Two Aspects Of Greek Corporate Tax Regime Facing Scrutiny

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

10 July 2007

The European Commission announced last week that it would be referring the Greek authorities to the European Court of Justice over their discriminatory tax treatment of dividends issued by foreign companies, and over the discriminatory taxation of non-Greek partnerships.

With regard to the issue of foreign dividends, the European Commission explained that it had decided to send the matter to the ECJ because Greece exempts from income tax dividends paid by Greek companies to individuals while taxing dividends paid by companies established in other Member States.

As far as this different treatment is applied to dividends from companies established in the EU or in the EEA/EFTA countries, the Commission considers it to be discriminatory, and contrary to the EC Treaty which guarantees the free movement of capital.

Following a reasoned opinion on the matter sent by the European Commission in January 2007, EU Taxation and Customs Commissioner László Kovács announced that:

"The rules of the Internal Market forbid discrimination of dividends paid by companies of other Member States. Dividends paid from other Member States should be taxed in the same way as dividends paid by domestic companies".

The stated aim of the exemption from income tax of dividends paid by Greek companies is to avoid double taxation of the company profits. Such double taxation would arise when the profits were taxed first at the level of the company and then again in the hands of the individual shareholders when distributed as dividends.

The European Commission also explained last week that it has decided to refer Greece to the European Court of Justice (ECJ) due to the Greek tax rules according to which non-resident partnerships in Greece are taxed more heavily (25 %) than those resident in Greece (20 %).

The Commission is of the view that these rules are discriminatory and incompatible with the EC Treaty which guarantees the freedom of establishment.

Greece argues that the difference in tax rates is justified because a proportion of the profits (50 %) of a domestic partnership is taxed in Greece in the hands of the individual partners. The Commission considers that this situation does not necessarily entail higher taxation; on the contrary, it may in some circumstances lead to an even lower effective rate of tax.

The Greek authorities have argued that no foreign partnership has complained about discriminatory tax treatment and that, on the basis of the data available, there were no foreign partnerships operating in Greece in the form of a branch. However, Commission considers these arguments to be irrelevant.

The Commission sent a Reasoned Opinion to Greece in January in which it requested that the legislation in question be amended, but such steps were not taken.

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