Brussels, 31 January 2008
Taxation of outbound dividends: Commission takes steps against Germany, Estonia and the Czech Republic
The European Commission has sent requests for information in the form of letters of formal notice (the first step of the infringement procedure of Article 226 of the EC Treaty) to Germany and Estonia about their rules under which dividends (and in the case of Germany also interest) paid to foreign pension funds may be taxed more heavily than dividends (and interest) paid to domestic pension funds. It also sent a letter of formal notice to the Czech Republic about its rules under which dividends paid to foreign companies are taxed more heavily than dividends paid to domestic companies. Germany, Estonia and the Czech Republic are asked to reply within two months.
"These letters of formal notice are part of a sustained action by the European Commission to eliminate discriminatory taxation of dividends paid to shareholders resident elsewhere in the EU and EEA" said EU Taxation and Customs Commissioner László Kovács.
Outbound dividends to pension funds
Pension funds are usually subject to different tax rules than companies. The tax rules on dividends paid to pension funds and dividends paid to companies are therefore assessed separately.
In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate or the "Pensionskassen" can benefit from a partial refund of German withholding taxes. However, similar institutions established elsewhere in the European Economic Area (Iceland, Norway and Liechtenstein) cannot benefit from such a reduced rate or partial refund.
Moreover, for another category of pension institution, the "Pensionsfonds", the dividends received are taxed on a net basis. That means that they can deduct any costs related to their investment, such as interest they pay to their creditors. However, dividends paid from Germany to similar foreign institutions are subject to a withholding tax on the gross dividend, without the possibility to deduct any costs.
The same rules apply to interest payments paid to "Pensionskassen" and to "Pensionsfonds", so the letter of formal notice to Germany also covers the taxation of interest paid to foreign pension institutions.
In Estonia dividends paid by Estonian companies to Estonian pension funds are not subject to tax, whereas dividends paid to non-resident pension funds are subject to a withholding tax of 22%.
If a Member State levies a higher tax on dividends (or interest) paid to foreign pension funds this may dissuade these funds from investing in its companies. Equally, companies established in that Member State might face increased difficulties in attracting 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.
In the case of interest payments, it may also result in a restriction of the freedom to provide services, protected by Article 49 EC and Article 36 EEA. The Commission is not aware of any justification for such restrictions.
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 (IP/07/616 of 7 May 2007) and to Italy and Finland (IP/07/1152 of 23 July 2007).
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.
Outbound dividends to companies
The letter of formal notice to the Czech Republic concerns the taxation of dividends paid to companies resident in Iceland.
The Czech Republic exempts domestic dividends paid to parent companies that hold a participation of 20% or more for at least two years. Dividends paid to Iceland are subject to a withholding tax of 15%, regardless of the size of the participation.
Only in the case of Iceland does the Commission consider that there may be a breach of the freedom of establishment and the free movement of capital, as protected by Articles 31 and 40 EEA. There is no discrimination of dividends paid to other Member States or to Norway.
Dividends paid to Liechtenstein are also subject to a withholding tax of 15%, but the Commission is of the opinion that the different treatment of dividends paid to Liechtenstein is justified by the need to ensure fiscal supervision for the Czech Republic, since there is no exchange of information with Liechtenstein.
Concerning the higher taxation of dividends paid to companies 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). The Commission sent reasoned opinions to Luxembourg (IP/06/1060 of 25 July 2006), Germany and Austria (IP/07/1152 of 23 July 2007). The Commission closed the infringement procedure against Latvia on the higher taxation of dividends paid to foreign companies (IP/07/66 of 22 January 2007). Latvia eliminated the discrimination on 12 June 2007.
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 Estonia, (2006/4101), Germany (2006/4098) and Czech Republic (2005/4752).
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: