Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Dividend taxation of individuals in the Internal Market
Date: 2003-12-19
Institutions: European Commission
Subjects: company with share capital, share, tax on profits of self-employment, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 19.12.2003
COM(2003) 810 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL,
THE EUROPEAN PARLIAMENT AND THE EUROPEAN ECONOMIC AND
SOCIAL COMMITTEE

Dividend taxation of individuals in the Internal Market

.

EN

  EN

1. 

INTRODUCTION

the  Communication1  accompanying 

In 
the
Commission  proposed  to  develop  guidance  on  important  ECJ  rulings  and  to  co-
ordinate 
the
Commission. The Communication specifically mentioned the Verkooijen ruling3 on
dividend taxation as important for the design of Member States’ tax systems.

implementation  via  appropriate  Communications 

the  Company  Taxation  Study2 

from 

their 

The  Ruding  report  of  1992  had  already  highlighted  that  “the  manner  in  which
Member  States  currently  provide  relief  for  the  double  taxation  of  corporate  profits
distributed to individual shareholders in the form of dividends constitutes a source of
discrimination  against  cross-border  investment  flows”  and  stated  that  “such
discrimination tends to fragment capital markets in the Community”4. Elimination of
this  discrimination  is  essential  to  increase  the  competitiveness  of  EU  financial
markets  and  bring  greater  market  liquidity,  more  rational  allocation  of  capital,  and
greater choice for investors, all key objectives of the Financial Services Action Plan5.

A  better  functioning  single  market  for  equity  will  also  help  to  achieve  the  Lisbon
goal of becoming "the most competitive and dynamic knowledge-based economy in
the  world  by  the  end  of  the  decade".  Finally,  it  will  help  citizens  to  deal  with  the
effects of demographic developments on pension provision, as the higher returns on
such a market will help them to provide for their old age.

This Communication focuses on the taxation of the dividends received by individual
shareholders who are portfolio investors, as this is the area that is most problematic
in practice6. It provides guidance on the implications of Community law for Member
States’ dividend taxation systems, to help Member States to ensure that their systems
are  compatible  with  the  requirements  of  the  Internal  Market.  It  also  examines  the
economic  effects  of  integration  systems  that  are  compatible  with  the  Treaty
principles regarding the free movement of capital.

1

2

3

4

5

6

The Commission Company Tax Communication, COM(2001) 582 final,  “Towards an internal  market
without tax obstacles”.
SEC(2001)  1681,  “Company  taxation  in  the  internal  market”,  a  Commission  staff  working  paper
released on 23 October 2001, available on the Commission’s website under the address:
http://europa.eu.int/comm/taxation_customs/publications/official_doc/sec/sec.htm
Case C-35/98 Verkooijen [2000] ECR I-4071.
Report  of  the  Committee  of  Independent  Experts  on  Company  taxation  (the  Ruding  Report),
March 1992, pages 207-208.
COM(1999) 232 final of 11 May 1999.
Portfolio investors are investors  who do not aim to influence the  management of the target company.
The taxation of dividends received by companies is to a large extent covered by the Parent-Subsidiary
Directive (Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable
in the case of parent companies and  subsidiaries  of  different  Member  States,  OJ  L  225  of  20  August
1990), which provides for exemption of withholding taxes on the payment of qualifying dividends and
credit or exemption in the hands of the company receiving them.

2

 
                                                
2. 

THE TAXATION OF DIVIDENDS IN THE INTERNAL MARKET

2.1. 

The taxation of dividends

2.1.1.  General

Different levels of taxation should be distinguished, when considering the taxation of
dividends. The first is the corporate taxation of the company’s profits at the level of
the company. The second is the taxation of the shareholder, subdivided in two parts:

a)  Any withholding tax levied on the dividends paid by the  company on behalf of

the shareholder at the moment the dividends are paid out.

b)  Income taxation at the level of the individual shareholder receiving the dividends.

2.1.2.  Economic double taxation

Economic double taxation arises when the same income is taxed twice in the hands
of two different taxpayers.  In the  case of dividends, economic double taxation may
arise when first the company is subject to corporation tax and then the shareholder is
subject to income tax on the distributed profits, i.e. the dividends.

2.1.3. 

International juridical double taxation

International juridical double taxation arises when two States tax the same taxpayer
on the same income. In the case of dividends, international juridical double taxation
may occur when the shareholder first suffers a withholding tax on his dividend in one
State  and  then  income  tax  in  another  State.  Distributed  profits  of  companies  may
suffer both economic and juridical double taxation.

Widely  accepted  guidelines  for  the  elimination  of  international  juridical  double
taxation of dividends are provided by the OECD Model Tax Convention on Income
and Capital. According to Article 10 of the OECD Model Tax Convention dividends
may be taxed in the state of residence of the shareholder, but also in the source state.
However, the tax levied by the source state is limited to 15% if the shares are held by
an individual shareholder.  In  their  bilateral tax treaties Member States  can agree to
either levy lower source taxation or none at all (and outside the treaty context they
can, of course, provide unilaterally for lower or no source taxation).

Articles  23  A  and  23  B  of  the  OECD  Model  deal  with  methods  for  elimination  of
double taxation. The combined effect of Articles 10 and 23 A and 23 B of the OECD
Model is that in the case of individuals, the State of residence of the shareholder is
allowed to tax dividends arising in the other State. However, it must credit against its
own tax on such dividends the tax which has been collected by the State where the
dividends arise7. No Member State has made a reservation on this part of the OECD
Model.

7

Paragraph 49 of the Commentary on Articles 23 A and 23 B of the OECD Model Tax Convention.

3

 
                                                
The  credit  under  the  OECD  Model  is  only  an  ordinary  credit,  as  opposed  to  a  full
credit. Ordinary credit means that the residence State limits the credit to its own tax
on the dividend. So if the residence State does not tax the dividend, or taxes it at a
lower rate than the source State, the OECD Model does not oblige the residence State
to pay out the part of the foreign withholding tax in excess of the tax charged by the
residence State itself.

Furthermore,  Articles  10  and  23  A  and  23  B  of  the  OECD  Model  deal  only  with
credits for tax levied directly on the dividend by the source state, i.e. the withholding
tax  paid  by  the  company  on  behalf  of  the  shareholder,  and  not  with  credits  for  the
underlying tax, i.e. the corporation tax, as is the case in imputation systems8.

Finally  it  should  be  noted  that  the  credit  system  of  the  OECD  Model  applies
regardless  of  the  applicable  dividend  system  (classical,  schedular,  imputation,
exemption, see below).

2.2. 

Dividend taxation systems

All  Member  States'  systems  have  in  common  that  they  levy  corporation  tax  at  the
level  of  the  company.  Apart  from  variations  in  corporate  tax  bases  and  rates,  they
differ  in  their  approach  to  the  taxation  of  dividends  received  by  individual
shareholders. A basic choice each Member State had to make was whether or not to
deal with the economic double taxation which may result from the combined effect
of corporate and income taxation. Some Member States' systems may originally have
been designed primarily for domestic situations. In practice Member States' systems
may  not  fit  into  one  of  the  four  types  described  below,  as  they  may  combine
elements of the various systems.

2.2.1.  Classical system

The  classical  system  sees  the  corporation  as  an  entity  entirely  separate  from  its
shareholders, consistent with its status as a separate legal entity. As a  consequence,
under  the  classical  system  the  company’s  profit  is  subject  to  corporation  tax  at  the
company level and the distributed profit, i.e. the dividend, is taxed at the shareholder
level  as  part  of  his  overall  income  at  the  applicable  marginal  income  tax  rate.  The
classical system thus results in full economic double taxation.

2.2.2.  Schedular systems

Under schedular systems a company’s profits are equally subject to corporation tax,
but dividends received by individual shareholders are taxed as a separate category of
income. There are three subtypes of schedular systems.

8

Paragraph 1 of the Commentary on Articles 23 A and 23 B.

4

 
                                                
Single schedular rate

Under this system the dividends received by individual portfolio investors are subject
to a single separate tax rate. The schedular tax  rate is  usually  in the range of 15 to
30%, i.e. considerably lower than the maximum marginal income tax rate, which is
usually in the range of 40 to 60%. In practice the schedular tax rate is often chosen in
such  a  way  that  the  combined  pressure  of  corporation  tax  and  schedular  tax
corresponds to the top marginal income tax rate. Individual portfolio investors in the
top  income  tax  bracket  thus  never  suffer  more  corporate  and  income  tax  on  their
dividends than the top marginal income tax rate. Another effect is that for a domestic
entrepreneur  with  sufficient  profits,  the  choice  between  self-employment  and  an
incorporated business is tax-neutral (as is the case under the imputation system, see
below).  For  taxpayers  in  the  lower  income  tax  brackets  a  system  with  a  single
schedular  rate  does  not  achieve  complete  neutrality,  i.e.  the  combined  pressure  of
corporation tax and schedular tax is higher than the tax they would have paid on the
basis  of  the  marginal  income  tax  rate  applicable  to  them.  However,  for  most
taxpayers  the  combined  pressure  is  lower  than  under  the  classical  system,  and  for
shareholders in the high income tax bracket the system fully relieves double taxation.

Multiple schedular rates

Under this system a Member State has a separate schedular tax rate for each marginal
income tax rate. With multiple schedular rates a Member State may achieve identical
results as with an imputation system. The separate schedular rates can be chosen in
such a way that for each income tax bracket the combined tax burden of corporation
tax  and  income  tax  equals  the  marginal  income  tax  rate,  as  under  the  imputation
system. In practice, for countries with multiple marginal income tax rates the system
could be simplified by applying only two schedular tax rates.

Half income tax method

Under  the  half  income  tax  method  only  half  of  the  dividends  received  by  a
shareholder  are  subject  to  the  applicable  marginal  income  tax  rate.    With  the  half
income tax method the combined pressure of corporation and personal income tax on
the  dividend  could  also  correspond  to  the  top  marginal  income  tax  rate,  i.e.  this
method  could  achieve  the  same  result  as  the  imputation  system  for  high  income
taxpayers.

It  would  of  course  be  possible  to  exempt  more  than  half  of  the  dividend  for  lower
income taxpayers. In practice, however, the Member States which apply this system,
have chosen the  half  income  method  (Germany,  Luxembourg  and  Portugal;  France
has announced that it will introduce the half income method by 1 January 2005).

Right of assessment

Usually  national  rules  provide  for  a  right  of  assessment  whereby  low-income
taxpayers may opt  for  the dividend  to  be taxed  under  the  normal  income  tax  rules,
which amounts to application of the classical system, if that leads to lower taxation
than applying the schedular system.

5

 
2.2.3. 

Imputation system

The  imputation  system  is  based  on  the  conduit  approach,  where  the  corporation  is
viewed  as  a  conduit,  and  the  corporation  tax  on  the  company’s  profit  serves  as  a
prepayment  for  the  income  tax  on  the  dividend  of  the  shareholders.  Under  the
imputation  system  both  company  and  shareholder  are  taxed  separately,  but  at  the
shareholder level the dividend is first grossed up by the corporation tax paid by the
company on that income and then a credit is granted for some or all of that amount
against the income tax on the dividend. Hence the credit may be 100% or lower.  If
the credit is equal  to the corporation tax paid by the company on the dividend this
system guarantees full relief of the economic double taxation for shareholders of all
income levels.

2.2.4.  Exemption system

Finally the dividend income may be exempt from income taxation.

2.3. 

The effects of the different systems

The  following  example  illustrates  the  effect  of  the  various  methods  in  domestic
situations,  assuming  a  corporate  tax  rate  of  33,3%,  a  marginal  income  tax  rate  of
50%, and, where applicable, a full imputation credit or a schedular tax rate of 25%.
These rates are chosen in such a way that the effective tax rate on dividends, that is
the combined pressure of corporation tax and income tax, equals the highest marginal
income tax rate. In practice this is what many Member States have done, to achieve
neutrality between self-employed and incorporated businesses.

To  avoid  any  possible  misunderstanding  it  should  be  underlined  that  the  tax  rates
used in this example have no normative value, the only purpose of the example is to
illustrate the different effects of the four systems.

Example 1:  The effects of the various dividend taxation systems

4

5

1
Profit
2 Corporation
tax 33,3%
3 Dividend (1-/-

2)
Income tax
base

Income tax
(50% of 4)
Full credit (2)

6
7 Remaining

income tax (5-
/-6)
Schedular tax
(25% of 4)

8

Half
income
100
33.3

66.7

33.35
(50%
of 3)
16.7

Imputation Exemption

100
33.3

66.7

0

100
33.3

66.7

100
(3+2)

50

33.3
16.7

Classical

Schedular

100
33.3

66.7

66.7

33.35

100
33.3

66.7

66.7

16.7

6

 
9 Net dividend
(3-/-5, 7, or 8)

10 Effective tax

rate on 1 is
combined tax
burden

33.35

66.65%

50

50

50

66.7

50%

50%

50%

33.3%

The classical system leads to unrelieved economic double taxation: The profit is first
subjected to corporation tax at the level of the company and then after distribution to
income tax at the level of the individual shareholder.

Schedular  systems,  including  the  half-income  system,  can  be  designed  (as  in  the
example)  to  give  the  same  result  in  terms  of  the  net  dividend  as  the  imputation
system.  In  practice  both  systems  can  eliminate  the  economic  double  taxation,
although  the  schedular  systems  achieve  this  without  the  extra  calculations  required
by  the  imputation  system9.  Under  both  systems  the  effective  tax  (that  is  the
corporation tax plus the applicable income tax together) on the dividend can be the
same as the marginal income tax rate, at least for high income taxpayers. An effect of
this is that it renders the choice between self-employed and incorporated businesses
neutral  from  the  taxation  perspective.  That  is,  assuming  that  all  profits  are
distributed,  he  pays  the  same  amount  of  tax,  whether  he  conducts  his  business
through a separate legal entity subject to corporation tax, or conducts his business as
a  self-employed  person.  In  the  first  case  his  profit  is  subject  to  corporation  tax  of
33.3,  and  income  tax  of  16.7,  in  total  50  (under  the  imputation  system),  or
corporation tax of 33.3, and schedular tax of 16.7, again totalling 50. If he does not
incorporate  his  business,  but  runs  it  as  a  self-employed  person,  he  simply  pays
income  tax  of  50,  which  is  the  same  as  the  total  tax  burden  of  50  under  the
imputation and schedular system.

Under the exemption system the overall tax burden logically equals the corporate tax
rate, as no income tax is levied on the dividend.

2.4. 

Systems in Member States

For  the  purposes  of  this  Communication  three  dividend  payment  situations  are
distinguished:  domestic,  inbound  and  outbound.  Domestic  dividends  are  dividends
paid by  a company in a Member State to  a shareholder in the same  Member  State.
Inbound  dividends  means  dividends  paid  from  another  Member  State  to  a
shareholder  resident  in  a  Member  State,  outbound  means  dividends  paid  from  a
company  in  the  Member  State  concerned  to  an  individual  shareholder  in  another
Member State.

9

In turn, single  schedular rate  or  half  income  systems  do  not  fully  relieve  double  taxation  of  dividend
income for lower income taxpayers, whereas the imputation system always achieves that.

7

 
                                                
Table 1:

Domestic dividends: Overview of Member States’ and acceding States’
dividend 
individual  shareholders  receiving
domestic dividends

taxation  systems  for 

Member
States

Acceding
States

Classical
Ireland

Imputation
Spain, France Belgium, Denmark,

Schedular

Exemption
Greece

Malta

Germany,
Luxembourg,
Netherlands, Austria,
Portugal, Sweden
Cyprus, Czech Rep.,
Hungary, Lithuania,
Poland, Slovak Rep.,
Slovenia

Estonia10,
Latvia

Italy,  Finland  and  the  United  Kingdom  do  not  appear  in  the  above  table,  as  they
apply options or combinations of systems. Italy leaves portfolio investors the choice
between the imputation system or a schedular  rate of 12.5%.  Finland combines  the
imputation system and the schedular system in such a way that for practical purposes
it  amounts  to  an  exemption  system.  The  United  Kingdom  operates  an  imputation
system  in  combination  with  a  schedular  system  with  two  different  rates,  which  for
low-income taxpayers amounts to exemption.

Ireland is the only Member State applying a classical system for domestic dividends.
It is an interesting  case,  given  its low corporation  tax  rate of 12.5%. As a  result of
this low corporate tax rate the economic double taxation resulting from the combined
tax  pressure  of  corporate  tax  and  income  tax  on  domestic  dividends  remains
relatively low.

Five  Member  States  apply  an  imputation  system  to  domestic  dividends,  including
Italy,  Finland  and  the  United  Kingdom.  Ireland,  Germany  and  Portugal  had
imputation  systems  too,  but  abolished  them.  Greece  is  the  only  Member  State
applying an exemption system.

A  majority  of  eleven  Member  States  apply  some  form  of  schedular  system  to
domestic dividends, again including Italy, Finland and the United Kingdom. Malta is
the only accession country that applies an imputation system to domestic dividends
received  by  individual  shareholders.  Two  acceding  States  apply  the  exemption
system,  and  a  majority  of  seven  apply  some  form  of  schedular  system.  It  may  be
worth noting that the US also recently introduced a schedular system11.

10

11

The Estonian system is noted as an exemption system, although it has a unique feature: corporation tax
is not levied until dividends are paid out. No income tax is levied on domestic dividends. It could also
be seen as a system in which profits are exempt in the hands of the company, and in which the tax paid
by  the  company  at  the  same  rate  as  that  imposed  on  personal  income  is  a  withholding  tax,
a pre-payment of the shareholder's tax liability on the dividends.
With  a  rate  of  15%  (5%  for  taxpayers  in  the  low  income  tax  bracket),  see  the  Jobs  and  Growth  Tax
Relief Reconciliation Act of 2003, of 22 May 2003.

8

 
                                                
Current developments

Italy has announced that it will abolish its imputation system. Dividends received by
individual  portfolio  shareholders  would  be  subject  to  a  schedular  rate  of  12,5%12.
France  announced  that  it  would  replace  its  imputation  system  with  a  half  income
system as per 1 January 2005. The tax treatment of inbound dividends by Finland13
and  Austria14  is  the  subject  of  legal  proceedings  before  the  ECJ,  as  a  result  of
requests for preliminary rulings by national courts. Finland is considering abolishing
its imputation system15. Austria has already adopted legislation in order to bring its
law in conformity with EU law16.

3. 

LEGAL ANALYSIS

3.1. 

General

3.1.1. 

Introduction

According to Article 14 of the EC Treaty “The internal market shall comprise an area
without internal frontiers in which the free movement of goods, persons, services and
capital is ensured in accordance with the provisions of the Treaty”. Article 56 of the
EC Treaty elaborates the free movement of capital.

In the  absence of  harmonisation  direct  taxation  has  remained  essentially  within  the
competence  of  Member  States.  However,  Member  States  must  exercise  that
competence consistently with Community law17.

The  most  relevant  case  for  the  taxation  of  portfolio  dividends  is  Verkooijen.  The
facts  in  this  case  were  relatively  simple:  When  taxing  dividend  income,  the
Netherlands exempted the first 1 000 guilders. However, this exemption only applied
to  domestic  dividends.  It  did  not  apply  to  inbound  dividends.  The  Court  ruled  that
this  was  not  in  conformity  with  the  EC  Treaty.  Various  elements  of  the  case  are
discussed in more detail below.

12

13

14

15

16

17

Legislative Decree of 12 September 2003. The changes should take effect as of 1 January 2004.
Case C-319/02, Manninen.
Case C-315/02, Lenz.
See the English summary of an extensive report by a working group established by the Finnish Ministry
of Finance on http://www.vm.fi/resource/fi/27616.pdf, page 197.
Budgetbegleitgesetz 2003.
Verkooijen,  paragraph  32,  which  refers  to  Case  C-80/94  Wielockx  [1995]  ECR  I-2493,  paragraph  16,
Case C-264/96 ICI [1998] ECR I-4695, paragraph 19, Case C-311/97 Royal Bank of Scotland [1999]
ECR I-2651, paragraph 19.

9

 
                                                
3.1.2.  The free movement of capital

Articles  56  and  58  of  the  EC  Treaty  on  the  free  movement  of  capital  are  the  most
relevant ones for issues concerning dividend taxation, as in practice most individual
shareholders with foreign shares do not have definite influence over the company’s
decisions and cannot determine its activities18.

Pursuant to Article 56 “all restrictions on the movement of capital between Member
States and  between  Member States  and  third  countries  shall  be  prohibited”.  Article
56 does not itself contain a definition of the concept of capital movement. Reference
should be made in that respect to the nomenclature contained in Annex I to Council
Directive  88/361/EEC  of 24 June 1988  for the implementation  of  Article  67  of  the
(EEC)  Treaty19.  Although  receipt  of  dividends  is  not  expressly  mentioned  in  that
annex  as  capital  movement,  it  necessarily  presupposes  participation  in  new  or
existing undertakings referred to in Heading I (2) of the nomenclature. The receipt of
dividends may also be linked to “Acquisition by residents of foreign securities dealt
in on a stock exchange20.” The ECJ therefore ruled that the receipt by a national of a
Member  State  residing  in  that  Member  State  of  dividends  on  shares  in  a  company
whose  seat  is  in  another  Member  State  is  covered  by  Directive  88/36121.
Consequently, the receipt of dividends is covered by Article 56 of the EC Treaty.

3.1.3.  Restrictions and justifications

In order to determine whether a provision of national law is compatible with Article
56 of the EC Treaty it should be established whether it restricts the free movement of
capital and if so, whether the restriction can be justified.

Two  questions,  developed  in  the  ECJ's  case  law,  determine  whether  there  is  a
restriction on the free movement of capital within the  meaning of  Article 56 of the
Treaty:

(cid:1) 

(cid:1) 

Is  the  provision  liable  to  dissuade  residents  of  a  Member  State  from  investing
their capital in companies established in other Member States?22

Is the provision of the Member State liable to constitute an obstacle to companies
established in other Member States to raise capital in that Member State?23

18

19

20

21

22

23

The ECJ ruled in the case of shareholders with foreign shares giving them definite influence over the
company’s decisions and the possibility to determine its activities that they were exercising their right
of  establishment  in  the  sense  of  Article  43  of  the  EC  Treaty,  see  Case  C-251/98  Baars  [2000]
ECR I-2787, paragraph 22.
OJ 1988 L 178/5. The nomenclature is expressly stated not to be an exhaustive list. The substance of
Article 67 of the EEC Treaty is now to be found in Article 56 of the EC Treaty
Item III.A.2. of Annex I.
See Verkooijen paragraphs 28 to 30.
To  that  effect  Case  C-484/93  Svensson  and  Gustavsson  v  Ministre  du  Logement  et  de  l'Urbanisme
[1995] ECR I-3955, paragraph 10, Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraph
26,  and  Case  C-439/97  Sandoz  v  Finanzlandesdirektion  für  Wien,  Niederösterreich  und  Burgenland
[1999] ECR I-7041, paragraph 19.
Verkooijen, paragraph 35.

10

 
                                                
If  either  or  both  the  above  questions  are  answered  positively,  the  provision
constitutes a restriction on capital movements.

In  Verkooijen  the  ECJ  ruled  that  making  the  grant  of  a  tax  advantage  relating  to
taxation  of  the  income  of  natural  persons  who  are  shareholders  subject  to  the
condition  that  the  dividends  are  paid  by  companies  established  within  national
territory constitutes a restriction on capital movements.24

3.1.4.  Article 58.1. and Article 58.3.

Once  a  restriction  is  established,  it  should  be  explored  whether  a  justification  is
applicable.

One of the main exceptions to Article 56 is provided by Article 58.1.(a), which gives
Member  States  the  right  “to  apply  the  relevant  provisions  of  their  tax  law  which
distinguish between taxpayers who are not in the same situation with regard to their
place of residence or with regard to the place where their capital is invested”.

Moreover,  on  the  basis  of  Article  58.1.(b),  Member  States  may  "take  all  requisite
measures  to  prevent  infringements  of  national  law  and  regulations",  in  particular
those concerned with taxation.

However,  the  exceptions  of  Article  58.1.  are  limited  by  Article  58.3,  which  states
specifically  that  the  national  provisions  referred  to  by  Article  58.1.  “shall  not
constitute  a  means  of  arbitrary  discrimination  or  a  disguised  restriction  on  the  free
movement of capital and payments as defined in Article 56”.

It  should  be  borne  in  mind  that  Article  58.1  represents  an  exception  to  the
fundamental  principle  of  free  movement,  and  must  therefore  be  interpreted
restrictively.25

The  possibility  retained  for  Member  States  in  Article  58  to  differentiate  between
persons  in  different  situations  has  been  upheld  in  the  case  law  of  the  ECJ26.
According to that case law, such provisions may be compatible with Community law
in so far as (1) they apply to situations which are not objectively comparable or (2)
they  are  justified  by  overriding  reasons  in  the  general  interest.  However,  these
provisions  may  not  in  any  event  be  more  restrictive  than  is  necessary  in  order  to
achieve  the  aim  pursued,  that  is  to  say,  must  be  consistent  with  the  principle  of
proportionality27.

24

25

26

27

Verkooijen, paragraph 36.
Case C-54/99 Eglise de Scientologie [2000] ECR I-1335, paragraph 17; Opinion of Advocate General
Tizzano in Case C-516/99 Schmid [2002] ECR I-4573, paragraph 44.
Verkooijen, paragraph 43.
See,  for  example,  Case  C-478/98  Commission  v.  Belgium  (DEM  Eurobonds)  [2000]  ECR  I-7589,
paragraph 41 and Case C-163/94 Sanz de Lera and others [1995] ECR I-4821, paragraph 23.

11

 
                                                
On the basis of Verkooijen it can be concluded that the exceptions set out in Article
58.1. are essentially the expression of principles already recognised in the case law28.
According  to  the  ECJ  these  exceptions  did  not  justify  the  restriction  on  inbound
dividends of Verkooijen.

3.1.5.  Other justifications

Member States often invoke justifications based on overriding reasons in the general
interest. On only one occasion did the ECJ accept such a justification (the coherence
argument,  in  the  Bachmann  case,  which  is  discussed  further  below).  All  of  the
following attempted justifications have been rejected by the ECJ.

– 

– 

– 

– 

– 

the  risk  of  tax  avoidance:  the  ECJ  consistently  rejects  this  justification  if  the
legislation  at  stake  does  not  have  the  specific  purpose  of  preventing  wholly
artificial arrangements29;

the  loss  of  tax  revenue:  reduction  in  tax  revenue  cannot  be  regarded  as  an
overriding  reason  in  the  public  interest  which  may  be  relied  on  to  justify  a
measure which is in principle contrary to a fundamental freedom30;

the  need  for  progressivity  of  the  tax  system:  it  is  settled  case-law  that
detrimental tax treatment contrary to a fundamental freedom cannot be justified
by the existence of other tax advantages, even if those advantages exist31;

the existence of lower tax rates in other Member States32;

that  harmonisation has  not been achieved: in  the  absence  of  harmonisation  at
Community  level,  the  Member  States  must  nevertheless  comply  with
Community law33;

– 

the effectiveness of fiscal supervision/administrative difficulties34;

28

29

30

31

32

33

34

See paragraph 43 of Verkooijen .
Case C-324/00 Lankhorst, not yet published, paragraph 37, ICI, paragraph 26, see also Case C-397/98
Hoechst [2001] I-1727, paragraph 57.
Lankhorst, paragraph 36, Verkooijen paragraph 59, ICI paragraph 28.
Paragraph 97 of Case C-385/00 De Groot, not yet published, where the ECJ refers to: with respect to
the  freedom  of  establishment,  Case  270/83  Commission  v  France  [1986]  ECR  273,  paragraph  21,
Case  C-107/94  Asscher  [1996]  ECR  I-3089,  paragraph  53,  and  Saint-Gobain,  paragraph  54;  with
respect to the freedom to provide services, Case C-294/97 Eurowings Luftverkehr [1999] ECR I-7447,
paragraph  44;  and,  with  respect  to  the  free  movement  of  capital,  Case  C-35/98  Verkooijen  [2000]
ECR I-4071, paragraph 61.
I-7449,  also  Case  C-270/83
Paragraph  44  of  Case  C-294/97  Eurowings 
Commission/France [1986] p. 273, paragraph 21 and Case C-107/94 Asscher [1996] I-3089, paragraph
53,
Paragraph  34  of  Case  C-18/95  Terhoeve,  [1999]  I-345,  on  social  security  legislation,  where  the
ECJ  refers  to  Case  C-120/95  Decker  v  Caisse  de  Maladie  des  Employés  Privés  [1998]  ECR  I-1831,
paragraphs 22 and 23, and Case C-158/96 Kohll v Union des Caisses de Maladie [1998] ECR I-1931,
paragraphs 18 and 19).,
See,  for  instance,  Case  C-80/94  Wielockx  [1995]  ECR  I-2493  and  Case  C-250/95  Futura  [1997]
ECR I-2471.

[1999]  ECR 

12

 
                                                
– 

– 

the absence of reciprocal treatment under a double tax treaty: Treaty rights are
unconditional and cannot be made subject to the contents of a tax treaty35;

aims  of  a  purely  economic  nature,  such  as  the  intention  to  promote  the
economy  of  the  country  by  encouraging  investment  by  individuals  in
companies with their seat in that country36;

– 

other advantages are enjoyed by the person suffering from the restriction37.

3.2. 

Inbound dividends

This  Chapter  3.2.  examines  various  situations  concerning  inbound  dividends.  Each
time  the  conclusion  is  the  same:  Under  the  EC  Treaty  Member  States  cannot
effectively tax inbound dividends higher than domestic dividends.

3.2.1. 

Inbound dividends: Exemption

Member  States  which  exempt  (part  of  the)  domestic  dividends  should  extend  this
exemption  to  inbound  dividends.  This  conclusion  follows  immediately  from
Verkooijen.38

3.2.2. 

Inbound dividends: Classical versus imputation system

Under imputation system credits are usually only given for domestic dividends. The
effect of not granting an imputation credit to inbound dividends is that the taxpayer
pays  more  income  tax  on  inbound  dividends  than  on  domestic  dividends.  The
example below illustrates the higher taxation, assuming a corporate tax rate of 30%
in  both  countries,  a  marginal  income  tax  rate  of  50%,  a  full  credit  for  the  30%
corporation tax in the domestic situation, and no withholding taxes.

Example 2:  The effect of not granting a credit on inbound dividends

Profit
Corporation tax 30%
Dividend
Grossed-up dividend
Income tax 50%
Full credit
Remaining income tax
Net dividend

Domestic dividend
100
30
70
100
50
30
20
50

Inbound dividend
100
30
70

35

35

35

36

37

38

Paragraph 26 of Case C-270/83 Avoir Fiscal [1986], p. 173.
Verkooijen,  paragraph  48,  where  the  ECJ  refers  to  Case  C-120/95  Decker  v  Caisse  de  Maladie  des
Employés Privés [1998] ECR I-1831, paragraph 39, and Case C-158/96 Kohll v Union des Caisses de
Maladie [1998] ECR I-1931, paragraph 41.
Case C-270/83 Commission v. France [1986] ECR I-273, Case C-107/94 Asscher [1996] ECR I-3089,
3113,  Case  C-307/97  Saint  Gobain  [1999]  ECR  I-6163,  6181,  Case  C-294/97  Eurowings  [1999]
ECR I-7449, 7463.
France exempts the first € 2.440 of dividends received by married couples, but inbound dividends are
excluded  from  the  exemption.  The  Commission  therefore  opened  an  infringement  procedure  against
France on this issue, see IP/03/990 of 10.7.2003.

13

 
                                                
The effect is clear: Of an original company profit of 100 just 35 remains in the hands
of the shareholder if the dividend came from a foreign company, whereas 50 remains
of  a  profit  originating  in  the  same  country.  So  if  for  inbound  dividends  the
imputation  country  applies  the  classical  system,  the  result  is  full  economic  double
taxation. The legal question can now be  reformulated:  Is it compatible with Article
56  of  the  EC  Treaty  for  a  Member  State  to  apply  the  classical  system  to  inbound
dividends,  if  it  applies  an  imputation  system  to  domestic  dividends?  Or,  in  other
words,  if  a  Member  State  takes  unilateral  measures  to  avoid  double  taxation  on
domestic dividends should it also apply them in international situations?

Effectively subjecting inbound dividends to higher taxation than domestic dividends
dissuades national residents from investing in the shares of companies established in
other  Member  States.  It  is  therefore  a  restriction  on  capital  movements  contrary  to
Article 56 EC.

Moreover,  the  ECJ  will  also  examine whether a  measure has  a  restrictive  effect  on
companies  established  in  other  Member  States39.  In  this  case  it  constitutes  an
obstacle to the raising of capital in the Member State concerned since dividends paid
by  such  companies  to  national  residents  receive  less  favourable  tax  treatment  than
dividends distributed by a company established in the Member State. As a result their
shares  are  less  attractive  to  investors  residing  in  that  Member  State  than  shares  in
companies in another Member State.

An  imputation  system  which  is  not  extended  to  inbound  dividends  is  therefore  a
restriction of the free movement of capital.

3.2.2.1.  Overriding reason in the general interest

The  restriction  being  established,  it  is  necessary  to  examine  whether  the  restriction
may be objectively justified by any overriding reason in the general interest40.

Coherence

As regards the need to preserve the coherence of the tax system, the ECJ pointed out
in Verkooijen41 that in Bachmann42 a direct link  existed, in  the case of one and the
same  taxpayer,  between  the  grant  of  a  tax  advantage  and  the  offsetting  of  that
advantage by a fiscal levy, both of which related to the same tax.

39

40

41

42

Verkooijen, paragraph 35.
Ibidem, paragraph 46.
Ibidem, paragraph 28.
Case C-204/90 Bachmann, [1992] ECR I-249.

14

 
                                                
In  Verkooijen  all  Member  States  which  submitted  observations  maintained  that
restricting the exemption to domestic dividends was justified by the need to preserve
the coherence of the Netherlands tax system. In their view, the exemption should be
reserved  to  shareholders  who  receive  domestic  dividends  because  only  Dutch
companies  pay  Dutch  corporation  tax.  One  Member  State  argued  that  if  the
Netherlands were to grant the exemption to inbound dividends such dividends might
entirely  escape  taxation  in  the  Netherlands.  Another  Member  State  argued  that
exemption of inbound dividends would enable the shareholders to enjoy tax relief in
both states.

A Member State applying an imputation system without granting a credit for inbound
dividends  may  equally  call  on  fiscal  coherence.  It  might  argue  that  Article  58  was
intended specifically to cover the case of such an imputation system. It might claim
that unlike the situation in Verkooijen, there is a direct link in such a system between
the  taxation  of  the  company’s  profits  and  the  tax  credit  granted  to  the  shareholder,
ensuring the coherent tax treatment of the company’s profit both in its hands and in
those of the shareholder. It might claim that there are not two separate taxes, but an
integrated  system  in  which  the  same  income  is  dealt  with  in  the  taxation  of  two
persons.

However,  the  ECJ  ruled  in  Verkooijen43  and  Baars44  that  the  coherence  argument
was not applicable, as no direct link existed between the taxation of the shareholders
and the  corporate tax  levied on corporations,  which  meant  two  separate  taxes  from
different taxpayers. The ECJ confirmed this jurisprudence in Bosal45.

In conclusion, the coherence argument cannot be successfully invoked to defend the
refusal of an imputation tax credit for inbound dividends, as in this specific situation
it also concerns corporation tax levied on a company and income tax charged on an
individual  shareholder,  hence  two  separate  taxes  levied  on  different  taxpayers,
without a direct link.

3.2.2.2.  The proportionality principle

Assuming that notwithstanding the above analysis a justification were to be found to
defend  the  refusal  of  credits  to  inbound  dividends,  it  should  still  be  examined
whether such a refusal was “of such a nature as to ensure achievement of the aim in
question and not go beyond what was necessary for that purpose”46.

In  essence,  an  imputation  system  is  nothing  more  than  a  calculation  method  to
calculate the income tax rate applicable to a dividend. The aim of imputation systems
is to eliminate the double taxation resulting  from  the classical system. As has  been
demonstrated  above,  schedular  systems  achieve  the  same  aim,  at  least  for  the  high
income  taxpayer,  without  the  restriction,  i.e.  the  refusal  of  credits  to  inbound
dividends.  It  is  therefore  disproportionate  to  maintain  an  imputation  system  for
domestic dividends and a classical system for inbound dividends.

43

44

45

46

As in Paragraph 58 of Verkooijen.
Paragraph 40.
Case C-168/01 Bosal, not yet published, paragraph 29.
Case C-436/00 X, Y against Riksskatteverket, not yet published, paragraph 49.

15

 
                                                
3.2.3. 

Inbound dividends: Classical versus schedular

There may be Member States which apply a schedular system to domestic dividends
whilst applying the classical system to inbound dividends.

As example 3 shows, this leads to much higher taxation of the inbound dividend.

Example 3:  The effect of not applying the schedular system to inbound dividends

Profit
Corporation tax 30%
Dividend
Schedular tax 25%
Income tax 50%
Net dividend

Domestic dividend
100
30
70
17,5

52,5

Inbound dividend
100
30
70

35
35

This is a clear restriction of the free movement of capital in the sense of Article 56 of
the EC Treaty.

There  seems  to  be  no  justification  for  such  a  restriction.  Many  Member  States
operating  a  schedular  system  apply  it  to  both  domestic  and  inbound  dividends.
Nothing  would  prevent  the  other  States  with  a  schedular  system  doing  the  same,
apart  from  budgetary reasons and possibly  the wish to  stimulate  investors to invest
domestically. Neither justification is acceptable under the EC Treaty.

3.2.4. 

Inbound dividends: Credit for foreign withholding tax

There may also be a problem with juridical double taxation arising from credits for
foreign  withholding  taxes.  Inbound  dividends  are  subject  to  higher  taxation  than
domestic  dividends  if  the  country,  applying  a  schedular  or  a  classical  system,  does
not give a credit for foreign withholding tax but applies the deduction47 method.

Example 4: Higher taxation of inbound dividends

Schedular system, withholding tax rate 15%, schedular rate 25%

Domestic dividend Inbound dividend

Dividend
Foreign withholding tax 15%
Dividend after foreign withholding tax
Schedular tax 25%
Net dividend

100

25
75

100
15
85
21,25
63,75

47

Under the deduction method the foreign tax is deducted from the gross dividend. The result is the base
for the calculation of the domestic tax on the dividend.

16

 
                                                
Classical system, withholding tax rate 15%, marginal income tax rate 50%

Domestic dividend Inbound dividend

Dividend
Foreign withholding tax 15%
Dividend after foreign withholding tax
Income tax 50%
Net dividend

100

50
50

100
15
85
42,50
42,50

It is clear that the higher tax burden on inbound dividends constitutes a restriction in
the sense of Article 56 of the EC Treaty on individual taxpayers to invest in foreign
shares.

Such  a  Member  State  may  argue  that  it  has  a  non-discriminatory  system,  which
subjects both domestic and inbound dividends to the same tax treatment, and that the
restriction is the result of the foreign withholding tax.

However, this argument cannot be accepted if the Member State’s relevant tax treaty
gives  the  other  State  the  right  to  levy  a  withholding  tax  (generally  of  15%),  and  if
Article 23 states that the Member State shall give a credit for this withholding tax.

In  such  circumstances  the  restriction  of  the  free  movement  of  capital  would  be
caused by the Member State itself, and not by the source State, as the OECD Model
and the applicable tax treaties require that the residence State must provide the relief.

3.3. 

Outbound dividends

Chapter  3.3.  examines  various  situations  concerning  outbound  dividends.  As  with
inbound  dividends,  the  conclusion  is  similar:  Under  the  EC  Treaty  Member  States
cannot effectively tax outbound dividends higher than domestic dividends.

3.3.1.  Outbound dividends: limit on taxation

Article  56  prohibits  a  Member  State  from  granting  more  favourable  treatment  to
investments  by  domestic  shareholders  than  to  investments  by  foreign  shareholders.
Higher  taxation  of  outbound  dividends  than  of  domestic  dividends  therefore
constitutes a restriction on the free movement of capital. So, for example, a Member
State cannot levy tax a withholding tax on outbound dividends and exempt domestic
dividends, as it would tax outbound dividends higher than domestic dividends.

It should be noted that a simple comparison of the withholding tax rate on domestic
dividends with the withholding tax rate on outbound dividends is not sufficient. The
basis of comparison should be for the domestic dividends the combined effect of any
domestic  withholding  tax  rate  plus  the  domestic  income  taxation  and  for  the
outbound dividend the withholding tax rate on the outbound dividend.

17

 
3.3.2.  Outbound dividends: Right of assessment

If  a  Member  State  has  a  schedular  system  and  offers  residents  the  right  to  opt  for
assessment  of  the  dividend  income  under  the  normal  income  tax  rules,  it  should
extend that right to non-residents who are in a situation comparable to residents, on
the  basis  of  the  Schumacker  case.  According  to  Schumacker48  a  non-resident
individual portfolio investor would be in a situation comparable to a resident investor
when he earns his income entirely or almost exclusively from dividends originating
in a Member State and does not receive in his Member State of residence sufficient
income  to  be  subject  there  to  taxation  there  in  a  manner  enabling  his  personal  and
family circumstances to be taken into account (by his Member State of residence).

4. 

ECONOMIC EFFECTS

The  outcome  of  the  legal  analysis  above  is  clear:  if  Member  States  integrate
corporate  taxation  with  income  taxation  by  using  the  imputation  system  or  a
schedular system, the EC Treaty obliges them to extend this  integration to  inbound
dividends.

The theoretical economic impact of integration depends mainly on its possible effects
on  tax  neutrality.  As  the  Ruding  report  noted:  "The  absence  of  tax  neutrality  with
respect  to  the  location  of  investment  within  the  Community  constitutes  a  potential
impediment  to  the  realisation  of  the  full  benefits  from  the  completion  of  a  single
internal  market.  By  according  preferential  treatment  to  domestic  dividends,  or  by
discriminating against investments in some Member States, non-neutral tax rules can
distort the allocation of capital within the Community. Resources are misallocated in
so far as capital inputs are directed from their most productive uses – that  is, those
with the highest rates of return before taxes – to locations where such inputs are less
productive,  but  yield  greater  after-tax  returns  as  a  consequence  of  their  relatively
favourable  tax  treatment.  The  resulting  economic  inefficiency  manifests  itself  in
reduced  capital  productivity,  which 
international
competitiveness,  and  lower  levels  of  total  output  and  living  standards  in  the
Community  as  a  whole"49.  In  addition,  not  extending  integration  to  inbound
dividends  would  also  have  distorting  effects  on  cross-border  mergers  and
reorganisation  decisions,  as  before  and  after  these  business  operations,  dividends
arise  in  different  countries  and  the  dividends  would  receive  a  different  fiscal
treatment.  It  follows  that  any  improvement  of  the  situation  would  lead  to  a  better
functioning Internal Market.

the  Community's 

impairs 

48

49

Case C-279/93 Schumacker [1995] I-225, paragraph 47.
Ruding Report, page 34.

18

 
                                                
Tax neutrality is usually discussed in relation to Capital Import Neutrality (CIN) and
Capital Export Neutrality (CEN). CIN requires that the marginal effective tax rate on
investors  in  any  given  State  be  the  same,  regardless  of  the  investors'  State  of
residence. Under CEN "the tax system provides no incentive for resident investors in
a given country to invest at home rather than abroad, or vice versa, because resident
investors  pay  the  same  total  domestic-cum-foreign  tax  on  their  worldwide  income
regardless of the domestic/foreign composition of that income"50. CIN and CEN are
often discussed in the context of companies directly investing in other companies. In
that  context  CIN  is  achieved  via  the  exemption  method,  and  CEN  via  the  credit
method.  It  should  be  noted  that  the  focus  of  this  Communication  is  different,  as  it
deals with dividends received by individual shareholders who are portfolio investors.
However, the CIN and CEN concepts could also be transposed to their situation.

CEN applied to individual shareholders would mean that their domestic and foreign
investments would suffer the same effective tax pressure (that is the combined effect
of all taxes involved, corporation tax, withholding tax and income tax). CIN plays in
practice  no  role  for  individual  shareholders.  No  Member  State  or  acceding  State
exempts inbound dividends paid to individual shareholders from income taxation. In
combination  with  the  fact  that  most  Member  States  tax  dividends  received  by
individual  shareholders differently, unless  this  taxation is  harmonised,  CIN  can  not
be achieved and CEN is the dominant principle.

It  should  be  noted  that  given  the  absence  of  full  scale  corporate  tax  harmonisation
(which is not advocated by the Commission) complete CEN is in practice extremely
difficult if not impossible to achieve, both for schedular and imputation systems. In
order to achieve 100% neutrality, schedular systems should have different schedular
rates  depending  on  the  Member  State  from  which  the  dividend  was  paid.  The  rate
should  even  take  into  account  the  underlying  corporation  tax  paid  by  all  lower  tier
subsidiaries. In the same way, the calculation of the underlying tax component of the
imputation  credit  relief  would  be  a  particularly  complicated  matter.  For  direct
investment  by  companies  some  Member  States  do  calculate  the  underlying  tax,
taking  into  account the  tax paid  by lower-tier subsidiaries. However,  for  individual
portfolio  investors  this  seems  unfeasible,  as  they  do  not  have  any  control  over  the
companies  they  invest  in.  They  are  therefore  not  likely  to  be  able  to  obtain  the
necessary information.

In practice, therefore, a pragmatic solution is for schedular systems to apply the same
rate  to  domestic  dividends  as  to  inbound  dividends.  Similarly  under  imputation
systems, one could simply apply the same imputation credit to inbound dividends as
to domestic  dividends, if  it is  preferred  to  avoid  having  to  calculate  the  underlying
corporation tax abroad. As demonstrated in  Chapter  3,  the  effects  of  schedular  and
imputation systems are equivalent in this respect.

50

Paragraph  3.7  of  "Double  Taxation  Relief  For  Companies:  A  Discussion  Paper",  by  Mike  Waters  of
the 
on
http://www.inlandrevenue.gov.uk/consult/dtrc.pdf

Revenue, 

March 

Inland 

found 

1999, 

UK 

10 

be 

to 

19

 
                                                
It follows that because the foreign corporation tax may be higher or lower than the
domestic corporation tax, the effective tax rate on inbound dividends under schedular
and imputation systems may differ from the national marginal income tax rate. Full
CEN  is  therefore  not  achieved.  However,  this  respects  the  internationally  agreed
principle that business profits should be taxed in the country where they arise, as well
as the principle that in the present state of Community law, Member States are free to
set their corporation tax rates and bases. In other words, in this context the reduction
of cross-border neutrality is a price to be paid for Member States’ sovereignty to set
their own corporate taxes.

5. 

CONCLUSION

Member States operate different systems for the taxation of dividend payments in the
hands of individuals. For domestic dividends most Member States prevent or reduce
the  economic  double  taxation  resulting  from  the  levying  of  corporation  tax  and
income  tax  from  the  same  income  by  applying  either  an  imputation  system  or  a
schedular system.

Where,  in  applying  their  systems,  Member  States  differentiate  between  the  tax
treatment of domestic and inbound or outbound dividends this can be a restriction on
cross-border investments and it can result in fragmented capital markets in the EU.

In  its  developing  case  law  the  ECJ  has  considered  this  issue  on  the  basis  of  the
provisions on the free movement of capital. It has, in the main case considered in this
Communication,  given  a  clear  ruling  on  the  incompatibility  of  a  measure  which
provided for a different tax treatment of domestic and inbound dividends.

The  Commission  believes  that  analysis  of  this  case  law  leads  to  fundamental
conclusions  about  the  design  of  dividend  taxation  systems:  Member  States  cannot
levy higher taxes on inbound dividends than on domestic dividends. Likewise, they
cannot levy higher taxes on outbound dividends than on domestic dividends.

Member  States  may  in  the  original  design  of  their  dividend  taxation  systems  have
focused on their domestic effects, which may have  resulted in unlawful restrictions
on  inbound  and  outbound  dividends.  It  follows  that  Member  States  should  re-
examine their systems in the light of the current Treaty provisions.

As outlined in this Communication, it is possible to provide for methods of relief that
are compatible with the Treaty, while maintaining possibilities to tax in a relatively
straightforward  manner. A number of  Member States  have  already  introduced  such
methods;  others  are  in  the  process  of  doing  so.  These  changes  should  help  to
optimise the allocation of capital in the Internal Market, even though full neutrality
remains out of reach, in the absence of tax harmonisation.

In deciding on what to do, Member States should adopt a co-ordinated approach to
ensure a rapid removal of the tax obstacles that exist, thereby creating a more stable
and  investment-friendly  environment  and  removing  the  uncertainty  created  by
potential legal conflict and litigation.

20

 
The  Commission  wishes  to  promote  this  co-ordination  in  the  interests  of  both
individual investors and business and overall in the interest of ensuring the maximum
efficiency  of  the  Internal  Market  with  its  consequent  positive  effects  on  the
competitiveness of the Union in the global marketplace.

The  Commission  therefore  calls  on  the  Member  States  to  work  together  with  it  to
deal  quickly  and  effectively  with  the  issues  examined  in  this  Communication.  If
solutions  cannot  be  found  despite  the  clear  logic  of  such  an  approach,  the
Commission,  in  line  with  its  responsibility  as  guardian  of  the  Treaty,  will  take  the
necessary  steps  to  ensure  effective  compliance  with  the  Treaty,  including  bringing
the matter before the ECJ on the basis of Article 226 of the EC Treaty.

The  Commission  invites  the  Council,  the  European  Parliament  and  the  European
Economic and Social Committee to give their opinion on this Communication.

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