The cumulative effect of the Verkooijen, Lenz and Manninen line of cases is that the
less favourable treatment of inbound dividends is considered to be a restriction on the
free movement of capital. Hintsanen and Pettersson (2005) furthermore suggest that
the Manninen case does not merely cover individual shareholders but also has
relevance for corporate taxpayers.
Equal treatment of domestic and inbound dividends could be ensured either by
abolishing the exemption on domestic dividends or abolishing the corporation tax
charge on foreign dividends. Abolition of the exemption on domestic dividends could
lead to the restructuring of the financial architecture of companies in an attempt to
avoid the resulting losses. In either case, multinationality is likely to be enhanced.
Exit Taxes
Many Member States seek to tax their resident individual and/or corporate taxpayers
on capital gains in respect of their assets. In domestic situations, such capital gains
will usually be taxed when realised, i.e. when the assets are sold or otherwise
disposed of. However, if an individual taxpayer moves to another Member State
before selling his assets, his original state of residence risks losing the taxing rights on
the capital gains which have accrued on those assets. Similarly, if a company transfers
its residence to another Member State or transfers individual assets to its branch
(permanent establishment) in another Member State (or vice versa), the original
state of residence risks the partial loss of its taxing rights on the gains which have
accrued while the company was resident in its territory. Many Member States have
attempted to deal with this issue by taxing such accrued but as yet unrealised capital
gains at the moment of transfer of the residence by the taxpayer or of the individual
assets to another Member State.
The European Court of Justice has stated that immediate taxation of latent
capital gains on assets transferred to another Member State infringes the principle of
freedom of establishment and has a dissuasive effect on taxpayers wishing to establish
themselves in another Member State.29
Equivalent to the impact that employment protection regulations such as “firing costs”
are found to have in reducing aggregate employment (see e.g. Scarpetta, 1996),
removal of such exit charges on companies may be deemed likely to increase
multinationality.
Double Taxation Treaties
Double taxation arises where two countries impose taxes on the same income or
capital. This may arise where one country imposes taxes on the basis that an
individual or company is tax resident there while another country imposes tax on the
same item because the income arises there. Article 293 of the EC Treaty provides that
Member States shall, so far as is necessary, enter into negotiations with each other
29 According to a recent European Commission communication on this matter (“Direct Taxation: The
European Commission proposes an EU-coordinated approach on exit taxation”, IP/06/1829, Brussels,
19 December 2006), member states should provide for an unconditional deferral of collection of the tax
due until the moment of actual realisation. It recognised however that this will not necessarily provide
a solution for double taxation or unintended non-taxation which may arise due to mismatches between
different national rules.
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