“An analysis of the ECJ case law leads to fundamental conclusions about the
design of dividend taxation systems: Member States cannot levy higher taxes on
inbound dividends than on domestic dividends. Likewise, they cannot levy
higher taxes on outbound dividends than on domestic dividends.”
The provisions of the EU Treaties relating to the free movement of capital were
implemented by various directives, including Directive 88/361.25 The case
Staatssecretaris van Financien v B.G.M. Verkooijen was referred by the Netherlands
to the ECJ to determine whether Article 1(1) of Directive 88/361 precluded a Dutch
legislative provision which treated inbound dividends received from companies
resident in other Member States less favourably than dividends received from
domestic sources.26 The ECJ ruled that it did, and rejected justification arguments
based on the promotion of the economy, cohesion of the tax system, loss of revenue,
and a possible tax advantage for taxpayers receiving in the Netherlands dividends
from companies with their seat in another Member State.
In Lenz, the ECJ examined the Austrian treatment of dividends received from capital
invested in domestic companies and in other Member States.27 Ms. Lenz, an Austrian
resident, was unable to avail of the reduced tax rates applicable to dividends from
Austrian companies because the dividends she received were from German
companies. The ECJ found that the tax legislation at issue had the effect of deterring
taxpayers living in Austria from investing their capital in companies established in
other Member States. The legislation also produced a restrictive effect in relation to
companies established in other Member States, in that it constituted an obstacle to
their raising capital in Austria. The legislation therefore constituted a restriction on
the free movement of capital.
The ECJ rejected submissions arguing that the measure was justified on the basis that
the Austrian government was unable to levy tax on revenue from companies
established outside their territory. The court also rejected submissions in relation to
the need to maintain coherence of the national tax system. The aim of the Austrian
legislation was to reduce the economic effects of double taxation of company profits
(by way of corporation tax) and the taxation of a shareholder (by way of income tax)
on the same profits distributed in the form of dividends. The ECJ noted that apart
from the fact that personal income tax and corporation tax were two distinct taxes
which affect different taxpayers, the Austrian legislation did not make the obtaining
of the tax advantages at issue (enjoyed by Austrian residents on their domestic
revenue from capital) dependent upon the taxation of the companies’ profits.
Similarly in Manninen the ECJ held that the Finnish tax credit system whereby
individuals who received dividends from a Finnish resident company received a tax
credit which was not available where the dividend was received from a company in
another Member State (in this case Sweden) was a restriction on the free movement of
capital and prohibited by Article 56 EC. 28
25 Article 1(1) provided that Member States should abolish restrictions on movements of capital taking
place between persons resident in Member States. To facilitate application of this directive, capital
movements were classified in accordance with the Nomenclature in Annex I.
26 (Case C-35/98) [2000] ECR I-4071.
27 Anneliese Lenz v Finanzlanddesdirekiton fur Titol (Case C-315/02) [2004] ECR I-07063.
28 (Case C-319/02) [2004] ECR I-07477.
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