16 March 2008
On 31 January 2008, the European Commission announced that it had sent requests for information in the form of letters of formal notice (the first step of the infringement procedure under Art. 226 of the EC Treaty) to Germany and Estonia about their rules under which dividends (and in the case of Germany also interest) paid to foreign pension funds may be taxed more heavily than dividends (and interest) paid to domestic pension funds. It also sent a letter of formal notice to the Czech Republic about its rules under which dividends paid to foreign companies are taxed more heavily than dividends paid to domestic companies. Germany, Estonia and the Czech Republic are asked to reply within two months.
Outbound dividends to pension funds
In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate or the "Pensionskassen" can benefit from a partial refund of German withholding taxes. However, similar institutions established elsewhere in the European Economic Area (EEA) cannot benefit from such a reduced rate or partial refund.
In addition, for another category of pension institution, the "Pensionsfonds", the dividends received are taxed on a net basis, i.e. any costs related to their investment, such as interest, are deductible. However, dividends paid from Germany to similar foreign institutions are subject to a withholding tax on the gross dividend, without the possibility to deduct any costs.
The same rules apply to interest payments paid to "Pensionskassen" and to "Pensionsfonds".
In Estonia, dividends paid by Estonian companies to Estonian pension funds are not subject to tax, while dividends paid to non-resident pension funds are subject to a withholding tax of 22%.
According to the Commission, the higher taxation of foreign pension funds may constitute a restriction to the free movement of capital (Art. 56 of the EC Treaty and Art. 40 of the EEA Agreement).
In the case of interest payments, it may also result in a restriction of the freedom to provide services (Art. 49 of the EC Treaty and Art. 36 of the EEA Agreement), according to the Commission. The Commission is not aware of any justification for such restrictions.
Outbound dividends to companies
The letter of formal notice to the Czech Republic concerns the less favorable taxation of dividends paid to companies resident in Iceland, as opposed to domestic dividends.
The Commission considers that there may be a breach of the freedom of establishment and the free movement of capital (Arts. 31 and 40 of the EEA Agreement).Dividends paid to Liechtenstein are also subject to a withholding tax of 15%, but the Commission is of the opinion that the different treatment of dividends paid to Liechtenstein is justified by the need to ensure fiscal supervision for the Czech Republic, since there is no exchange of information with Liechtenstein..
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