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ELM News ImageDirect Taxation: Commission decides to refer Belgium, Spain, Italy, the Netherlands and Portugal to the Court over discriminatory taxation of outbound dividends and asks Latvia to end such discriminatory taxation

The European Commission decided to refer Belgium, Spain, Italy, the Netherlands and Portugal to the European Court of Justice for their rules under which certain dividend payments to foreign companies (outbound dividends) may be taxed more heavily than dividend payments to domestic companies (domestic dividends). The Commission considers that these rules are contrary to the EC Treaty and the EEA Agreement, as they restrict both the free movement of capital and the freedom of establishment. At the same time the Commission sent Latvia a formal request to amend its tax legislation concerning outbound dividend payments to companies. The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If Latvia does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the European Court of Justice.

"The Member States cannot tax dividends paid to companies of other Member States more heavily than dividends paid to their own companies" said EU Taxation and Customs Commissioner László Kovács. "I am happy that the Court of Justice confirmed this position on 14 December 2006 in its judgement on Denkavit, Case C-170/05."

The tax rules of Belgium, Spain, Italy, Latvia, the Netherlands and Portugal may in certain cases lead to higher taxation of outbound dividends than of domestic dividends. While they provide for no or only very low taxation of domestic dividends, outbound dividends are subject to withholding taxes ranging from 5 to 25%.

As regards Belgium, Spain, Italy, Latvia and Portugal the discrimination concerns outbound dividends paid to Member States and to those EEA/EFTA countries which provide appropriate assistance (i.e. exchange of information). As regards the Netherlands it only concerns the latter countries.

The Commission had sent a Reasoned Opinion to Belgium, Spain, Italy, the Netherlands and Portugal on 25 July 2006 (IP/06/1060), to request them to change their legislation. In reaction the Netherlands modified its legislation, but only for dividends paid to other Member States. As a result, the decision to refer the Netherlands to the Court concerns just dividends paid to those EEA/EFTA countries which provide appropriate assistance (i.e. exchange of information). Belgium, Italy and Portugal did not reply to the Reasoned Opinions. Spain's reply was negative.

The Commission had also sent a Reasoned Opinion to Luxembourg on 25 July 2006. The Commission is happy to note that Luxembourg decided to end the discrimination (which only concerned the EFTA countries which provide appropriate assistance (i.e. exchange of information). The case against Luxembourg will be closed as soon as Luxembourg has made the necessary changes to its tax rules.

In the Denkavit ruling of 14 December 2006 (Case C-170/05) the Court confirmed the principle that outbound dividends cannot be subject to higher taxation in the source State (the State where the subsidiary is established) than domestic dividends.

However, according to this ruling, it may be relevant to take into account whether the State of residence of the parent company gives a tax credit for the withholding tax levied by the source State. The Commission will take this recent ruling into account when drafting the applications to the Court. Up to now, the Commission followed the same approach as the EFTA Court in the Fokus Bank case (Case E-1/04), where it explicitly ruled that it was not relevant whether a tax credit was given in the residence State.

The Commission's cases reference numbers are Belgium (2004/4347), Spain (2004/4354), Italy (2004/4350), Latvia (2005/4753), The Netherlands (2004/4352) and Portugal (2004/4353).