CE to tackle tax discrimination against foreign dividends

The European Commission has adopted a Communication aimed at providing guidance for EU Member States and Accession States on how to render their systems for taxing dividends received by private individuals compatible with the EC Treaty. An analysis of the case law of the European Court of Justice makes it clear that EU Member States' tax systems should not hinder individuals from investing in foreign shares. Member States cannot levy higher taxes on dividends from companies in other Member States than on domestic dividends and, similarly, they cannot levy higher taxes on outbound dividends than on domestic dividends.

The Commission calls on the Member States to co-operate in order to deal quickly with the issues examined in the Communication but this would not involve harmonisation of their systems. If Member States cannot agree on solutions, the Commission will be obliged to initiate legal action against those Member States whose dividend tax rules do not comply with the Treaty.

The Communication is an element of the strategy for the EU's future tax policy that the Commission announced in May 2001.
"Citizens investing in foreign companies are entitled to the same tax treatment as citizens investing in their own country and, likewise, dividends paid to non-residents cannot be taxed at a higher level than dividends paid to residents" said Taxation Commissioner Frits Bolkestein.

Co-ordinated action
The Communication analyses the decisions of the European Court of Justice concerning taxation of dividends. Essentially, the Court has made clear that subjecting inbound or outbound dividends to higher taxation than domestic dividends constitutes a restriction on the free movement of capital in violation of Article 56 of the EC Treaty.

The Communication focuses on the taxation of individual shareholders because this is the area that is most problematic in practice. The taxation of dividends received by companies is to a large extent covered by an existing Directive (the Parent-Subsidiary Directive - 90/435/EEC) 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).

The Commission proposes to discuss its findings with Member States and to suggest co-ordinated action to ensure alignment of their dividend taxation legislation with Community law. The purpose would be to ensure rapid removal of any existing tax obstacles to cross-border investment.

The purpose would not be to harmonise national tax laws, as Member States are and should continue to be free to determine what tax they levy on dividends as well as the type of dividend tax system.Where Member States do not agree on appropriate solutions, the Commission intends to examine the relevant national rules and take the necessary steps to ensure their compliance with the fundamental freedoms of the Treaty, including, where necessary, bringing cases before the Court of Justice.

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