ECJ Could Strike Another Blow Against National Tax Bases

by Ulrika Lomas, Tax-News.com, Brussels

02 May 2006

An opinion issued by an advisor to the European Court of Justice could strike another blow to the tax raising powers of national governments in the EU if taken up by the court.

According to Advocate General Leendert Geelhoed, a withholding tax imposed by the French government on dividends transferred to a parent company located in the Netherlands is "quite patently discriminatory" against non-resident taxpayers, because dividends destined for a French parent would attract no such tax.

The ramifications of the Denkavit case could reverberate across the European Union if the ECJ agrees with the AG's non-binding decision, which it tends to do. Most countries impose withholding taxes on dividend and interest income to prevent income destined for another territory from leaving untaxed, and accountants are expecting a flurry of retrospective claims from companies for overpaid tax potentially spanning two decades, with the final total likely to reach billions of euros.

Peter Cussons of PricewaterhouseCoopers was quoted by the Financial Times as saying that a judgment along the lines of the opinion would be "another nail in the coffin of fiscal sovereignty".

"Withholding tax is on death row," he remarked.

A decision against the French government in the Denkavit case would be especially welcomed by Europe's pension fund industry, which has argued that governments tend to discriminate against foreign pension funds by taxing them more heavily.

In December 2005 PwC's EU Direct Tax Group and the European Federation for Retirement Provision (EFRP) lodged an unprecedented 26 complaints with the European Commission against 18 Member States of the European Union for infringing the free movement of capital principle.

The member states targeted included Austria, the Czech Republic, France, Germany, Lithuania, Poland, Portugal and Slovenia for infringements concerning both dividend taxation and interest taxation; Denmark, Estonia, Finland, Hungary, Italy, Latvia, The Netherlands, Spain and Sweden for infringements concerning only dividend taxation; and the United Kingdom for an infringement concerning interest taxation.

The complaints identify that in those member states pension funds that are established abroad are discriminated against as they are subject to a higher (withholding) tax on dividends and interest than domestic pension funds.

PwC and EFRP claim that such legislation breaches EU law, in particular the free movement of capital of Article 56 of the EC Treaty.

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