Taxation of outbound dividends: Commission takes steps against Austria,Germany, Italy and Finland
European Commission - IP/07/1152 23/07/2007
Brussels, 23 July 2007
The European Commission has formally requested Austria and Germany to amend their fiscal legislation concerning outbound dividend payments to companies. Both Member States tax dividends paid to foreign companies more heavily than dividends paid to domestic companies. The requests takes the form of a ‘reasoned opinion’ (second step of the infringement procedure provided for in article 226 of the EC Treaty). If the relevant national legislations are not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice. The Commission has also sent requests for information in the form of letters of formal notice (first step of the infringement procedure of Article 226 of the EC Treaty) to Italy and Finland about their rules under which dividends paid to foreign pension funds may be taxed more heavily than dividends paid to domestic pension funds. Italy and Finland are asked to reply within two months.
"The Member States cannot tax dividends paid to shareholders resident elsewhere in the EU more heavily than dividends paid to shareholders resident in their own Member State" said EU Taxation and Customs Commissioner László Kovács. "Such discrimination is contrary to the EC Treaty, as confirmed by the Court of Justice in its judgement on Denkavit of 14 December 2006."
Outbound dividends to companies
The tax rules of Germany and Austria may lead to higher taxation of outbound dividends than of domestic dividends, where outbound dividends are dividends paid by a German company to a foreign shareholder, domestic dividends are dividends paid by a German company to a German shareholder. In particular, while there is in practice a tax exemption of domestic dividends, outbound dividends are subject to withholding taxes ranging from 5 to 25%.
The Commission considers the higher taxation of outbound dividends contrary to the EC Treaty and the EEA Agreement, as it restricts the free movement of capital and the freedom of establishment. The discrimination concerns outbound dividends paid to Member States and to those EEA/EFTA countries which provide appropriate assistance (i.e. exchange of information).
On the same issue the Commission has already decided to refer Belgium, Spain, Italy, the Netherlands and Portugal to the European Court of Justice on 22 January 2007 (IP/07/66).
In the Denkavit ruling of 14 December 2006 (Case C-170/05) the Court confirmed the principle that outbound dividends cannot be subject to higher taxation in the source State (i.e. the State from where the dividends are paid) than domestic dividends. However, according to this ruling, it may be relevant to take into account whether the State of residence of the shareholder gives a tax credit to the shareholder for the withholding tax levied by the source State. Up to now, the Commission followed the same approach as the EFTA Court in the Fokus Bank case (Case E-1/04), where it explicitly ruled that it was not relevant whether a tax credit was given in the State of residence.
Outbound dividends to pension funds
All Member States subject pension funds to different tax rules than companies. The situation regarding pension funds and companies are therefore assessed separately.
For Italy and Finland the issue concerns outbound dividends paid to foreign pension funds. In both Member States domestic pension funds pay some tax on their dividends, but the withholding taxes on outbound dividends appear higher than the tax levied on domestic dividends.
If a Member State levies a higher tax on dividends paid to foreign pension funds this may dissuade these funds from investing in its territory. Equally, companies established in that Member State might face increased difficulties to attract capital from foreign pension funds. The higher taxation of foreign pension funds may thus result in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. The Commission is not aware of any justification for such a restriction.
Concerning the higher taxation of foreign pension funds, the Commission has already sent letters of formal notice to the Czech Republic, Denmark, Spain, Lithuania, the Netherlands, Poland, Portugal, Slovenia and Sweden on 7 May 2007 (IP/07/616).
Following up to the complaints it received, the Commission is still examining the situation in other Member States. This may result in the opening of further infringement procedures.
The Commission's Communication of 19 December 2003 (IP/04/25) on the taxation of dividends received by individuals provides an overview of issues related to dividend taxation.
The Commission has no estimate of the amounts of tax revenue at stake. They may vary from Member State to Member State, depending on the Member States' tax rules and depending on how much cross-border shareholdings there are.
The Commission's cases reference numbers are Germany (2004/4349), Austria
(2004/4346), Italy (2006/4094) and Finland (2006/4096).