Lithuania And Latvia Facing Action Over Dividend Taxation

By Ulrika Lomas, for LawAndTax-News.com, Brussels

03 March 2008

The European Commission announced on Thursday that it has sent a reasoned opinion to Lithuania about its rules under which interest paid to foreign companies, investment funds and pension funds is taxed more heavily than interest paid to comparable domestic recipients.

After receiving a letter of formal notice, Lithuania notified the Commission that the Government had approved a change to the rules related to taxation of dividends paid to non-resident recipients. Therefore, the reasoned opinion sent last week deals only with the fact that a higher level of taxation is applied to interest paid by Lithuanian companies to non-resident recipients (companies, investment funds and pension funds) than to resident recipients.

If a Member State levies a higher tax on interest paid to foreign investors, this may dissuade these investors from investing in its companies. Equally, companies established in that Member State might face increased difficulties in attracting capital from non-residents.

The Commission has also sent a request for information in the form of letter of formal notice to Latvia regarding rules under which dividends paid to non-resident individuals may be taxed more heavily than dividends paid to residents.

Latvia exempts domestic dividends paid to resident individuals from taxation. However, dividends paid to non-resident individuals are subject to a withholding tax of 10%.

The Commission explained that it considers that this may constitute a breach of the free movement of capital, as protected by Article 56 of EC Treaty and Article 40 EEA.

Lithuania and Latvia have both been asked to reply within two months.

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