Brussels, 26 June 2008
Taxation of dividends: Commission formally requests the Czech Republic and Italy to end discriminatory taxation of foreign pension funds
The European Commission has sent reasoned opinions (the second step of the infringement procedure of Article 226 of the EC Treaty) to the Czech Republic and Italy about their rules under which dividends paid to foreign pension funds are taxed more heavily than dividends paid to domestic pension funds. For the Czech Republic, the reasoned opinion also concerns discriminatory taxation of interest and real estate income received by foreign pension funds. The two Member States are asked to reply within two months.
"It is a high priority for the Commission to eliminate tax discrimination in pension funds." said EU Taxation and Customs Commissioner László Kovács. "The fourteen infringement cases that the Commission has opened so far show the Commission's determination to create a level playing field for pension investments, to the benefit of the Single Market and of all citizens with an occupational pension."
Outbound dividends to pension funds
Italy levies a tax of 11% on dividends received by Italian pension funds, whereas dividends paid from Italy to pension funds established elsewhere may be subject to an Italian withholding tax at an effective rate of 15%.
The Czech Republic levies a withholding tax of 15 % on dividends paid both to domestic and foreign pension funds. However, domestic pension funds do not effectively pay tax on these dividends: they can either credit the withholding tax against corporation tax payable on other income (dividend income is not part of their corporate tax base), or they get a refund of the withholding tax. Pension funds established in other Member States or in the EEA/EFTA States cannot get a refund of the 15% withholding tax on the dividends paid to them. The result is that Czech pension funds are effectively exempt from taxation on Czech dividends, whereas pension funds from elsewhere in the EU or in the EEA/EFTA States pay tax at a rate of 15%.
The reasoned opinion sent to the Czech Republic also covers discriminatory taxation of interest paid to pension funds established in other Member States or in the EEA/EFTA States and real estate income received by them. Czech pension funds are not subject to a withholding tax on the interest they receive, nor is interest included in their tax base. Interest paid to pension funds established elsewhere in the EU or in the EEA/EFTA States is subject to a withholding tax of 15%. In addition, Czech funds pay 5% tax on income from real estate, whereas foreign funds pay 21%.
The higher tax on income from dividends, on interest and on real estate income, received by foreign pension funds may dissuade these funds from investing in the Member State levying the higher tax. Equally, companies established in these Member States may face difficulties in attracting capital from foreign pension funds. The higher taxation of foreign pension funds thus results in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. In the case of controlling participations by the foreign pension funds, it may also result in a restriction of the freedom of establishment, protected by Article 43 EC and Article 34 EEA. The Commission is not aware of any justification for such restrictions.
Concerning the higher taxation of dividends paid to 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 (IP/07/616 of 7 May 2007), to Italy and Finland (IP/07/1152 of 23 July 2007) to Germany and Estonia (IP/08/143 of 31 January 2008) and Austria (on 23 November 2007) and reasoned opinions to Spain and Portugal (IP/08/712 of 6 May 2008).
Following up on 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's cases reference numbers are 2006/4102 for the Czech Republic and 2006/4094 for Italy.
For the press releases issued on infringement procedures in the taxation or customs area see:
For the latest general information on infringement measures against Member States see: