Germany, Estonia and the Czech Republic have been asked to reply within two months.

"These letters of formal notice are part of a sustained action by the European Commission to eliminate discriminatory taxation of dividends paid to shareholders resident elsewhere in the EU and EEA" explained EU Taxation and Customs Commissioner László Kovács.

Pension funds are usually subject to different tax rules than companies. The tax rules on dividends paid to pension funds and dividends paid to companies are therefore assessed separately.

In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate or the "Pensionskassen" can benefit from a partial refund of German withholding taxes.

However, similar institutions established elsewhere in the European Economic Area (Iceland, Norway and Liechtenstein) cannot benefit from such a reduced rate or partial refund.

In Estonia dividends paid by Estonian companies to Estonian pension funds are not subject to tax, whereas dividends paid to non-resident pension funds are subject to a withholding tax of 22%.

If a Member State levies a higher tax on dividends (or interest) paid to foreign pension funds, this may dissuade these funds from investing in its companies.

Equally, companies established in that Member State might face increased difficulties in attracting capital from foreign pension funds. The higher taxation of foreign pension funds may thus result in a restriction of the free movement of capital.

The letter of formal notice to the Czech Republic concerned the taxation of dividends paid to companies resident in Iceland.

The Czech Republic exempts domestic dividends paid to parent companies that hold a participation of 20% or more for at least two years. Dividends paid to Iceland are subject to a withholding tax of 15%, regardless of the size of the participation.

Only in the case of Iceland does the Commission consider that there may be a breach of the freedom of establishment and the free movement of capital. There is no discrimination of dividends paid to other Member States or to Norway.

Dividends paid to Liechtenstein are also subject to a withholding tax of 15%, but the Commission is of the opinion that the different treatment of dividends paid to Liechtenstein is justified by the need to ensure fiscal supervision for the Czech Republic, since there is no exchange of information with Liechtenstein.