Case C-319/02

Proceedings brought by

Petri Manninen

(Reference for a preliminary ruling from the Korkein hallinto-oikeus)

(Income tax – Tax credit for dividends paid by Finnish companies – Articles 56 EC and 58 EC – Cohesion of the tax system)

Summary of the Judgment

Free movement of capital – Restrictions – Tax credit granted to taxpayers in respect of dividends paid by limited liability companies – Restriction to national companies – Not permissible – Justification – None

(Arts 56 EC and 58 EC)

Articles 56 EC and 58 EC preclude national legislation whereby the entitlement of a fully-taxable person in a Member State to a tax credit on dividends paid to him by limited companies, which offsets the corporation tax due by those companies against the tax due from the shareholder by way of income tax on revenue from capital, is excluded where those companies are not established in that State.

Such tax legislation constitutes a restriction on the free movement of capital in that it has the effect of deterring fully-taxable persons in the Member State concerned from investing their capital in companies established in another Member State. It also has a restrictive effect as regards companies established in other Member States in that it constitutes an obstacle to their raising capital in the Member State concerned.

That legislation cannot be justified by an objective difference in situation capable of giving rise to a difference in tax treatment in accordance with Article 58(1)(a) EC. In the face of a tax rule which aims to prevent double taxation of the profits distributed by the company in which the investment is made – corporation tax and then income tax – shareholders who are fully taxable in the Member State concerned find themselves in a comparable situation, whether they receive dividends from a company established in that Member State or from a company established in another Member State, since in both cases the dividends are, apart from the tax credit, capable of being subjected to double taxation.

Nor can that legislation be regarded as an emanation of the principle of territoriality, since that principle does not preclude the granting of a tax credit in respect of dividends paid by companies established in other Member States. In any event, having regard to Article 58(1)(a) EC, the principle of territoriality cannot justify different treatment of dividends distributed by companies established in the Member State concerned and those paid by companies established in other Member States, if the categories of dividends concerned by that difference in treatment share the same objective situation.

Furthermore, even if that tax legislation is based on a link between the tax advantage and the offsetting tax levy, in providing that the tax credit granted to the shareholder fully taxable in the Member State concerned is to be calculated by reference to the corporation tax due from the company established in that Member State on the profits which it distributes, such legislation does not appear to be necessary in order to preserve the cohesion of the national tax system. Having regard to the objective of preventing double taxation, the granting to a shareholder who holds shares in a company established in one Member State of a tax credit calculated by reference to the corporation tax owed by that company in that Member State would not threaten the cohesion of the national tax system and would constitute a measure less restrictive of the free movement of capital.

As for the reduction in tax receipts in relation to dividends paid by companies established in other Member States, this cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is contrary to a fundamental freedom.

(see paras 20, 22-24, 32-36, 38-39, 44-46, 49, 55, operative part)