Keywords

Summary



Keywords

1. Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends

(Art. 56(1) EC)

2. International agreements – Agreement creating the European Economic Area – Freedom of establishment – Free movement of capital – Restrictions – Tax legislation – Corporation tax – Taxation of dividends

(EEA Agreement, Arts 31 and 40)

Summary

1. A Member State which subjects dividends distributed to companies established in other Member States to a less favourable tax regime than that applied to dividends distributed to resident companies, by exempting from taxation, in the amount of 95%, dividends distributed to resident companies and subjecting dividends distributed to companies established in other Member States to a withholding at source at the rate of 27%, part of that sum being capable of being subsequently repaid on application, fails to fulfil its obligations under Article 56(1) EC.

Such a difference in treatment is not called into question by reason of the application of conventions for the avoidance of double taxation. Whilst the possibility cannot be excluded that a Member State might succeed in ensuring compliance with its obligations under the Treaty by concluding a convention for the avoidance of double taxation with another Member State, it is necessary for that purpose that application of the double taxation convention allow the effects of the difference in treatment under national legislation to be compensated for. The difference in treatment between dividends distributed to companies established in other Member States and those distributed to resident companies does not totally disappear unless the tax withheld at source under national legislation can be set off against the tax due in the other Member State in the full amount of the difference in treatment arising under the national legislation. Where such a set-off against the tax due in the other Member State of the tax withheld at source is not guaranteed by the legislation in question, and the choice as to whether to tax income from the Member State concerned in the other Member State, or the level at which it is to be taxed, depends not on that State but on the tax rules laid down by the other Member State, set-off of the tax withheld at source against the tax due in the other Member State, pursuant to the provisions of conventions for the avoidance of double taxation, does not allow in all cases for the difference in treatment arising from the application of national legislation to be compensated for.

Nor is that difference in treatment called into question on the ground that account must be taken of the national taxation system as a whole, the objective of which is to ensure that, directly or indirectly, the natural persons who are the final beneficiaries of dividends are taxed, and in particular of the fact that a natural person who is resident and a shareholder is subject to personal income tax, so that the level of taxation between a shareholder who is a natural person and a resident and a non-resident shareholder is in reality equivalent. Such an approach amounts to comparing regimes and situations which are not comparable, namely, on the one hand, physical persons who receive dividends and their income tax regime, and on the other, capital companies receiving outgoing dividends and the withholding at source which is levied by the Member State concerned. It is irrelevant in that respect that the legislation of that State is designed to correct a possible imbalance at the level of the taxation of physical persons who hold shares in the companies to which the dividends are paid.

Such a difference in treatment is likely to deter companies established in other Member States from making investments in the Member State in question and therefore constitutes a restriction on the free movement of capital, prohibited in principle by Article 56(1) EC.

It is true that, in the context of measures laid down by a Member State in order to prevent or mitigate the imposition of a series of charges to tax on, or the economic double taxation of, profits distributed by a resident company, resident shareholders receiving dividends are not necessarily in a situation which is comparable to that of shareholders receiving dividends who are resident in another Member State. However, as soon as a Member State, either unilaterally or by way of a convention, imposes a charge to tax on the income, not only of resident shareholders, but also of non-resident shareholders, from dividends which they receive from a resident company, the situation of those non-resident shareholders becomes comparable to that of resident shareholders. It is solely because of the exercise by that State of its taxing powers that, irrespective of any taxation in another Member State, a risk of a series of charges to tax or economic double taxation may arise. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction on the free movement of capital prohibited, in principle, by Article 56 EC, the State in which the company making the distribution is resident is obliged to ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax or economic double taxation, non-resident shareholder companies are subject to the same treatment as resident shareholder companies. Thus, where that Member State has chosen to exercise its taxing power over dividends distributed to companies established in other Member States, non-resident recipients of those dividends find themselves in a situation comparable to that of residents as regards the risk of economic double taxation of dividends distributed by resident companies, so that non-resident recipients cannot be treated differently from resident recipients.

The less favourable treatment in question cannot be justified by the need to ensure coherence of the tax system or the maintenance of a balanced distribution of the power to tax. Nor can it be justified having regard to the fight against tax evasion. Such justification is permissible only if it concerns purely artificial contrivances, the aim of which is to circumvent tax law, so that any general presumption of evasion is excluded. In the present case, all dividends distributed to companies established in other Member States are generally made subject to a less favourable tax regime. Moreover, Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation may be invoked by a Member State in order to obtain from the competent authorities of another Member State all the information necessary to enable it correctly to establish the amount of the taxes covered by that directive. The less favourable treatment which the national legislation in question imposes on dividends distributed to companies established in other Member States therefore constitutes a restriction on the free movement of capital incompatible with Article 56(1) EC.

(see paras 32, 36-40, 42-45, 51-54, 56, 58-61, 64, operative part 1)

2. There is no breach of obligations under Articles 31 and 40 of the Agreement on the European Economic Area (EEA) by a Member State which subjects dividends distributed to companies established in other Member States to a less favourable tax regime than that applied to dividends distributed to resident companies, by exempting from taxation, in the amount of 95%, dividends distributed to resident companies and subjecting dividends distributed to companies established in other Member States to a withholding at source at the rate of 27%, part of that sum being capable of being subsequently repaid on application.

It is true that the less favourable treatment which the national legislation in question accords to dividends distributed to companies established in States party to the EEA Agreement constitutes a restriction on the free movement of capital for the purposes of Article 40 of the EEA Agreement, and on the freedom of establishment for the purposes of Article 31 of that Agreement.

However, that restriction is justified by the overriding reason in the public interest regarding the fight against tax evasion. The case-law concerning restrictions on the exercise of freedom of movement within the Community cannot be transposed in its entirety to movements of capital between Member States and non-member countries, since such movements take place in a different legal context. In that respect, the framework of cooperation between the competent authorities of the Member States established by Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation does not exist between the latter and the competent authorities of a non-member State when the latter has not entered into any undertaking of mutual assistance. In the absence of any provision for exchange of information with a State party to the EEA Agreement, and where conventions for the avoidance of double taxation signed with other States party to the EEA Agreement do not contain provisions laying down an obligation to supply information, the national legislation at issue must be regarded as justified in relation to States party to the EEA Agreement for the overriding reason in the public interest concerning the fight against tax evasion, and as appropriate to ensure the realisation of the objective in question without going beyond what it necessary in order to attain it.

(see paras 67-72, 74-75)