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Taxation of outbound dividends and interest: Commission takes steps against Lithuania and Latvia

European Commission - IP/08/334   28/02/2008

Other available languages: FR DE LT LV

IP/08/334

Brussels, 28 February 2008

Taxation of outbound dividends and interest: Commission takes steps against Lithuania and Latvia

The European Commission has sent a reasoned opinion (the second step of the infringement procedure of Article 226 of the EC Treaty) to Lithuania about its rules under which interest paid to foreign companies, investment funds and pension funds is taxed more heavily than interest paid to comparable domestic recipients. It has also sent a request for information in the form of letter of formal notice (the first step of the infringement procedure of Article 226 of the EC Treaty) to Latvia about its rules under which dividends paid to non-resident individuals may be taxed more heavily than dividends paid to residents. Lithuania and Latvia are asked to reply within two months.

Outbound dividends and interest paid to companies, investment funds and pension funds

After receiving a letter of formal notice (see IP/07/616), Lithuania notified the Commission that the Government had approved a change to the rules related to taxation of dividends paid to non-resident recipients. Therefore, the reasoned opinion sent today deals only with the fact that a higher level of taxation is applied to interest paid by Lithuanian companies to non-resident recipients (companies, investment funds and pension funds) than to resident recipients.

If a Member State levies a higher tax on interest paid to foreign investors, this may dissuade these investors from investing in its companies. Equally, companies established in that Member State might face increased difficulties in attracting capital from non-residents. The higher taxation of foreign companies, investment funds and pension funds may thus result in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. 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.

Outbound dividends to individuals

The letter of formal notice to Latvia concerns the taxation of dividends paid to non-resident individuals.

Latvia exempts domestic dividends paid to resident individuals from taxation. However, dividends paid to non-resident individuals are subject to a withholding tax of 10%.

Commission considers that there may be a breach of the free movement of capital, as protected by Article 56 of EC Treaty and Article 40 EEA.

Background

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. In other cases concerning outbound dividend and interest payments, the Commission has already sent a number of letters of formal notice and reasoned opinions (IP/08/143, IP/07/616, IP/07/1152 and IP/06/971).

Following up on 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 cases reference numbers are 2007/2458 for Latvia and 2006/4095 for Lithuania.

For the press releases issued on infringement procedures in the taxation or customs area see:

http://ec.europa.eu/taxation_customs/common/infringements/infringement_cases/index_en.htm

For the latest general information on infringement measures against Member States see:

http://ec.europa.eu/community_law/infringements/infringements_en.htm


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