paid by a company resident in a third country — Treatment not applying exclusively to situations in which the parent company exercises decisive influence over the company making the distribution — Inapplicability of the provisions governing freedom of establishment — Applicability of the provisions governing the free movement of capital

   (Arts 49 TFEU and 63 TFEU)

6. Freedom of establishment — Tax legislation — Corporation tax — National legislation not permitting a resident company to surrender surplus advance tax to subsidiaries not resident and not liable to tax in that Member State — Permissible

   (Art. 49 TFEU)

1.  Articles 49 TFEU and 63 TFEU must be interpreted as precluding legislation of a Member State which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends if it is established, first, that the tax credit to which the company receiving the dividends is entitled under the imputation method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends and, second, that the effective level of taxation of company profits in the Member State concerned is generally lower than the prescribed nominal rate of tax.

   When a nationally-sourced dividend is paid, it is exempt from corporation tax in the hands of the company receiving it, irrespective of the tax paid by the company making the distribution, that is to say, it is also exempt when, by reason of the reliefs available to it, the latter has no liability to tax or pays corporation tax at a rate lower than that which normally applies. By contrast, application of the imputation method to foreign-sourced dividends will lead to an additional tax liability so far as concerns the resident company receiving them if the effective level of taxation to which the profits of the company paying the dividends were subject falls short of the nominal rate of tax to which the profits of the resident company receiving the dividends are subject. Unlike the exemption method, the imputation method therefore does not enable the benefit of the corporation tax reductions granted at an earlier stage to the company paying dividends to be passed on to the corporate shareholder. Consequently, exemption from tax of dividends paid by a resident company and application to dividends paid by a non-resident company of an imputation method which takes account of the effective level of taxation of the profits in the State of origin cease to be equivalent if the profits of the resident company making the distribution are subject in the Member State of residence to an effective level of taxation lower than the nominal rate of tax which is applicable there.

   Such legislation is not justified by the need to ensure the cohesion of the national tax system. Whilst application of the imputation method to foreign-sourced dividends and of the exemption method to nationally-sourced dividends may be justified in order to avoid economic double taxation of distributed profits, it is not, however, necessary, in order to maintain the cohesion of the tax system in question, that account be taken, on the one hand, of the effective level of taxation to which the distributed profits have been subject to calculate the tax advantage when applying the imputation method and, on the other, of only the nominal rate of tax chargeable on the distributed profits when applying the exemption method. National rules which took account in particular, also under the imputation method applicable to foreign-sourced dividends, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less prejudicial to freedom of establishment and the free movement of capital.

   (see paras 46-48, 60-62, 65, operative part 1)

2.  Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which allows a resident company receiving dividends from another resident company to deduct from the amount which the former company is liable to pay by way of advance corporation tax the amount of that tax paid by the latter company, whereas no such deduction is permitted in the case of a resident company receiving dividends from a non-resident company as regards the corresponding tax on distributed profits paid in another Member State, also where:

   —

   the foreign corporation tax to which the profits underlying the distributed dividends have been subject was not or was not wholly paid by the non-resident company paying those dividends to the resident company, but was paid by a company resident in a Member State that is a direct or indirect subsidiary of that non-resident company;

   —	advance corporation tax has not been paid by the resident company which receives the dividends from a non-resident company, but was paid by its resident parent company under a group income election.

   (see paras 67, 82, operative part 2)

3.  Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which, while exempting from advance corporation tax resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends received by them, allows resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permits them to recover the advance corporation tax paid but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment and, secondly, does not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally-sourced dividends. Those provisions of the Treaty also preclude such legislation where:

   —

   the foreign corporation tax to which the profits underlying the distributed dividends have been subject was not or was not wholly paid by the non-resident company paying those dividends to the resident company, but was paid by a company resident in a Member State that is a direct or indirect subsidiary of that non-resident company;

   —	advance corporation tax has not been paid by the resident company which receives the dividends from a non-resident company, but was paid by its resident parent company under a group income election.

   (see paras 67, 82, operative part 2)

4.  EU law must be interpreted as meaning that a parent company resident in a Member State, which in the context of a group taxation scheme has, in breach of the rules of EU law, been compelled to pay advance corporation tax on the part of the profits from foreign-sourced dividends, may bring an action for repayment of that unduly levied tax in so far as it exceeds the additional corporation tax which the Member State in question was entitled to levy in order to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends were subject compared with the nominal rate of tax applicable to the profits of the resident parent company.

   The right to a refund of charges levied by a Member State in breach of EU law is the consequence and complement of the rights conferred on individuals by provisions of EU law prohibiting such charges. The Member State is therefore required in principle to repay charges levied in breach of EU law.

   (see paras 84, 87, operative part 3)

5.  EU law must be interpreted as meaning that a company that is resident in a Member State and has a shareholding in a company resident in a third country giving it definite influence over the decisions of the latter company and enabling it to determine its activities may rely upon Article 63 TFEU in order to call into question the consistency with that provision of legislation of that Member State which relates to the tax treatment of dividends originating in the third country and does not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends.

   On the other hand, since the chapter of the Treaty on freedom of establishment does not contain any provision which extends the application of its provisions to situations concerning the establishment of a company of a Member State in a third country or the establishment of a company of a third country in a Member State, legislation relating to the tax treatment of dividends originating in third countries is not capable of falling within the scope of Article 49 TFEU.

   Thus, where it is apparent from the purpose of such national legislation that it can only apply to those shareholdings which enable the holder to exert a definite influence on the decisions of the company concerned and to determine its activities, neither Article 49 TFEU nor Article 63 TFEU may be relied upon. On the other hand, national rules relating to the tax treatment of dividends from a third country which do not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends must be assessed in the light of Article 63 TFEU.

   (see paras 97-99, 104, operative part 4)

6.  Article 49 TFEU does not preclude legislation of a Member State which allows a resident company to surrender to resident subsidiaries the amount of advance corporation tax paid which cannot be offset against the liability of that company to corporation tax for the current accounting period or previous or subsequent accounting periods, so that those subsidiaries may offset it against their liability to corporation tax, but does not allow a resident company to surrender such an amount to non-resident subsidiaries where the latter are not taxable in that Member State.

   The right to surrender surplus advance corporation tax to subsidiaries ensures that a group of companies that are subject to tax in the same Member State does not, by reason only of that advance taxation, pay tax of an amount exceeding the tax liability of the group in that Member State. The extension of that right to non-resident companies that are not taxable in that Member State would deny the latter the legitimate right to levy additional tax on foreign-sourced dividends paid out of profits which were subject to a nominal rate of tax lower than that applicable in that Member State and would thus jeopardise a balanced allocation of the power to impose taxes between Member States.

   (see paras 106, 110, 111, operative part 5)

Case C‑35/11

Test Claimants in the FII Group Litigation

v

Commissioners of Inland Revenue and The Commissioners for Her Majesty’s Revenue & Customs

(Reference for a preliminary ruling from the High Court of Justice of England and Wales, Chancery Division)

‛Articles 49 TFEU and 63 TFEU — Payment of dividends — Corporation tax — Case C‑446/04 — Test Claimants in the FII Group Litigation — Interpretation of the judgment — Prevention of economic double taxation — Equivalence of the exemption and imputation methods — Meaning of ‘tax rates’ and ‘different levels of taxation’ — Dividends from third countries’

Summary — Judgment of the Court (Grand Chamber), 13 November 2012

1. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Exemption of nationally-sourced dividends — Taxation of foreign-sourced dividends with set-off of the tax actually paid by the company making the distribution in the Member State in which it is resident — Effective level of taxation of company profits generally lower than the nominal rate of tax — Not permissible — Justification — Need to ensure the cohesion of the tax system — Not justified

   (Arts 49 TFEU and 63 TFEU)

2. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Set-off against the advance tax payable by a resident company receiving nationally-sourced dividends of the amount of advance tax paid by the company making the distribution — Inability of a resident company receiving foreign-sourced dividends to deduct the tax on distributed profits paid by the company making the distribution in the State in which it is resident — Foreign tax paid by a subsidiary — Advance tax paid by the resident parent company — Not permissible

   (Arts 49 TFEU and 63 TFEU)

3. Freedom of establishment — Free movement of capital — Tax legislation — Corporation tax — Exemption from advance corporation tax of resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends — Optional regime for resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends that permits them to recover the advance corporation tax paid — Obligation to pay the advance corporation tax and subsequently to claim repayment — No tax credit for shareholders of those companies — Foreign tax paid by a subsidiary — Advance tax paid by the resident parent company — Not permissible

   (Arts 49 TFEU and 63 TFEU)

4. EU law — Direct effect — National charges incompatible with EU law — Obligation to repay them

5. Freedom of establishment — Free movement of capital — Scope — Tax legislation — Corporation tax — Taxation of dividends — Tax treatment of dividends paid by a company resident in a third country — Treatment not applying exclusively to situations in which the parent company exercises decisive influence over the company making the distribution — Inapplicability of the provisions governing freedom of establishment — Applicability of the provisions governing the free movement of capital

   (Arts 49 TFEU and 63 TFEU)

6. Freedom of establishment — Tax legislation — Corporation tax — National legislation not permitting a resident company to surrender surplus advance tax to subsidiaries not resident and not liable to tax in that Member State — Permissible

   (Art. 49 TFEU)

1.  Articles 49 TFEU and 63 TFEU must be interpreted as precluding legislation of a Member State which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends if it is established, first, that the tax credit to which the company receiving the dividends is entitled under the imputation method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends and, second, that the effective level of taxation of company profits in the Member State concerned is generally lower than the prescribed nominal rate of tax.

   When a nationally-sourced dividend is paid, it is exempt from corporation tax in the hands of the company receiving it, irrespective of the tax paid by the company making the distribution, that is to say, it is also exempt when, by reason of the reliefs available to it, the latter has no liability to tax or pays corporation tax at a rate lower than that which normally applies. By contrast, application of the imputation method to foreign-sourced dividends will lead to an additional tax liability so far as concerns the resident company receiving them if the effective level of taxation to which the profits of the company paying the dividends were subject falls short of the nominal rate of tax to which the profits of the resident company receiving the dividends are subject. Unlike the exemption method, the imputation method therefore does not enable the benefit of the corporation tax reductions granted at an earlier stage to the company paying dividends to be passed on to the corporate shareholder. Consequently, exemption from tax of dividends paid by a resident company and application to dividends paid by a non-resident company of an imputation method which takes account of the effective level of taxation of the profits in the State of origin cease to be equivalent if the profits of the resident company making the distribution are subject in the Member State of residence to an effective level of taxation lower than the nominal rate of tax which is applicable there.

   Such legislation is not justified by the need to ensure the cohesion of the national tax system. Whilst application of the imputation method to foreign-sourced dividends and of the exemption method to nationally-sourced dividends may be justified in order to avoid economic double taxation of distributed profits, it is not, however, necessary, in order to maintain the cohesion of the tax system in question, that account be taken, on the one hand, of the effective level of taxation to which the distributed profits have been subject to calculate the tax advantage when applying the imputation method and, on the other, of only the nominal rate of tax chargeable on the distributed profits when applying the exemption method. National rules which took account in particular, also under the imputation method applicable to foreign-sourced dividends, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of the distributed profits and for ensuring the internal cohesion of the tax system while being less prejudicial to freedom of establishment and the free movement of capital.

   (see paras 46-48, 60-62, 65, operative part 1)

2.  Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which allows a resident company receiving dividends from another resident company to deduct from the amount which the former company is liable to pay by way of advance corporation tax the amount of that tax paid by the latter company, whereas no such deduction is permitted in the case of a resident company receiving dividends from a non-resident company as regards the corresponding tax on distributed profits paid in another Member State, also where:

   —

   the foreign corporation tax to which the profits underlying the distributed dividends have been subject was not or was not wholly paid by the non-resident company paying those dividends to the resident company, but was paid by a company resident in a Member State that is a direct or indirect subsidiary of that non-resident company;

   —	advance corporation tax has not been paid by the resident company which receives the dividends from a non-resident company, but was paid by its resident parent company under a group income election.

   (see paras 67, 82, operative part 2)

3.  Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which, while exempting from advance corporation tax resident companies paying dividends to their shareholders which have their origin in nationally-sourced dividends received by them, allows resident companies distributing dividends to their shareholders which have their origin in foreign-sourced dividends received by them to elect to be taxed under a regime which permits them to recover the advance corporation tax paid but, first, obliges those companies to pay that advance corporation tax and subsequently to claim repayment and, secondly, does not provide a tax credit for their shareholders, whereas those shareholders would have received such a tax credit in the case of a distribution made by a resident company which had its origin in nationally-sourced dividends. Those provisions of the Treaty also preclude such legislation where:

   —

   the foreign corporation tax to which the profits underlying the distributed dividends have been subject was not or was not wholly paid by the non-resident company paying those dividends to the resident company, but was paid by a company resident in a Member State that is a direct or indirect subsidiary of that non-resident company;

   —	advance corporation tax has not been paid by the resident company which receives the dividends from a non-resident company, but was paid by its resident parent company under a group income election.

   (see paras 67, 82, operative part 2)

4.  EU law must be interpreted as meaning that a parent company resident in a Member State, which in the context of a group taxation scheme has, in breach of the rules of EU law, been compelled to pay advance corporation tax on the part of the profits from foreign-sourced dividends, may bring an action for repayment of that unduly levied tax in so far as it exceeds the additional corporation tax which the Member State in question was entitled to levy in order to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends were subject compared with the nominal rate of tax applicable to the profits of the resident parent company.

   The right to a refund of charges levied by a Member State in breach of EU law is the consequence and complement of the rights conferred on individuals by provisions of EU law prohibiting such charges. The Member State is therefore required in principle to repay charges levied in breach of EU law.

   (see paras 84, 87, operative part 3)

5.  EU law must be interpreted as meaning that a company that is resident in a Member State and has a shareholding in a company resident in a third country giving it definite influence over the decisions of the latter company and enabling it to determine its activities may rely upon Article 63 TFEU in order to call into question the consistency with that provision of legislation of that Member State which relates to the tax treatment of dividends originating in the third country and does not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends.

   On the other hand, since the chapter of the Treaty on freedom of establishment does not contain any provision which extends the application of its provisions to situations concerning the establishment of a company of a Member State in a third country or the establishment of a company of a third country in a Member State, legislation relating to the tax treatment of dividends originating in third countries is not capable of falling within the scope of Article 49 TFEU.

   Thus, where it is apparent from the purpose of such national legislation that it can only apply to those shareholdings which enable the holder to exert a definite influence on the decisions of the company concerned and to determine its activities, neither Article 49 TFEU nor Article 63 TFEU may be relied upon. On the other hand, national rules relating to the tax treatment of dividends from a third country which do not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends must be assessed in the light of Article 63 TFEU.

   (see paras 97-99, 104, operative part 4)

6.  Article 49 TFEU does not preclude legislation of a Member State which allows a resident company to surrender to resident subsidiaries the amount of advance corporation tax paid which cannot be offset against the liability of that company to corporation tax for the current accounting period or previous or subsequent accounting periods, so that those subsidiaries may offset it against their liability to corporation tax, but does not allow a resident company to surrender such an amount to non-resident subsidiaries where the latter are not taxable in that Member State.

   The right to surrender surplus advance corporation tax to subsidiaries ensures that a group of companies that are subject to tax in the same Member State does not, by reason only of that advance taxation, pay tax of an amount exceeding the tax liability of the group in that Member State. The extension of that right to non-resident companies that are not taxable in that Member State would deny the latter the legitimate right to levy additional tax on foreign-sourced dividends paid out of profits which were subject to a nominal rate of tax lower than that applicable in that Member State and would thus jeopardise a balanced allocation of the power to impose taxes between Member States.

   (see paras 106, 110, 111, operative part 5)