Member States Break EU Tax Laws

by Ulrika Lomas, Tax-News.com, Brussels

07 June 2010

The European Commission (EC) has referred Austria, Germany and Portugal to the European Court of Justice (ECJ) over alleged discriminatory tax provisions, due to their failure to comply with its reasoned opinions.

With regard to Austria, the EC considers that the rules which require foreign investment funds, real estate funds and credit institutions to appoint an Austrian fiscal representative result in discriminatory treatment. Under Austrian law, domestic credit institutions managing domestic investment funds or real estate funds are not required to appoint a fiscal representative.

In addition, the fiscal representatives appointed must always be established in Austria. The EC therefore also considers that the prohibition of foreign credit institutions and certified public accountants from being appointed as fiscal representatives for investors in investment funds or real estate funds are discriminatory and incompatible with the freedom to provide services.

In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate, or the "Pensionskasse" can benefit from a partial refund of the withholding tax paid. However, similar institutions established elsewhere in the EU and in the European Economic Area cannot benefit from this reduced rate or partial refund.

For another category of German pension institutions, the "Pensionsfonds", the dividends received are taken into account in the annual tax assessment procedure and are taxed on a net basis at the general corporate tax rate of 15%. However, dividends paid from Germany to similar foreign institutions are subject to a final withholding tax of 25% on the gross dividend, without the possibility of deducting any costs.

A similar distinction is made between interest payments paid to "Pensionskassen" and "Pensionsfonds", or to a foreign pension institution.

The EC stated that, if a member state levies a higher tax on dividends or interest paid to foreign pension funds, those funds might be dissuaded from investing in companies in the member state concerned. Equally, companies established in that member state might have difficulty attracting capital from foreign pension funds. Higher taxation of foreign pension funds may thus restrict the free movement of capital, and the EC is not aware of any justification for such restrictions.

Finally, Portuguese tax rules may in certain cases lead to higher taxation of dividend payments to foreign companies (outbound dividends) than dividend payments to domestic companies (domestic dividends). While the legislation provides for no or only very low taxation of domestic dividends, outbound dividends are subject to withholding taxes up to 20%. The Commission considers that these rules restrict both the free movement of capital and the freedom of establishment.

In a ruling in 2006, the ECJ confirmed the principle that outbound dividends cannot be subject to higher taxation in the source state 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 EC will take this ruling into account when drafting the applications to the ECJ.

Recommended