Opinion of the European Economic and Social Committee on the ‘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’ (COM(2003) 810 final)
Date: 2004-06-30
Institutions: European Economic and Social Committee
Subjects: corporation tax, free movement of capital, share, tax on income, tax on profits of self-employment, tax system

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Official Journal of the European Union

7.12.2004

Opinion of the European Economic and Social Committee on the ‘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’

(COM(2003) 810 final)

(2004/C 302/15)

On 19 December 2003, the EU Commission decided, in accordance with Article 262 of the Treaty estab-
lishing the European Community, to consult the European Economic and Social Committee on the above-
mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, responsible for
preparing the Committee's work on the subject, adopted its opinion on 8 June 2004. The rapporteur was
Mr Retureau.

At its 410th plenary session, held on 30 June and 1 July 2004 (meeting of 30 June 2004), the European
Economic and Social Committee adopted the following opinion by 151 votes to one, with 12 abstentions.

1. Introduction

1.5
The aim is ‘to help Member States to ensure that their
systems are compatible with the requirements of the internal
market in accordance with the Treaty principles regarding the
free movement of capital.’

1.1
The communication submitted for an opinion concerns
primarily the taxation of dividends received by individuals for
their portfolio investments.

1.6
If Member States do not adopt the proposed method for
removing obstacles to freedom of movement for equity invest-
ments, the Commission, as guardian of the Treaties, could then
use Article 226 of the EC Treaty.

1.2
It is part of the follow-up to the Communication accom-
panying the Company Taxation Study (1), which already
proposed to develop guidelines for applying the main ECJ
rulings in this area and, in the case of dividends received by
individuals, refers to the Verkooijen ruling (2). The inclusion of
inbound and outbound dividends under the free movement of
expressly
capital
mentioned in the Treaty or in the directive.

something new; dividends

are not

is

1.7
It should be pointed out that the ECJ can highlight
elements relating to the interpretation of EU law, so as to
judge to resolve the legal problem referred to
enable that
him (4).

Differences between the tax systems of

1.3
the Member
States with regard to the ‘double taxation of corporate profits
distributed to individual shareholders in the form of divi-
dends’ (3) would constitute a major source of discrimination,
and an obstacle to the free movement of capital within the
single market.

1.4
The proposed guidelines concern the implications of EU
law for Member States' dividend taxation systems and are
aimed, in the light of the ECJ case law referred to above, at
eliminating restrictions encountered by individuals when their
income from shares held in a portfolio is taxed. The proposal
also seeks to reduce excessively high withholding tax rates in
the states of origin of dividends.

(1) ‘Towards an internal market without tax obstacles’ COM (2001)

582 final

(2) Case C-35/98 Verkooijen [2000] ECR I-4071
(3) Ruding report of March 1992 pp. 207-208

2. Dividend taxation in the internal market

2.1
Taxation on companies' earnings consists of a tax on
profits, the rate of which varies from 12.5 to 40 % depending
on the country (approximately 30 % on average). Taxation of
the dividends paid out of profits after corporation tax may be
carried out at source and be deducted from the dividend
distributed, but it may also be imposed as personal tax at the
marginal rate or at a separate rate.

2.2
According to the Commission, the taxation of compa-
nies' earnings and dividends is ‘economic double taxation’, and
individuals also run the risk of ‘international juridical double
taxation’ (when two states tax dividends received abroad).

(4) Judgement of 28 January 1992, Bachmann, CR09204/90, Rec. p. I-

249

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2.2.1
The OECD Model Tax Convention, which has been
proposed in order to avoid international juridical double taxa-
tion, does not deal with economic double taxation.

3.2.2.1
The Court stated that a legislative provision such as
the one at issue … ‘has the effect of dissuading nationals of a
Member State residing in the Netherlands from investing their
capital in companies which have their seat in another Member
State.’

2.2.2
On the basis of the OECD Model Tax Convention, tax
already paid at source on dividends in the state of origin
should be deducted from tax due in the state where the share-
holder has his tax domicile, in the form of an ordinary charge
limited to any tax that may be due on dividends in the state of
tax domicile.

‘Such a provision also has a restrictive effect as
3.2.2.2
regards companies established in other Member States:
it
constitutes an obstacle to the raising of capital in the Nether-
lands.’

2.2.3
The OECD model, according to the Commission,
applies to all the tax systems on dividends, whether in a pure
or mixed form (classical, schedular, imputation and exemption).

In the Schmid case (1), the Advocate-General noted that
3.3
dividends from foreign shares, which are not subject in Austria
to the final withholding at source by way of tax on revenue
from capital assets, are therefore subject in full to income tax
there and cannot, moreover, benefit from the application of the
50 % tax rate. The Advocate-General concluded that
the
freedom of capital movements was violated.

3. The Verkooijen ruling and some other relevant judge-

ments

In the ECJ judgment on the Verkooijen case, the person
3.1
named was refused exemption from income tax for share divi-
dends from a company established in a Member State other
than the Netherlands.

3.2
That exemption applied to income from shares on
which Netherlands dividend tax had been levied at source in
the Netherlands, which excluded income from shares received
in other countries.

3.2.1
Firstly, the exemption was intended to raise the level
of undertakings' equity capital and to stimulate interest on the
part of private individuals in Netherlands shares; secondly, in
particular for small investors, the exemption was intended to
compensate in some measure for the double taxation through
an exemption of one thousand guilders.

3.2.1.1
For the purpose of taxing Mr Verkooijen's income,
the tax inspector did not apply the dividend exemption on the
ground that Mr Verkooijen was not entitled to it since the divi-
dends received by him ‘had not been subject to the Netherlands
dividend tax.’

the Court considered that

3.2.2 When requested by the national court with jurisdiction
for a preliminary question,
the
receipt of foreign dividends was indissociable from a capital
movement; thus, if the tax rules applicable to incoming divi-
dends was different
from and less advantageous than that
applicable to domestic dividends, this was a prohibited restric-
tion on the free movement of capital.

4. General comments of the EESC

4.1
The Member States continue to have jurisdiction on tax
matters. However, Articles 56 and 58 ECT currently in force
limit this national jurisdiction, which must not violate a funda-
mental
freedom or circumvent Community law: Article 56
makes it illegal to obstruct the free movement of capital, while
Article 58 recognises that, while the provisions of national tax
laws may ‘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’ and while
states may take ‘ take all requisite measures to prevent infringe-
ments of national law and regulations, in particular in the field
of taxation and the prudential supervision of financial institu-
tions.... or … take measures which are justified on grounds of
public policy or public security,’ such measures ‘shall not
constitute a means of arbitrary discrimination or a disguised
restriction on the free movement of capital and payments.’

4.2
The case law of the Court, in essence, asks that persons
liable for taxation be treated equally, and condemns interna-
tional double taxation.

4.3 With EU enlargement, and even greater differences in
rates of corporation tax and personal income tax on dividends,
the EESC thinks it is urgent to encourage all the Member States
who have not yet done so to conclude international agreements
against double taxation on the basis, at least, of the model
proposed by the OECD, so as to bring about equality of treat-
ment at national level for dividends received by portfolio inves-
tors, irrespective of their origin within the Community.

(1) C-516/99 case, on 30 May 2002

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4.4
The EESC notes that the Treaty also envisages the free
movement of capital to or from non-EU countries, and that a
number of international bilateral agreements also exist between
some Member States and some non-EU countries.

an individual portfolio made up of shares of companies based
in two or more Member States. A portfolio may contain shares
from companies in several EU and non-EU countries.

Full neutrality could only ideally be achieved, combining
4.5
all the conditions set out in the communication and sticking to
the EU area, with a single Community rate of corporation tax
in an exemption system, provided that
the conditions for
imposing personal income tax were equal in all the countries
concerned, and if income from shares were considered to be
the only income of a taxpayer investing in a portfolio. The
Commission recognises itself, moreover, that full tax neutrality
could only be achieved by the complete harmonisation of
Member States' taxation.

5.2
The EESC would also point out that income from securi-
ties may also come from investment trusts or pension funds, in
forms where it is impossible to know the national origin of the
various components of the distributed dividends and capital
gains. Moreover, the tax rules applying to capital gains from
these forms of investment and to the distributed income are
sometimes different from those governing dividends paid direct
to individuals with their own share portfolio. The Commission
does not deal with these issues.

4.6
The tax sovereignty of parliaments and states, deciding
on personal and corporate taxation and on the national budget,
the heart of Europe's democracies. The
lies historically at
equality of citizens before charges levied by the state is a basic
principle of constitutional values. Member States, at the present
stage of European integration, still have serious reasons for
wishing to retain their national jurisdiction over tax matters, as
provided for in the treaties. This situation could, of course,
change in the future. But the EESC would not like to see the
latitude that the Member States have at present giving rise to
cases of ‘fiscal dumping.’

4.7
The EESC considers that the guidelines proposed, if they
are limited to the matters actually dealt with by the Court,
should be included on these terms among the respective terms
of reference of the Commission and the Member States. If this
were decided, the European Parliament and the Community's
consultative bodies should be fully involved in the monitoring
of such a procedure.

Finally,

4.8
the EESC wonders whether the threat of a
referral to the Court of Justice is really likely to facilitate the
search for a solution; nevertheless,
the EESC feels that the
Member States concerned must rapidly adopt provisions to
prevent inbound or outbound dividends being subject to discri-
mination. This could also amount to trying to make the Court
a substitute for Community tax legislation, beyond the jurisdic-
tion adopted by the Member States, which would risk leading
to a confusion of powers.

5.3
The EESC notes that the communication does not deal
either with the question of capital gains tax on sales of listed
securities. Individuals do not invest in shares just so they can
collect the dividends. Re-selling shares to take a profit is some-
times an even more fundamental reason for investing, and is
part and parcel of managing a portfolio and one's income. This
issue too should doubtless also be studied.

5.4
Regarding the debate on economic double taxation, the
EESC considers it legitimate to distinguish between individuals
and companies, irrespective of the methods and tax rates used.
The part of earnings that is distributed to shareholders consti-
tutes disposable income for the latter, but not all earnings are
necessarily distributed. Some are ploughed back into the
company, which adds value to its shares and shareholders'
wealth; this part of earnings is only covered by corporation tax
and not by personal income tax in the Commission's scheme of
things. It should therefore also be made known if these capital
gains are taxed or not when they are realised and under which
conditions; the communication does not deal with this ques-
tion, which the EESC considers to be an important one.

6. Conclusions

5. Specific comments

5.1
The EESC notes that the Commission's relatively simple
analysis model covers only one shareholding scenario: that of

The EESC considers that the treatment of double taxa-
6.1
tion and the taxation at source of
inbound and outbound
domestic dividends with a view to ensuring their non-discrimi-
natory treatment are major objectives, without jeopardising the
basic principle of the equality of individuals before charges
levied by the state at national level. The Member States could
also consider cooperation between countries with similar tax
practices, in order to study the best tax practices available.

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6.2
The issues raised by the EESC in its specific comments
could be examined later on, with a view to greater harmonisa-
tion of corporation tax and taxes on income and gains from
the internal
securities, so as to improve the operation of
market.

6.3
Finally, the EESC feels that the Commission's communi-
cation opens the door to resolving problems that are often the
subject of referrals to the Court of Justice and that should be
avoided in the future so as to avoid overburdening it needlessly
with appeals in this area.

Brussels, 30 June 2004.

The President

of the European Economic and Social Committee

Roger BRIESCH

APPENDIX

to the opinion of the European Economic and Social Committee

The following amendments, though rejected, were supported by at least one-quarter of the votes cast:

Point 4.6

Delete the last sentence in this point.

Voting

For:

Against:

Abstentions:

58

84

9

Point 4.8

Delete this point.

Voting

For:

Against:

Abstentions:

53

85

16