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Dividend taxation of individuals

In the light of the case law of the European Court of Justice, the Commission has concluded that higher taxes cannot be levied on inbound dividends than on domestic dividends or on dividends paid to non-residents than on those paid to residents. Consequently, it provides the Member States and accession countries with guidance on how to ensure their systems of dividend taxation of individuals are compatible with the EC Treaty.


Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee of 19 December 2003 on dividend taxation of individuals in the Internal Market [COM(2003) 810 final - Not published in the Official Journal].


This Communication looks at the taxation of dividends paid to individual portfolio investors since this is an area where there are the greatest problems (taxation of dividends paid to companies is largely governed by the Parent Subsidiary Directive). It provides guidance on the impact on Community law of the methods of taxation of dividends used by the Member States to help them ensure that their systems are compatible with the requirements of the Internal Market. It also discusses the economic implications of integration systems.

Member States use different systems to tax dividends paid to individuals. In the case of domestic dividends most Member States use an imputation or schedular system to avoid or reduce economic double taxation resulting in corporation tax and then income tax being levied on the same income.

If Member States apply different tax treatment to domestic, inbound or outbound dividends in such systems, this may restrict cross-border investment, lead to a fragmentation of capital markets in the European Union and be contrary to Article 56 of the EC Treaty.

In its case law the European Court of Justice (ECJ) has examined this question in the light of the rules governing the free movement of capital. In the main case considered in this Communication (Case C-35/98, Verkooijen, 6 June 2000, ECR 2000 I-4071) the Court ruled that a measure providing for different tax treatment of domestic and inbound dividends was clearly incompatible with the EC Treaty.

The Commission considers that an analysis of this case law allows some fundamental conclusions to be drawn about the design of the taxation systems: Member States cannot levy higher taxes on inbound dividends than on domestic dividends.

The Commission underlines that it is possible to provide for methods of tax relief that are compatible with the EC Treaty while maintaining possibilities to tax dividends in a relatively straightforward way. A number of Member States have already introduced such methods and others are in the process of doing so. These changes should help to optimise the allocation of capital in the Internal Market even though full neutrality remains out of reach in the absence of tax harmonisation.

Member States should adopt a coordinated approach to ensure a rapid removal of the tax obstacles that exist, thereby creating a more stable and investment-friendly environment and removing the uncertainty created by potential legal conflict and litigation.

The Commission wishes to promote this coordination in the interests of both individual investors and businesses and, above all, in the interests of ensuring maximum efficiency of the internal market with its consequent positive effects on the competitiveness of the Union in the global marketplace.

If Member States do not find a solution despite the clear logic of such an approach, the Commission, in line with its responsibility as guardian of the Treaty, will take the necessary steps to ensure effective compliance with the Treaty, including referring the matter to the ECJ on the basis of Article 226 of the Treaty.


Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee of 23 May 2001 on tax policy in the European Union - Priorities for the years ahead [COM(2001) 260 final - Not published in the Official Journal].

In this Communication the Commission sets out the general objectives of future Community tax policy and identifies a number of specific priorities for direct and indirect taxation. The Commission is considering using more appropriate instruments than harmonisation of legislation to achieve these objectives. It has undertaken not only to make recommendations to provide guidance for the Member States in applying the EC Treaty and interpreting the ECJ's case law but also to take a more proactive and targeted approach to legal procedures where it considers that Member States' tax measures are incompatible with Community law.

Commission Communication of 11 May 1999 implementing the framework for financial markets: action plan [COM(1999) 232 final - Not published in the Official Journal].

The action plan for financial services proposes policy objectives and specific measures to improve the single market in financial services. It advocates the abolition of restrictions on individuals' cross-border shareholdings.

Last updated: 04.05.2007
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