EU Orders Germany And Austria To End Tax Discrimination On Funds

by Ulrika Lomas, Tax-News.com, Brussels

14 July 2003

The European Commission is to take formal legal action against Germany and Austria for allowing discriminatory tax treatment of foreign investment funds that it considers breaches Articles 49 and 56 of the European Treaty concerning rules on the free movement of people and capital. The Commission will also send a formal letter to France advising the government to end a tax allowance on share income that is only available on shares issues in France.

In a recent statment, the Commission set out the rationale behind its decision:

"Under rules on the taxation of dividends introduced in Germany in October 2000 and applicable from 2001, corporation tax is no longer offset against shareholders' income tax, but companies and their shareholders are taxed independently. To compensate for this economic double taxation, the corporate tax rate has been reduced to 25% and only half the amount of dividends distributed to shareholders is taxed (so-called "Halbeinkünfteverfahren").

"However, in the case of foreign investment funds, the full amount of dividends distributed is taxable. Moreover, the distinction made in Germany between foreign investment funds according to their structure and accounting methods (so-called "white", "grey" or "black" funds) with resulting differences in taxation is considered by the Commission to be incompatible with the EC Treaty insofar as it results in disproportionate tax burdens on foreign investment funds.

"The Commission has been informed that the German Government intends to present new legislation on the taxation of investment funds in general to apply as from January 2004, but no draft legislation had been published so far. However, the Commission appreciates that the draft legislation presented in autumn 2002, which would have extended the discriminatory taxation of foreign funds to capital gains, was withdrawn after, inter alia, the Commission expressed its concerns.

"Austria's Income Tax Act provides for tax relief for residents whereby they may either be subject to final taxation ('Endbesteuerung') of 25% on capital income (including inheritance tax) or they may apply to be taxed at only half of their individual marginal tax rate for such income (Halbsatzverfahren). However, both of these tax advantages are not available for income received from foreign investment funds. The Austrian government has presented draft legislation to amend the discriminatory provisions; it has not yet been adopted.

"French tax legislation (Article 158, paragraph 3 of the 'Code Général des Impôts') grants a tax allowance of €1220 for single people and €2440 for married couples on certain income from shares issued in France but not those issued elsewhere. The Commission is concerned that the effect of this discriminatory treatment is not only to encourage French taxpayers to exclusively invest in shares issued in France, but also to discourage French taxpayers from investing in investment funds from outside France. Such discrimination may be in violation of EC Treaty rules on the freedom to provide services (Article 49) and on the free movement of capital (Article 56), as well as the investment funds (UCITS) Directive (85/611/EEC).

"The Commission has therefore decided to issue a formal request for information, giving France two months to reply. In the absence of a satisfactory response, the Commission may decide to formally request France to amend its legislation through a so-called 'reasoned opinion', the second stage of infringement procedures."

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