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European Union-Belgium; Italy; Latvia; Netherlands: Portugal and Spain

24 February 2007

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EU Commission progresses infringement actions against Member States for discriminatory taxation of outbound dividends

On 22 January 2007, the EU Commission announced that it had decided to refer Belgium, Italy, the Netherlands, Spain and Portugal to the European Court of Justice (ECJ) with respect to discriminatory tax treatment on outbound dividends contained in the legislation of the above-mentioned Member States (case reference numbers: 2004/4347 (Belgium), 2004/4350 (Italy), 2004/4352 (Netherlands), 2004/4353 (Portugal) and 2004/4354 (Spain))."

According to the EU Commission, the above-mentioned Member States' rules restrict both the free movement of capital and the freedom of establishment provided for in the EC Treaty and the EEA Agreement as they impose a higher tax charge on certain dividend distributions made to foreign companies (cross-border dividends) than that imposed on dividend distributions made to domestic companies (domestic dividends). Under the tax rules of these Member States, domestic dividends are not taxed or taxed at a very low rate, whereas outbound dividends are subject to withholding taxes ranging from 5% to 25%. The discrimination concerns outbound dividends paid to EU Member States and the EFTA countries, except for the Netherlands where the discrimination only concerns dividends paid to EFTA countries.

As the above-mentioned Member States have not changed their legislation despite the Commission's formal request of 25 July 2006 the Commission has decided to refer the cases to the ECJ under the next stage of the infringement procedure provided for in Art. 226 of the EC Treaty. Note that provided Luxembourg decided to end the discrimination, the case against Luxembourg will be closed after the adoption of amending legislation.

The Commission referred to the Denkavit case (C-170/05) decided by the ECJ on 14 December 2006 in its view, confirms the principle that cross-border dividends cannot be taxed more heavily by the source state than domestic dividends. The Commission also noted that when drafting the application to the ECJ, it would adopt its approach to that of the ECJ set out in the Denkavit case, under which, for the purpose of determining discrimination, a tax credit granted by the residence state of the parent company for the withholding tax levied by the source state must be taken into account. This entails a deviation from its former approach, which was based on the EFTA Court's decision in the Fokus Bank case (E-1/04), under which discrimination exists regardless of whether or not a tax credit is granted in the state of residence.

For similar reasons to the above, the EU Commission sent a "reasoned opinion" to Latvia requesting it to end discriminative taxation of outbound dividends (case number 2005/4753). If Latvia does not reply satisfactorily to the reasoned opinion within 2 months, the Commission may refer the matter to the ECJ.

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