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EC Takes Action Over Taxation Of Outbound Dividends

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

25 July 2007


The European Commission announced on Monday that it has formally requested Austria and Germany to amend their fiscal legislation concerning outbound dividend payments to companies.

Both Member States tax dividends paid to foreign companies more heavily than dividends paid to domestic companies.

The EC explained on Monday that:

"The tax rules of Germany and Austria may lead to higher taxation of outbound dividends than of domestic dividends, where outbound dividends are dividends paid by a German company to a foreign shareholder, domestic dividends are dividends paid by a German company to a German shareholder. In particular, while there is in practice a tax exemption of domestic dividends, outbound dividends are subject to withholding taxes ranging from 5 to 25%."

"The Commission considers the higher taxation of outbound dividends contrary to the EC Treaty and the EEA Agreement, as it restricts the free movement of capital and the freedom of establishment. The discrimination concerns outbound dividends paid to Member States and to those EEA/EFTA countries which provide appropriate assistance (i.e. exchange of information)."

The requests take the form of ‘reasoned opinions', which is the second step of the infringement procedure provided for in Article 226 of the EC Treaty. If the relevant national legislation is not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

The Commission has also sent requests for information in the form of letters of formal notice (the first step of the infringement procedure under Article 226) to Italy and Finland, concerning rules under which dividends paid to foreign pension funds may be taxed more heavily than dividends paid to domestic pension funds.

According to the EC:

"For Italy and Finland the issue concerns outbound dividends paid to foreign pension funds. In both Member States domestic pension funds pay some tax on their dividends, but the withholding taxes on outbound dividends appear higher than the tax levied on domestic dividends."

"If a Member State levies a higher tax on dividends paid to foreign pension funds this may dissuade these funds from investing in its territory. Equally, companies established in that Member State might face increased difficulties to attract capital from foreign pension funds. The higher taxation of foreign pension funds may thus result in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA. The Commission is not aware of any justification for such a restriction."

Italy and Finland have been asked to reply within two months.

"The Member States cannot tax dividends paid to shareholders resident elsewhere in the EU more heavily than dividends paid to shareholders resident in their own Member State" explained EU Taxation and Customs Commissioner László Kovács. "Such discrimination is contrary to the EC Treaty, as confirmed by the Court of Justice in its judgement on Denkavit of 14 December 2006."

TAGS: Italy

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