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EU-Austria, Finland, Germany and Italy

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EU Commission progresses infringement procedure against Austria, Germany, Italy and Finland regarding taxation of outbound dividends

On 23 July 2007, the European Commission announced that it had formally requested Austria (case reference no. 2004/4346) and Germany (case reference no. 2004/4349) to amend their tax rules concerning outbound dividend payments to companies. Furthermore, the Commission also sent requests for information to Finland (case reference no. 2006/4096) and Italy (case reference no. 2006/4094) with respect to their tax regime applicable to outbound dividends paid to foreign pension funds. Details are described below.

(a) Austria and Germany. Austria and Germany tax outbound dividends (dividends paid by resident companies to non-resident shareholders) more heavily than domestic dividends (dividends paid by resident companies to resident shareholders). Domestic dividends are in practice exempt from tax, whereas outbound dividends are subject to withholding taxes ranging from 5% to 25%.

Referring to the decision of the European Court of Justice (ECJ) in the Denkavit case, the Commission observed that the higher taxation of outbound dividends is incompatible with the EC Treaty and the EEA Agreement, as it restricts the free movement of capital and the freedom of establishment. The Commission noted that the discrimination exists with respect to EU Member States and those EEA/EFTA countries, which exchange information to a sufficient extent. Taking into account the infringement procedures initiated so far, the Commission appears to follow the decision of the EFTA Court in the Fokus Bank case, which took the view that it is not relevant from the point of view of the existence of a breach if a tax credit is given in the state of residence of the shareholder. The Denkavit decision, however, may suggest the opposite.

The requests to Austria and Germany are in the form of a reasoned opinion, which is the second stage of the infringement procedure of Art. 226 of the EC Treaty. If those countries do not reply satisfactorily to the reasoned opinion within 2 months, the Commission may refer the matter to the ECJ.

(b) Finland and Italy. In Finland and Italy, the withholding tax on dividends paid to foreign pension funds is higher than the withholding tax paid on dividends paid to a domestic pension fund, which, according to the Commission, may dissuade foreign pension funds from investing in those countries. Furthermore, it may become more difficult for companies established in Finland or Italy to attract capital from foreign pension funds, which may result in a restriction of the free movement of capital of Art. 56 of the EC Treaty and Art. 40 of the EEA Agreement.

The Commission has already sent letters of formal notice to the Czech Republic, Denmark, Lithuania, the Netherlands, Poland, Portugal, Slovenia, Spain and Sweden asking information about their tax rules which may lead to higher taxation of foreign pension funds.

The Commission announced that it is still examining the situation in other Member States.

The requests to Finland and Italy are in the form of a letter of formal notice, which is the first stage of the infringement procedure of Art. 226 of the EC Treaty. Depending on their answer to the request, due within 2 months, the Commission may decide to send those countries a reasoned opinion.


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