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EC Takes Member States To Task Over Dividend Taxation

by Ulrika Lomas,, Brussels

23 January 2007

The European Commission announced on Monday that it has decided to refer Belgium, Spain, Italy, the Netherlands and Portugal to the European Court of Justice over national rules under which certain dividend payments to foreign companies (outbound dividends) may be taxed more heavily than dividend payments to domestic companies (domestic dividends).

The tax rules of Belgium, Spain, Italy, Latvia, the Netherlands and Portugal may, in certain cases, lead to higher taxation of outbound dividends than of domestic dividends. While they provide for no or only very low taxation of domestic dividends, outbound dividends are subject to withholding taxes ranging from 5% to 25%.

With regard to Belgium, Spain, Italy, Latvia and Portugal, the discrimination concerns outbound dividends paid to Member States and to those EEA/EFTA countries which provide appropriate assistance (i.e. exchange of information). With regard to the Netherlands, it only concerns the latter countries.

The Commission considers that these rules are contrary to the EC Treaty and the EEA Agreement, as they restrict both the free movement of capital and the freedom of establishment.

At the same time the Commission sent Latvia a formal request to amend its tax legislation concerning outbound dividend payments to companies.

"The Member States cannot tax dividends paid to companies of other Member States more heavily than dividends paid to their own companies" explained EU Taxation and Customs Commissioner László Kovács, adding:

"I am happy that the Court of Justice confirmed this position on 14 December 2006 in its judgement on Denkavit, Case C-170/05."

The Commission also announced yesterday that it will be referring Belgium to the ECJ over its tax treatment of inbound dividends.

Under the Belgian tax system, there is no double taxation for domestic dividends, while there is for inbound dividends. The Commission considers that this difference in treatment is contrary to the freedom of establishment and the free movement of capital, guaranteed by the EC Treaty.

Belgian private investors receiving domestic dividends either pay a final tax withheld by the company or they are taxed at a special income tax rate of, in principle, 25%. Inbound dividends are first subject to a withholding tax of up to 15% in the source State on the basis of the double taxation agreement between Belgium and that State, and then suffer Belgian income tax at the special income tax rate of 25% without getting a credit for the foreign tax.

The result is that inbound dividends are taxed more heavily than domestic dividends.

The Commission had sent a Reasoned Opinion to Belgium in July 2006, but Belgium disputed its position on the matter.

A comprehensive report in our Intelligence Report series looking at tax effective structures for global manufacturing firms is available in the Lowtax Library at and a description of the report can be seen at
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