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Brussels, 19 December 2002

Taxation of investment funds: infringement procedure against Germany

The European Commission has decided to send an official request for information to Germany regarding what appears to be discriminatory tax treatment of dividends on foreign investment funds. According to information currently available to the Commission, the total amount of dividends on foreign funds is taxable, as compared to only half the amount of dividends on German funds. The Commission is concerned that this treatment will have a negative impact on the ability of foreign funds to sell shares in Germany, particularly since it seems that a recently drafted German bill would, if adopted, apply the same tax discrimination to capital gains. The Commission is therefore sending a request for information in the form of a letter of formal notice, which is the first stage of the infringement procedure provided for in Article 226 of the EC Treaty. The German authorities have two months to reply. Should they fail to give a satisfactory response, the Commission may proceed to the second stage of the infringement procedure and issue a reasoned opinion formally requesting Germany to alter its practices. The Commission may eventually bring a Member State before the Court of Justice for failing to apply European law correctly.

Frits Bolkestein, European Commissioner responsible for taxation issues, said "We cannot establish an integrated capital market by 2005 if discriminatory tax barriers are maintained. The Commission, as guardian of the Treaties, is determined to monitor the situation and, if necessary, take action against any measure still standing in the way of a single market for investment funds in Europe.

Under the new rules on the taxation of dividends, introduced in Germany in October 2000 and applicable from 2001, corporation tax is no longer charged to shareholders' income tax, but companies and their shareholders' are taxed independently. To compensate for this economic double taxation, the corporate tax rate has been reduced by 25% and only half the amount of dividends distributed to shareholders is taxed.

However, it appears that in the case of foreign investment funds the total amount of dividends distributed is taxable.

The Commission is concerned about the apparently discriminatory nature of the reforms applied since 2001, which may restrict the possibilities for foreign investment funds to be sold in Germany and so limit the scope for German investors to transfer their capital abroad.

Background information

In May 1999 the European Commission adopted an action plan setting out policy objectives and specific measures to improve the single market in financial services (see IP/99/327). It suggested indicative priorities and time-scales for legislative and other measures to tackle three strategic objectives, namely ensuring a single market for wholesale financial services, making retail markets open and secure and modernising prudential rules and supervision. It also addressed broader issues relating to an optimal single financial market, including the elimination of tax obstacles and distortions. In March 2000 the Lisbon European Council decided that the Action Plan for financial services must be implemented in its entirety by 2005. For the latest news on its implementation see IP/02/1785.

For current news on infringement cases in all Member States, see:

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